Convicted in real estate scam - could you be next? - Posted by GL(ON)

Posted by Hal Roark on December 12, 2002 at 17:05:47:


JR does make some good points about the message boards, but those points are true about the whole net.

As far as good books, do an archive search for books. You will get lots of great suggestions.

Confusion is the name of the game in the beginning. Don’t sweat it. It, too, shall pass. Just hang in the game, learn, ask, and the fog will slowly lift. Just remember: you don’t have to play till you are ready. Plus, this is a full contact sport. Don’t jump onto the playing field till you know what you are doing.


Convicted in real estate scam - could you be next? - Posted by GL(ON)

Posted by GL(ON) on December 08, 2002 at 22:04:24:

Here is a story from the St. Petersburg Times, of October 8 this year. It concerns a man named Craig Thomas who has been convicted of racketeering and fraud.

Interestingly, everything he did can be found recommended by one real estate guru or another. Although they don’t recommend fraud, some do say that if you do the kind of deals he did and they go sour, you can walk away and leave someone else holding the bag.

In his case he has been convicted and awaits sentencing to a minimum of 4 1/2 years to a maximum of 150 years in prison so if he gets the maximum jolt he should be pretty good at the lock step by the time he gets out in 2152.

So all you young cowboys learn from his misfortune. Always deal on the up and up, and make sure you never miss a payment.

Man guilty in real estate scam
His illegal real estate deals didn’t pay off the prior owners’ mortgages. Renters ended up evicted.
© St. Petersburg Times
published October 8, 2002

TAMPA – A Plant City man accused of spinning a web of illegal real estate deals that cheated home sellers and led to the eviction of unsuspecting renters pleaded guilty Monday to racketeering and organized fraud.

Investigators say that over a six-year period, Craig A. Thomas, 29, ran a variety of swindles, one of which involved acquiring titles to homes from cash-strapped sellers. Instead of using reputable title insurance companies, Thomas closed on the deals at fast food restaurants or Mail Boxes Etc., officials said.

Thomas did not notify the mortgage holders of the transactions, said Assistant Hillsborough State Attorney Suzy Rossomondo. In some cases, Thomas would then rent out the homes.

Because he did not make payments on the mortgages, banks foreclosed on the loans. The former owners, who thought they were clear of the debt, were on the hook. The foreclosures also led to the eviction of renters, one of whom was forced out with her two children two days before Christmas. Another woman returned from her fiance’s funeral to discover she had been evicted, Rossomondo said.

On top of the racketeering and fraud charges, Thomas pleaded guilty to 23 counts of grand theft, depositing checks with intent to defraud, uttering a forged instrument and worthless checks. He faces a minimum of 41/2 years and a maximum of more than 150 years at his sentencing Dec. 9, Rossomondo said.

Thomas’ frauds, which involved about 18 victims, had been investigated separately by several agencies, but they did not not result in successful prosecutions until authorities looked at them as a pattern, Rossomondo said.

“When you put them all together, it was a huge, ongoing scam,” said Rossomondo.

speaking of articles… - Posted by JB

Posted by JB on December 09, 2002 at 14:37:26:

anyone in the DC area might find this interesting (though long).

That guy deserves it! - Posted by Shane

Posted by Shane on December 09, 2002 at 13:13:54:

I would hope that nobody here does that kind of stuff. We are all here to make money, but come on, shouldn’t helping people be a priority? That guy deserves to go to prison.

The failed sub2 business model… - Posted by Hal Roark

Posted by Hal Roark on December 09, 2002 at 08:01:57:

I am constantly amazed at the number of folks that just “don’t get it.”

In this case, folks harp on the fact that the guy didn’t make the underlying payments, and that’s what got him in trouble, and (presumably), they, with their ethical sub2 biz, make the payments and thus they don’t have these (potential) problems. Bolderdash!

While it ain’t clear if this fellow intended to defraud of not, even if he did not, when the economy tanks and he can’t rerent the places and even get Lucifer in with -20 fico on a lease option, the “ethical” sub2 practitioner also “will not be able to make the payments.”

