Repost from Realty 411 Guide:
Real estate fraud is alive and kicking. Many industry experts anticipate real estate scams and legal issues to escalate in tandem with the new housing boom in the U.S. So how can investors at all levels enjoy sustainable investing, fend off risks of fraud, and better fulfill their goals of solving the issues they care about the most?
The Emerging Fraud Boom
Median existing home prices rose 11.5% last year, according to the latest data from the National Association of Realtors. NAR forecasts the median price of a new home will hit $289,700 by 2015. Based upon global, historical housing cycles, the new U.S. housing boom phase should last another seven to fifteen years. As the momentum grows during these periods, more and more Realtors get their licenses lenders have to work harder to compete for business, and an increasing number of individuals scale up their investments in real estate. Unfortunately, this often goes hand-in-hand with opportunists seeking to take advantage of the market, resulting in the rise of real estate and mortgage fraud. Sadly, barely a day seems to go by without another real estate mogul or industry worker being indicted or sentenced for their part in these scams.
Hop onto the most popular online real estate investment forums and a festering pool of potential fraud can be found. Here new investors looking for shortcuts are often misled by poor information, and others boast about how they fooled the banks and got away with it. At the same time, the surge in new real estate crowdfunding portals is set to make navigating the investment industry even more complex.
So how can real estate investors avoid being victimized by scammers, become unwittingly involved in fraudulent practices, and prevent temptation? What should they do if they feel something isn’t right?
Ledgers, Lawyers, & Liquidity
Who better to ask about legal protections from real estate fraud than America’s top legal eagle? The Boesch Law Group in Los Angeles, CA has been ranked one of the top 2% of law firms in the nation. The Boesch Law Group, and founder, Philip W. Boesch Jr. have been involved in landmark cases including the Michael Jackson wrongful death case. He won the “Number One Judgment in the Nation”, in the Anna Nicole Smith case, and he and his firm have achieved unmatched success in business and commercial litigation. The firm has successfully handled many challenging and complex real estate problems.
In an exclusive interview, Philip Boesch pointed to “under-performing assets” as the number one underlying issue in many of the legal cases being brought to the firm.
Boesch explained further that “under-performing assets, combined with poor liquidity and poor expectations” are frequently the root cause of cases where fraud is alleged. When expectations aren’t met, and promises aren’t delivered on, many pursue unsustainable shortcuts. These shortcuts put many on the fast track to nowhere but the courtroom.
When asked what the single best defense to avoid the temptation of committing fraud or becoming victim to it was, Philip pointed out the value of “an experienced team for vetting plans and reviewing prospectuses, up front”.
This goes beyond just an experienced real estate attorney, to include tax advisers, financial planners and wealth managers or business consultants too. Having multiple sets of veteran eyes review and evaluate the strengths of a business plan or financial projections can help identify and avoid potential cash flow challenges and alert individuals to options which could increase the potential of success.
On the most important first steps to take for those believing they may be victims of fraud, Philip Boesch recommends exercising rights to “review books and records” including the “general ledger and any available accounting software downloads such as from Quickbooks.”
Many real estate project and investment opportunity promoters and organizers may not want this information on public display. It is wise for any investor to lean towards opportunities which offer the most transparency and to pay attention to information access in initial agreements.
Maintaining Property Values & Pioneering Change
Real estate, as distinguished from publicly-traded REITS or funds, is typically an illiquid if not long-term investment. To realize maximum value, as Boesch notes, investors are often advised that the property must be held for some period of time, during which the market can fluctuate up or down. Whenever investors are involved in a partnership, or a limited liability company, or a corporation, and are required to hold the investment for some period of time, it is inevitable that partners or members can grow apart in their expectations. Family issues, divorce, death, personality clashes, life changes, job changes, often can lead to changing needs and expectations. And “change brought about by these every day human events,” Boesch says, “can lead to differences, over when and how, to cash out of an investment.”
Ups and downs in real estate can be subjected to other legal challenges that impact value. Boesch cites hanging shorelines from climate change, neighbors or public entities clashing with private property rights to exercise control over development, and environmental challenges, as just a few of the current events that are affecting real estate investments. Environmental issues in particular have attracted the Boesch Law Group’s attention as Philip Boesch has developed the reputation as one of the leading legal minds and protectors of the environment.
During his tenure as President of Heal the Bay, the organization achieved the adoption of rigorous new standards to reduce coastal pollution, the completion of a multi-billion dollar sewage treatment facility, and successful litigation against the EPA to enforce protection laws. Presently active on the Board of Directors of TreePeople, the leading environmental group promoting sustainable solutions for our urban environment, he is not only passionate about dealing with water and climate change issues, but about green solutions, sustainable self-sufficient development, and organic construction materials. All of these items should be on the radar of real estate investors and developers.
The Future of Real Estate for Sophisticated Investors
Anticipating future challenges as shorelines are altered by climate change, and as pollution and regulations evolve into new legal battles, Boesch encourages real estate investors to pay attention to how these changes will affect property values. Coastline erosion and waterway pollutants, for example, could dynamically shift demand and value to properties several blocks inland, but increase disputes over walkways and views.
Those with the foresight to recognize these trends and optimize their investment strategies appropriately will be those that are most successful.
Empowering Your Legacy
“Being a good neighbor and working with local governments doesn’t mean surrendering your private property rights,” Boesch says. He directs those passionate about sustaining the value of their real property investments to TreePeople’s mission, as a strong example of how to preserve wealth by sustainable, environmentally sound management.
Several years before the real estate crash of 2007, people would ask me, “Is there a real estate bubble?” I had to emphatically tell them that we were already deep into a bubble with some areas having already “popped”. One of the reasons they would ask was because they wanted to know if a particular area was going to appreciate in value.
Here is the Lesson That So Many Investors Had to Learn the Hard Way – Including Myself‘
Don’t buy real estate with the idea that you are going to make your money through appreciation. It’s a huge mistake and an easy trap to fall into.
It’s hard to predict the future, especially years in advance. Back during the boom, everybody was looking back in hindsight and saying, “Boy, what if I’d invested in that city and got the 30% annual increase in value on the house I bought – that would have been great!” But hindsight doesn’t do us much good. It’s like gambling and is usually based on luck.
“Investing” based on appreciation is called speculation, but what I’m talking about is a much more conservative approach to building wealth with a real estate portfolio.
Build it so you know there will be cash-flow and equity growth when you’re ready to retire. If you’re going to speculate then you’ve got to be prepared to lose all of the cash you spent to acquire the property and potentially more.
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