Accidental Real Estate Ponzi schemes - Posted by John Behle
Posted by John Behle on July 13, 2002 at 14:46:17:
There are some very apparent problems with this case. In some ways it is what happens to MANY newbie real estate investors. I don’t care how many properties she bought, based on results - she is still a newbie, naive and poorly trained.
I use the term “Ponzi” because that is effectively what he operation seems to have become. A Ponzi scheme doesn’t generally involve profit or enough to keep up with expenses. Sometimes the difference between one company’s success and another becoming a Ponzi can be whether it is profitable.
I say “Accidental” because it doesn’t seem like there is any scammer type intent here - just errors. Ms. Porter may be a wonderful person that does happen to be naive.
It’s easy to buy real estate. Anybody can learn that. One “Guru” proved he could buy nearly a million dollars in property in a couple days for no down payment. Then - under analysis - most of it was rejected because it wasn’t profitable. He illustrated the point, that it is easy to buy and that’s where the focus was. He also was smart enough to reject some of the deals a few days later when “due-diligence” showed things were not as thought or represented.
It’s easy to learn to buy real estate. It’s whole different step to learn how to buy it safely. And another to learn how to buy it profitably.
In this case, it looks like some proper “due diligence” could have presented big losses. It states that sellers mis-represented things and buyers didn’t follow through. Anyone surprised by that has NO BUSINESS being in this business.
In real estate school something like a hundred years ago, one of the few things I remember is the instructor saying “Buyers are Liars - and Sellers too”. You have to assume - if you want to be safe - that you are going to be lied to in this world. It’s sad, but true. Anyone who believes a seller, buyer, salesman or anyone else’s representations that is trying to get you to buy or sell something is setting themselves up for failure and even severe financial and personal problems.
So, she seems to have failed in doing her “due-diligence” - checking out the properties, home inspections, plumbing, heating, structure, electical, etc. What I read in the article is she was too busy buying to follow through on buying safely or possibly just too naive.
Next - and this is a big one - she didn’t appear to buy profitably. A deal that is too skinny can have the profit eaten up in vacancies, repairs, etc. If I were to describe a “Risky” business venture as a case for a business class - I would diagram what Ms. Porter did.
1- Profits too skinny
2- Unknown risks (by not doing proper or enough Due Diligence.
3- Very poor credit risks
4- Improper capitalization.
Let’s look at number 4. I think it is foolish to attempt what happened here without some ability to follow through. To put yourself in the middle of a transaction where if someone doesn’t pay you, you can’t pay others is risky. To top that off by choosing as your clientele people with a proven track record of not being able or willing to pay their debts is brilliant.
Where are the reserves? Where is the ability to hold it together when a few people don’t pay? Where is the profitability to be able to fund marketing, employees and what appears to be an extravagant lifestyle?
Not only is there not money for contingencies, but little ability to fund overhead. So she bought 60-100 properties (she doesn’t even know how many) - big deal. If she is making only a thosand or two per property, there is very little cushin there. Her overhead has to eat half that at least. Her lifestyle has to eat the rest and just a few people not paying, evictions, legal fees, vacancies and she is done for.
Profitability doesn’t always come in doing more and more deals. It’s like the joke about “we’re losing money on each deal - but we’ll make it up in volume.”
The lawsuits obviously were one of the contingencies that weren’t planned for. Look at who you are dealing with - desperate sellers and desperate buyers. If something goes wrong, you can be there will be lawsuits. I won’t go into the psychology of it right now, but both of these groups are victims and anyone trying to save or help them will many times end up portrayed as the next “victimizer” who took advantage of them. It’s amazing how they can be on your doorstep begging you to save them and their property one week and on their attorney’s doorstep the next complaining you stole it. We don’t know Ms. Porter’s ethics or her thinking. It’s possible she did the best she could - under the circumstances. It is the circumstances that have a high probability of failure.
It’s not enough to learn to buy properties for little or no down. Many “no down” deals should send you running and a naive investor sometimes says “yippee” - only to inherit the previous owner’s problems. I wrote an article back in 1878, probably my first, titled “Ten ways to become a Don’t Wanter” or “Don’t-Wanter-Itis can be contageous” detailing this very thing. I’d find it and re-publish if it wasn’t on the old smoke damaged TRS80 in my basement.
You need to buy properties safely. If you are not able or trained to do the “Due diligence” that is necessary, then hire someone who can. Even when and if you become a pro at it, it can still be cheaper to have someone else. Have a checklist, make every property subject to a thorough interior and exterior inspection and then follow through. Sometimes new investors almost want to run from investigating a deal that they’ve just signed up like they just shoplifted something.
MAKE YOUR DEALS PROFITABLE! It is possible to make as much on one or a couple deals as most real estate investors make on 60-100 without anywhere near the kind of effort. It is about education - NOT SYSTEMS. Newbies are drawn to the “Step one, Step two - Here’s all you need” type pitches and courses. That MAY be good as a start, but keep it up.
True and long term profits in real estate comes from learning all you can and being a problem solver with a large toolbox of techniques, strategies and profitable methods. When you know more solutions to problems, you recognize and can solve more problems. Deals you turn down now make make you tens of thousands. Deals you are accepting may become too tiny for your future. If there’s a book you haven’t read on real estate, read it. If there is an article here you haven’t read, the read it. Take off the blinders and consider that you might not be using or doing the best, safest or most profitable techniques. Sometimes the simplest sounding techniques - or easiest to sell to customers - do not make for the safest or best long term strategy.
Anyway, that’s today’s rambling from me.