Do you really think houses will appreciate forever? Do you really think this bubble will fail to burst? Do you really think you are going to be able to get renters into slim sub2 deals, even when it’s a buyer’s market?

This article (and others before and still to come) keep saying the same thing: even a few sub2 deals gone bad (in this case only 18) create the discovered multiple default scenario, which, in the hands of the local authorities, leads to a very, very bad situation for the investor.

Morale of the story? Sub2 is a legitimate acquisition technique. Corps, trusts, llcs, etc are legitimate asset protection devices. No/slim equity deals are bad deals. Period. No amount of wrapping them in asset protection devices, even if one gets the house “for free”, can turn a crappy deal into a real deal. Learn to buy houses with good, underlying, fundamental business numbers. Then, if the deal makes sense to take down sub2, do it. If asset protection features make sense, then do it. But to think you are going to “create” a deal out of crap because you got it for free and have liability protection features that absolve you of any and all responsibility and connection to the deal is the pinnacle of wishful thinking (and will be the bane of your existence). How many articles will it take?


Rent Skimming - Posted by Verve

Posted by Verve on December 08, 2002 at 22:43:39:

The operative phrase in this story is “he did not make payments on the mortgages”

I don’t believe there is one guru in the entire world that would espouse doing what this guy did. Here in CA, we call it “rent skimming” and it is illegal.

This guy deserves jail time…

Re: is taking over payments legit? - Posted by Mike

Posted by Mike on December 08, 2002 at 22:35:13:

I’ve read many posts online about folks taking over mortgage payments of distressed sellers. I was told this was illegal in my state (Oregon). To make it legit the new owner would have to pay off the initial mortgage in full and then get a new note under their own name. This law protects both the seller and the buyer apparently.

Is this a local law or is this the case across the country? I am under the impression that many “real estate guru” types teach this technique without covering the legality of it.

He sure does. - Posted by GL(ON)

Posted by GL(ON) on December 09, 2002 at 14:53:03:

He is a convicted felon and he deserves it.

My concern is for the newbie investor who may get into a similar situation inadvertently, by carelessly doing many similar deals without sufficient cash to back himself up in case he gets in a jam.

Someone who does not understand business will often treat all the money that comes into his hands as “profit” and spend it on themselves. Then the minute they run into a cash shortage they are dead.

If I see someone start a new business on borrowed money, and the first thing they do is lease themselves a Lincoln Town Car (or in the case of a store at the mall, a Corvette) then I know they will be bankrupt in 6 months.

we’re making progress here… - Posted by TRandle

Posted by TRandle on December 10, 2002 at 07:57:00:

Yeah, you’ve revised it from “The Flawed Model” to “The Failed Model”. I probably missed it, but I think this may be the first time I’ve seen you say Sub2 is just a technique. Sorry, had to get my digs in.

You already know I’m 100% behind your thinking here. As you know, I’ve learned the hard way that creative techniques don’t allow you to throw away all traditional buy and hold wisdom as many courses would have us believe.

Simply put, Sub2 and other techniques allow easier acquisition. The downside is the documentation is not familiar to most and not comprehensive enough to adequately cover the Multiple Default Scenario (MDS). I’m not sure any technique would protect an investor in the MDS, but I’m quite certain that Sub2 provides less protection than most.

That said, my opinion is that anyone who intends to build a portfolio of keepers best pay attention to good business sense and conventional buy and hold strategies, regardless of technique.

Re: The failed sub2 business model… - Posted by Jim FL

Posted by Jim FL on December 09, 2002 at 23:52:02:

I respect you as an investor, and a mind worth paying attention too.
You are held in high esteem with me, and with others here.
So, this is just my opinion, not the start of an argument.
I wanted to clarify something, or share my opinion, concerning one statement in your post here.

You said:
“In this case, folks harp on the fact that the guy didn’t make the underlying payments, and that’s what got him in trouble, and (presumably), they, with their ethical sub2 biz, make the payments and thus they don’t have these (potential) problems. Bolderdash!”

