Residential and commercial real estate investing has continued to grow since the foreclosure crisis began and continues to attract all types of investors looking to make a solid return on their investments.
Whether the investor is looking for short-term gains or long term real estate holdings, the promise of large lucrative returns with very little effort can be very enticing. With any investment, consumers need to be careful and conduct appropriate due diligence before engaging in any investment, particularly when investing in real estate as most investments are not guaranteed and may lose value.
Here are some important tips from Freddie Mac on understanding investment schemes and recognizing the red flags:
How does an investment property scheme work?
- Investment property schemes are usually spread by word of mouth and require individuals to invest large sums of money in investment properties. Most schemes promise either a large increase in the value of the property resulting in a large return on investment, or higher-than-market interest on contributed capital, or even both.
- A property 'investment club' arrangement is a group of individuals pooling funds in order to make investments in real estate that individual club members would otherwise not be able to afford. A property 'investment club' is a legitimate practice when all representations regarding investment are true and accurate. However, when there are misrepresentations as to the property or the investment, this type of arrangement is fraudulent and may lead to devastating consequences.
Common characteristics of fraudulent investment property schemes are multiple loan-level misrepresentations.
Red Flags of Investment Property Schemes:
- The use of straw buyers.
- Inflated appraisals.
- Falsely stated income.
- Circumvention of purchase guidelines.
- Large number of properties purchased.
- The borrowers are located in several states. While these schemes have historically involved borrowers who geographically lived close to the subject properties, the trend today is for at least some of the borrowers to be located several states away.
If you believe you have witnessed or been victimized by a real estate investment scheme or wish to report suspicious activity, please file a report here.