Steer clear of shady real estate investment schemes
By Attorney General Roy Cooper
With the real estate market booming in recent years, many people have invested in real estate and property developments. The sales pitches for these investments often promise high returns with virtually no risk. While many real estate opportunities are legitimate and live up to their promises, some are schemes set up to take advantage of investors.
Recently, my office won a court order to stop a $100 million real estate venture
in the North Carolina mountains. A group of developers behind the proposed Village of Penland development in Mitchell County sold overpriced lots and promised consumers they could make a profit without having to invest any of their own money. This complicated scheme used inflated appraisals and phony second mortgages as down payments to get consumers to borrow millions of dollars to purchase property in the development.
These developers used several different schemes to entice consumers to use their credit to purchase lots. In one scenario, the developers told consumers to apply for credit to buy ten lots for a total of $1.25 million and promised to buy back the lots at the same price within three years. Consumers were told that these ten lots would then be developed and that they would receive $100,000 when each home sold. In other cases, developers asked consumers to buy 20 lots for $2.5 million. The developers promised to buy the lots back in two years and deed consumers an additional 20 lots plus a house, which the companies said they would then rent from the consumer for $280,000 a year as a model home.
Consumers were later told that the developers would not be able to make the monthly mortgage payments as promised, leaving consumers stuck with large debts and no way to sell their lots for enough money to cover the loans. The developers have failed to complete any part of the project and instead used the money to fund other failed projects in South Carolina and St. Thomas and to pay for trips such as a cruise to the Greek isles and a ski trip to Switzerland.
To avoid being the next victim of one of these real estate schemes follow these tips:
- Do your own research on the property and investment opportunity. Investing in real estate should not be an impulse decision. Don’t rely on the information that is provided to you by the developers or principals and instead do your own research on the property and the real estate market in that area. Check independent references for the developers and builders to make sure they are reputable.
- Get an independent appraisal to check the value of the property. Never rely on the appraisal of the developer or seller. Hire an independent appraiser, and be sure to check that he or she is a licensed appraiser in the state where the property is located.
- Consider having your own attorney review the closing documents before you sign them to be sure that everything is accurate and above-board. You should not sign a closing statement that isn’t entirely accurate. Don’t agree to go ahead and sign something that isn’t accurate even if the developer promises that he or she will “take care of everything” after the closing.
- If the development involves more than 100 lots, ask for the HUD Property Report. Developers are required to register projects with more than 100 unimproved lots with the US Department of Housing and Urban Development. The HUD Property Report will include a disclosure statement outlining how the development will be completed and how services such as water and sewer systems will be provided. This same law, the Interstate Land Sales Full Disclosure Act, also provides protections for consumers by giving them a period of time to cancel their purchase in the development.
- And remember, if the opportunity sounds too good to be true, it probably is.
Attorney General Roy Cooper and his staff work from January through December to help consumers make smart choices. We are here to be of service when you need us, but through consumer education efforts like these columns we hope to help North Carolinians avoid problems from the start.