I know I personally have read articles like this, as well as posts by some who have had these problems.
Heck, I’ve even somewhat experienced some rough times holding several houses at once vacant that I bought subject to.
Part of the business.
My response to these posts, and articles about them is what you describe.
The CAUSE of the problems the investor is facing, whether it be criminal or civil actions, or both, is the fact that the investor did not make the loan payments.
Now you and I both know there is an underlying cause there as well.
Bad deals that did not support themselves, and an investor who was not prepared for dealing with risks.

Had the investors purchased the properties well below market value, with a ton of equity, they very well may have been able to prevent the occurences at hand.

I do think Subject to deals have risk, as all deals do.
I don’t think someone should take on holding any properties, using any method unless they are prepared to handle them, no matter how much equity there is.

I think we agree overall on this topic, with the conclusion that we must buy right in the first place, and build up cash reserves before holding.

I just don’t want people to run away from subject to deals all together, because they assume they are all possibly “illegal” or could lead to problems automatically, because that is not the case.

I do wish the “Gurus” would cover the risks more when teching these things.

Just my thoughts,
Jim FL

BRAVO! - Posted by js-Indianapolis

Posted by js-Indianapolis on December 09, 2002 at 16:13:22:

Excellent post. It’s people like you who saved me from SubTo-ing every property this side of the Mississippi, in the first week I started. It was new, exciting, and every house WILL have equity, right? WRONG.

Thanks for spelling it out, perfectly. I will be sure to bookmark this post, and prompty forward it to newbie posts that look like this: “I’ve got a SUB-TO DEAL! 2 bedroom/2 bath FMV 100K, mortgage 99K, seller 5 months behind, but only wants me to take over their payments!!! Where can I get the contracts?” Ever seen one of those?

I’ve been wrestling with the idea of looking specifically for owners willing to do sub to deals, as this could be a major plus in finding a good, solid deal. Although, I am hesitant, as I am being shown the “darK side of sub-to”, by so many. My thinking is that if this trend keeps up, the rules will be re-written on Sub-To deals. In fact, I’d go as far as saying they’re just going to be flat out illegal some day, if these “investors” keep giving them such a fine name in the press. At that point, what will everyone do?

Re: The failed sub2 business model… - Posted by Rich[FL]

Posted by Rich[FL] on December 09, 2002 at 14:43:56:

?While it ain’t clear if this fellow intended to defraud of not, even if he did not, when the economy tanks and he can’t rerent the places and even get Lucifer in with -20 fico on a lease option, the “ethical” sub2 practitioner also “will not be able to make the payments.” ?

Hal, given this situation, no matter what ethical technique a person used to acquire property, except maybe for cash (Subj-2, L/O, wrap, conventional, private funds, etc), if the economy tanks hard enough such that the investor can?t get income from these properties to pay the underlying mortgage and he doesn?t have the cash reserves to do so, HE?S IN TROUBLE! If he can?t make the mortgage payments to the banks and they have to foreclose, the chorus says ?you?re stupid and made a bunch of bad business decisions.? If he can?t make the payments to private individuals (via L/O, Subj-2, etc) and they eventually get foreclosed on and renters kicked out, then the chorus says ?you?re a low-life scumbag who?s taking advantage of people.? The bottom line in each of these scenarios is simple: the investor failed to live up to his contract terms. How he gets treated in the courts and the court of public opinion rests upon how many people he takes with him.

As for the story cited, it appears the ?investor? signed up these deals knowing he wasn?t going to pay the underlying mortgage. That, as we all know, simply isn?t legal and he got caught. This wasn?t a case of the techniques not working, it?s a case of the investor not working.

The bottom line is simply the fact that every technique available to the investor has various levels of risk both to himself and the people he?s dealing with. And it is up the investor to account for that risk and do whatever is necessary to mitigate it before it happens.

Many colleges are now offering courses in ethics (business ethics, law ethics, government ethics, engineering ethics, etc.) Maybe we should start a thread or forum on investing ethics!?


