From The Ground Up
by Phil Hardwick
Published: September 9,2002
I smell trouble.
The odor comes from a pot that is bubbling with a mix of a stressed-out stock market, distressed investors, a lack of double-digit investment alternatives and the usual swindlers who come out in times like these. If you are an investor in search of high yields don’t be tempted by what I predict will happen in the near future.
My prediction is that it won’t be long before investors see advertisements in many forms touting real estate as “the” investment to be switching to. Although real estate is not a bad investment, some of these enticing inducements will be scams. It has happened many times in the past when conditions are what they are now.
The scam begins with the promise of high returns on investment. To learn the details, all the investor has to do is attend a meeting — usually at a local hotel — to learn of a fantastic opportunity to earn over 10% on the investment. The interested investor is “allowed” to bring only one other person with him or her because “this is a limited opportunity available only to a few selected individuals.”
The meeting will be a high energy meeting featuring a dynamic speaker and renderings of a real estate development, often on or near a beach. The speaker will open by asking how many people are happy with their investments. He or she will then talk about an investment that has performed well over time. It will be mentioned that before all the dot.com millionaires made the Fortune 500, it was real estate investors who dominated the list of richest people in America. Next the speaker will talk about the current real estate market and how it is performing so well. There will even be a few examples. The crowd will be told of how difficult it is to invest in real estate in spite of cable television shows that make it look so easy. After all, who wants to get calls in the middle of the night from renters whose commodes are overflowing?
By now the crop of investors are ready to be harvested because they are salivating to learn about an easy, low-risk way to invest in real estate. They will first be shown the renderings of a real estate development. As I mentioned above, it will probably be a resort of some kind. The speaker will talk about demographics and how more people are owning second homes and taking vacations and getting older, etc, etc. In short, the speaker will convince the audience that there is a strong demand for the real estate product.
Now, wouldn’t it be great if everyone in this room could participate in this incredible opportunity?
The investors are then told about how they can own part of this investment. The investment will probably be in some form of limited ownership in which the investor will invest, but not have to be involved in, the management of the property. Not only that, but the investor will only be liable for the amount he or she invested if the property goes belly-up. Isn’t that a wonderful concept? A person can only lose all of his or her money.
The speaker will be sure to mention that guarantees can’t be made on how much the investor will earn, but there will be charts showing what happens under various scenarios that seem perfectly realistic to those in the audience. The audience will then be asked if there are any people who want to buy into this investment tonight. The ones who raise their hands will be herded into another room where the deal will be consummated and they will be treated royally. The ones who stay in the main room will be treated to a harder sell.
The investment itself may or may not be successful. This type of marketing doesn’t produce a lot of successful real estate investments. It does produce a lot of income for the promoters.
Now I’m not guaranteeing the above is going to happen. But I’ve seen it many times in the past when market conditions are what they are now and I have no reason to believe it won’t happen again.
If you see advertising of double-digit returns, your early warning system should go into effect. Before investing in any type of project as promoted in the manner described above please contact the Mississippi Secretary of State’s Office and the Mississippi Real Estate Commission. They have dealt with these schemes in the past and they know what to look for. They can also tell you what to look for.
The conditions are right and the pot is bubbling.
Phil Hardwick’s column on Mississippi Business appears regularly in the Mississippi Business Journal. His e-mail address is email@example.com.
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