Real Estate Fraud--Lessons?

We're all probably more susceptible to scams than we would like to admit. I've been fortunate in my still relatively young real estate career to have a mentor, Dave. After a career as a fortune 500 executive, Dave retired in his forties to enjoy the good life. Soon enough he was bored, and decided if other people could invest in real estate, so could he.

Lucky for me, Dave did much of my learning for me. After working with Dave for nearly 18 months, I know I have learned a lot, but I also realize just how little I knew when I first started. Indeed, I thought, people buy and sell homes every day, average people flip homes on TV! If I can pass the bar exam and do trial work, surely I can invest in homes.

I now understand how naive I was, and how LUCKY I am to have someone like Dave who not only buys my rounds, but teaches me when there is nothing in it for him (Thanks Dave!). I don't know if I would ever have fallen for a scam like the one described below, but I know I'd probably have made my own expensive mistakes. Real estate can and should be very profitable, but one mistake can permanently end what should be a long and profitable career. My advice to my friends is always ask me anything at all, even if we are not doing business!

Enjoy the article.

The ads said, “Dare to Dream,” and Jeff Denison was among dozens who did. Now his dream is a nightmare.

All he had to do to get into Utah's red-hot real estate market in 2006 was sign a contract with Dare to Dream Investments. That signature allowed his good credit to underwrite the purchase of a building lot and construction of a house.

He didn't have to lift another finger. Dare to Dream would do it all for him: Find the lot, hire the contractor, sell the house. He would get 55 percent of the profit right off the top. No muss, no fuss.
Denison liked the program so much, he signed up for two houses.
Now he's left holding the bag on two $300,000 mortgages beyond the one he owes on his actual home. And with the mortgage-credit crunch, not to mention the spiraling cost of gasoline, houses in Grantsville aren't selling to Wasatch Front commuters like they once were.

Making matters even worse, the structures have piles of liens against them by subcontractors who didn't get paid. Denison is struggling to find money for them, too.

“The biggest thing I've lost is my good credit [rating],” he said. “I'm trying not to go into foreclosure. But I've had to go 30 days, 60 days late [on mortgage payments]. I just can't keep up with it.”

His houses are among 42 built in Grantsville's Silver Fox
development by Dare to Dream investors. All but three remain empty, creating a modern-day ghost town.

Denison and other investors in Silver Fox properties say they were “misled” but have not filed suit against Dare to Dream or its sister company, Transform America Mortgage. Some are contemplating legal action; others are unsure whether it would be worthwhile.

But two other groups of Dare to Dream investors in Layton and Lehi projects have filed suit in U.S. District Court for Utah, claiming they were victims of fraud.
One action, filed in October by Gregory Waddoups and other investors in Layton real estate, says, “Dare to Dream does not disclose the risks or possible repercussions of the investments scheme . . . the investor is liable for any overages that may occur through the construction of the project.”

Waddoups' attorney, Brennan Moss, said in an interview that Dare to Dream's building lots were purposely appraised higher than their actual value, and contractors schemed to under-estimate building costs, believing they could get additional funding from investors once the houses were under construction.

“Dare to Dream profits from the scheme in an amount that is directly related to the appraised value of the lot,” according to the suit.

Moss said some of his clients are left with mortgages of $600,000 to $700,000 on homes that are worth only $450,000 in today's market. Some of the houses have not been completed.

“The real estate fraud may have worked for a time when housing prices were going up rapidly,” he said. “But Dare to Dream played fast and loose. It's terrible. It's devastating.”
Although Moss named a dozen defendants in the lawsuit - including appraisers, loan officers and builders - he lays most of the blame in the lap of Kimberly Schneider, of South Jordan, who ran Transform America Mortgage and Dare to Dream.
In March, Schneider filed for personal bankruptcy. Transform America Mortgage and Dare to Dream no longer exist.

In an interview, Schneider, a divorced mother of six, denied fraudulent activity. And she is broke, she said, to the extent she can't even hire a lawyer to defend against the lawsuits.

Among other things, Schneider blames the fiasco on the national credit crisis and the real-estate slump that followed.
“The market crashed in July [2007], and we couldn't close our loans,” she said. “I cried the entire month. It's my entire world.”
The lot appraisals and construction bids were all independent, she insisted - not part of a scheme.

Schneider explained that her parents lost their life savings in the Dare to Dream venture. She, too, poured all of her own money into the program in an effort to keep it afloat. And her brother holds mortgages on two houses he purchased through Dare to Dream.

“If we were doing any form of fraud, would I expose them like this?” she asked, noting that investors were left with properties, while she has nothing. “The money that was lost was our money.”

But Wesley Hutchins, an attorney for Marylee Asay and the Lehi group of investors who filed suit last month, said some of his clients have lost their Dare to Dream houses through bank foreclosures.

“Dare to Dream left my clients in dire financial circumstances,” he said. “It was speculation with other people's money and without full disclosure.”
Schneider and others involved with Dare to Dream cannot simply declare bankruptcy and walk away, Hutchins said. He has filed a complaint against Schneider in bankruptcy court, seeking to collect damages from any present or future assets and even future wages.

The Utah Division of Real Estate has heard plenty of complaints concerning Dare to Dream, according to Director Mark Steinagel.

While not commenting specifically about Dare to Dream, he warned potential investors against schemes that look too good to be true.

“We often hear of people trusting a little too much,” he said. “Their credit gets ruined, and they have people after them for construction liens.”

Steinagel said that when land appraisals are artificially inflated to generate loans of more than the land is worth, “it's a classic case of real-estate fraud.”