Amen, Brother Hal (nt) - Posted by JHyre in Ohio

Posted by JHyre in Ohio on December 09, 2002 at 13:05:31:


Re: The failed sub2 business model… - Posted by Amy

Posted by Amy on December 09, 2002 at 11:52:16:

Would the scenario of not being able to rerent subject-to’s be avoided by doing straight lease purchases should the numbers make sense? For example…I had a house I couldn’t re-rent because the seller did not disclose a major repair problem. Solution? I gave it back. (Still not sold a year later I might add.) Had I “bought” it subject to I would have been responsible for the payments, when I could not in good conscience put someone in there knowing what was wrong.
On the flip side, I have two ST’s that have tenant/buyers in them, who after 18 mos have been unable to cash out. The seller’s (who screwed up their own credit before I got the house) think me deeding their houses back to them will be a miracle cure for their credit. The payments are made…why would they want to take the risk of taking it back and being responsible for the payment again?? It does seem to me that ST is a riskier way to do this. Although, I know there are plenty of risks and problems with LP too.

How do people learn about investing? - Posted by Real Estate Timer

Posted by Real Estate Timer on December 09, 2002 at 10:42:45:

Hal -

Most people learn about investing (ie. the risks) from market down cycles, not market upcycles.

To apply an old Wall Street axiom to the real estate arena:

“Don’t confuse brains with a bull market.”

And just like many investors have learned about stock market risks in the last three years, odds are heavy that legions of real estate investors are soon going to learn a similar lesson.

Robert Campbell

How can I profit if/when bubble bursts? - Posted by Eddy (CT)

Posted by Eddy (CT) on December 09, 2002 at 09:42:58:

What possible scenarios could occur if criminal prosecutions increase for low/no equity sub-2 deals gone bad? Will the banks take back the majority of these houses? Will the sellers get the properties deeded back to them (they usually are motivated to dump them in the first place)?? Will l/o renters/buyers be in any position to win???
Just a thought or 2,

Good Rant… and very accurate info… - Posted by JT-IN

Posted by JT-IN on December 09, 2002 at 09:15:14:


It is amazing how many refuse to see the corelation between the risk of many no-equity deals, and the high likelihood of a catastrophic failure in these same subj to deals. The attitude of “it won’t happen to me” is quite dangerous to one who is sitting on a perverbial subject to landmine of 10 or even 20 low/no equity deals.

I think that history, and not in the too distant future, will provide some very graphic examples to illustrate the point you are making. Unfortunately, it seems that it will take this to convince the ones who refuse to admit that the handwriting is on the wall.

Excellent points made, and no one will be able to fault ole Hal… for not making a galant attempt at enlightening the subject to investor to the fact that “The British are Coming…”.


Re: Rent Skimming - Posted by GL(ON)

Posted by GL(ON) on December 09, 2002 at 01:18:15:

They don’t recommend rent skimming but they do say if anything goes wrong you can just walk away and quit making payments. Some say if you can’t rent or sell the place right away, you don’t have to make any payments at all - that’s how you can do deals with no money or credit and no risk.

To make doubly sure you use a trust to keep your name out of it. That’ll fool the district attorney alright. sarcasm alert

Check out some of the guys who advertise " no money, no credit and no risk". That’s how they say to do it.

Re: is taking over payments legit? - Posted by Jim FL

Posted by Jim FL on December 08, 2002 at 23:03:19:

I’d be REAL interested to read the law in your state that makes buying subject to the existing financing illegal?
Where did you get this from?
If “someone told” you, then check for references.

Trust me here Mike, this is not possibly the law there in your state, or any other for that matter.
If the ONLY way to sell a piece of real estate was to pay off the existing loans on it, then lease options, land contracts, wrap around mortgages, and a host of other methods of selling real estate would also be illegal.
I highly doubt that is the case.

So, PLEASE, before you rule out a great way to earn income, check into everything “you hear” first.

Good luck,
Jim FL

What is the world coming to?.. - Posted by Hal Roark

Posted by Hal Roark on December 11, 2002 at 07:57:00:


What’s the world coming to? First, about a week or so ago, I admit that my thinking has changed (a little) and there may be a place for the PacTrust, and now, I’m confessing that sub2 is a great acquisition technique. My o my.

As you know, I’ve always been a fan of sub2. And asset protection devices. I just think the 90s version of “no money down” – which is to create a deal out of nothing via the alleged protective features of asset protection devices and the sub2 technique – will prove to be a failed business model for those who used it on deals which weren’t deals to begin with.

But, you already know that…