As a refresher to those who may not remember, the year 2000 was when the technology bubble burst. That event was the trigger of my eventual journey into making my own investment decisions – rather than relying on faceless people on Wall Street – in an attempt to remain financially independent well into retirement. At the core, what happened in 2000 – and consequent huge losses in our retirement accounts – represented the beginning of my mistrust in those who were running the financial system. I’m sure millions of others can related to what I’m talking about.
The three fraudulent cases that I describe, below, should be viewed as a warning to those who decide to venture into managing their own investments. Cases #1 and #2 clearly show that, when you’re inexperienced (as I was), you need to be extra careful not to be taken advantage of. Thankfully, for case #3, we were not the target of such fraud; others, however, lost their retirement funds because they “trusted” their attorney, who was the perpetrator.
Fraudulent case #1
In 2003, while both still working in the automotive industry and knowing virtually nothing about real-estate investing, David and I invested in a local property. The decision was based purely on a real-estate agent’s recommendation as a “great investment opportunity.” Making a very long story short, this agent turned out to be a cunning fraud. We later found out that he was being sued by multiple individuals who lost money dealing with him. When all is said and done, we came out of the deal losing about $20,000, an expensive lesson that could have been worse. Based on this experience, however, I decided that it was not a good idea to rely on agents to bring me deals. I chose to obtain my own real-estate license, and later became a broker as well. I use the license purely as an investor.
After this rather unpleasant experience and spending much time and money educating ourselves on investing in real estate, David and I once again began buying properties in 2006.
Today, since I understand how to evaluate property values myself and what’s involved in making purchase decisions without losing money, I have no problem considering deals brought to us by agents. The moral of the story is that until and unless you know what you’re doing, be extra careful. Fraudsters can smell inexperience from a mile away and will take advantage of you.
What to do as a new investor? Attend local REIA (Real Estate Investors Association) meetings. Ask any and all questions you may have. Start with a very small deal that you know you can afford to lose. When that one makes you money, you’re off to a good start. But never let your guard down in terms of with whom you’re dealing.
As it turned out, the $20,000 loss was nothing compared to what was to come, as you will see in the next case.
Fraudulent case #2
Post Hurricane Katrina in 2005, the Bush Administration incentivized investors to invest in the hard-hit areas. It was known as the Gulf Opportunity Zone Act of 2005 (the GO Zone Act). A huge tax incentive was available for newly-built rental properties. The deal was brought to us by an experienced investor at our local, non-profit REIA. The experienced investor organized the investment tour to Gulfport, Mississippi, and invited those interested to join the tour. It was presented as a package deal, with every component of buying investment properties having been thought through. Included in the team were a mortgage broker, an attorney, and a property-management company that was going expand into Gulfport. All team members were based in Michigan.
We visited the sites in Mississippi and listened to the investment presentations. The mortgage broker, even after we insisted multiple times that we were not going to sign a loan document with variable-interest rates, kept bringing us the same documents without changing from variable- to fixed-rate loan – until when we finally said, “No fixed-rate loan, no deal.” It was clear that the mortgage broker expected none of the inexperienced investor would read the fine print on the loan documents closely. They also emphasized that it would be best for us to simply put 5% down on the loan. Instead, David and I insisted on paying 20% down to make sure that the cash-flow numbers would work for us.
Again, making another very long story short, this GO Zone investment turned out to be a complete disaster for us. The reality of what happened was quite contrary to the “great investment opportunity,” as it was presented to us. Because of the tax incentives and consequent glut of rental properties, the rental revenues kept declining. We ended up in the red from early on. In one complex, we owned three out of the eight duplexes. The other five, all originally purchased by those who were on the tour from Michigan, including the organizer, were foreclosed. (In retrospect, the organizer of the buying tour knew to cut the loss early on.) As for us, we kept making the mortgage payments until such time when we realized that there was no end to it. We were complete novices when it came to how to deal with this type of financial situations.
We learned that the bank was not interested in talking to us at all to help avoid an eventual financial disaster, and that the only way it would start the short-sale process was if we were to miss three consecutive payments – on purpose! It made no sense but, in the words of our then attorney, “Reiko, you have to stop paying good money after bad.” You probably remember hearing about those who simply walked away from the properties on which they owed money. Well, David and I were both from the old school. We simply thought that doing so was wrong.
When all was said and done, we went from having zero debt at the time when I left Chrysler to carrying an outstanding mortgage obligation on our primary residence (which was used as the source of our investment funds). In other words, we are continuing to pay for the properties we no longer own. The reason for this is because we chose to bite the bullet and take the financial responsibility rather than declare bankruptcy. Financially, perhaps, we were naïve not to choose the bankruptcy route. Morally, however, I believe we did the right thing.
What to do as a new investor? Stick to what you know. Again, focus on investing in one property at a time, making sure that each additional investment is a money maker. This could be quite boring to some of you. But boring is much better than losing money.
Fraudulent case #3
This shocking case came to my attention earlier this month. In fact, this is what triggered me to write on the topic of fraud. I have little to say about this case except, “Thank goodness we were able to steer clear of losing everything.” Our “now former” real-estate attorney, who gave me the advice about stopping to pay good money after bad, was caught defrauding his investor clients of millions of dollars and is currently in jail. I’m guessing but it appears that the primary reason we were not targeted in his scheme was because he knew that we had little money left to invest after the GO Zone fiasco.
What to do as a new investor? I used to dislike one of the Japanese proverbs when growing up in Japan. It goes as follows: “When you meet a stranger, think of him/her as a thief.” That sounds awful, doesn’t it? Well, when you live long enough, you begin to realize that there is some truth to it. Sad but true…
In conclusion
There are many lessons involved in each of the above three cases, which will be covered in detail in my book #2, a sequel to my autobiography, “To America with Profound Gratitude,” published in 2012. For me, the bottom line is that, despite all the trials and tribulations, I am proud of the choices I have made. Here is why: If I did not choose the path that I have been on, I would have remained terribly scared of what the stock market might do during the next down turn. Today, while our cash flow remains extremely tight, I am far less concerned about what happens on Wall Street thanks, in large part, to the many skills that I had to attain over the years to be an independent investor.
Happy investing!
