U.S. Investors: How To Spot a Real Estate Scam

All successful scams and cons have two things in common:

1) All scams involve a ‘hook’ designed to play on our natural greed and opportunism by asking us to do something that seems only slightly unethical (on the surface) in exchange for a huge monetary pay off. 2) All scams then count on our shame at accepting illicit terms to make sure we don’t report the crime or pursue justice.

Real estate scams are no different, and foreign investors have to be especially careful not to be taken in, especially investors who are new to the game. The Web is literally crawling with spammy get-rich-quick real estate investment sites. A single Google search will net you thousands of them. How can you tell a real opportunity from a scam? The best way is to thoroughly educate yourself on the current U.S. real estate market. You can start by reading our own article on U.S Real Estate Prospects for 2009.

In addition, the following tips will help you separate real deals from fake ones:

The deal sounds too good to be true. The old saw that if it sounds too good to be true then it probably is applies to real estate every bit as much as it applies to those Rolex watches being hawked out a Lincoln Navigator. If the deal you are being offered sounds too good to be true, don’t jump. Get your own attorney and real estate agent first, and investigate every angle thoroughly. The deal may indeed be genuine, but the only person you can really trust is you.

You read about it on a cheesy website. Really good real estate deals still disappear so quickly they barely get time to get settled on the Multiple Listing Service. Sometimes the photos never even make it onto the Web. If someone had to set up a spammy website to entice foreigners into buying certain U.S. properties, you can be pretty sure there either isn’t any property, or there is, but it is over-priced and nasty. Don’t even think about participating.

You have to go through an arrogant third party. If the come-on involves a lot of bashing of real estate professionals and a lot of bragging about how the third party has the ‘secret’ that will make you rich fast, run for your life. This is the classic “bend the rules with me and we’ll both get rich” line used by all professional con artists. He’ll get rich, you’ll lose everything.

You get lots of assurances of how easy it is. Investing in real estate is like home improvement in the sense that Murphy’s Law, “If anything can go wrong, it will,” definitely applies, as well as Murphy’s Corollary Law, “Everything costs twice as much as you think and takes twice as long.” Some people have become quite wealthy by investing in U.S. real estate, but very few of them did it while relaxing in their hot tubs and watching the money pour in. Not even Donald Trump gets off that easily.

The ‘service’ is targeted at foreign investors. During the craziest part of the recent real estate bubble, a common scam involved selling slum properties to recent immigrants and foreign investors at double the actual value on very poor mortgage terms. The scammer always worked with an appraiser who was in one the scam, and used out of state subprime brokers who knew they could sell the loans immediately and had lax underwriting standards. (See how we got in all this trouble?)

The immigrants were assured that once they got to the U.S. they’d be able to rent these places easily for huge profits. When they actually arrived, the scammers had cashed out the (false) equity in the worthless properties (which were deeded jointly to the immigrant and a nebulous third party name) and then disappeared without a trace, leaving the investors to make huge monthly payments on properties that were uninhabitable.

U.S. real estate prices are dropping fast, and great deals are definitely out there, but in general, there's no substitute for research, hard work, and top-notch licensed professionals.

Keep that fact in mind, and you'll do fine. Happy hunting!