American Greed

The Greed Report: Tempted by the real estate market? Investor beware!

Getty Images

Real estate is red hot. With the prime spring selling season still weeks away, the National Association of Realtors says list prices nationwide are up 10 percent on average from a year ago.

At the same time, the inventory of properties for sale is at a record low, the association says. Add the fact that interest rates are relatively low but poised to move higher, and many are concluding that now is an ideal time to invest.

If you are among those considering the potential opportunities, you should also consider a cautionary tale from the last boom a decade ago.

In 2006 and 2007, like today, demand was high and supply was low with no end in sight. The stock market was booming, too, but many investors — especially those nearing retirement — wanted something a little safer.

Enter John Bravata, a smooth-talking, sharp-dressing former cop from Michigan, profiled on the latest episode of CNBC's "American Greed."

Bravata's firm, BBC Equities, sold shares in a real estate investment fund to hundreds of eager clients, most at or near retirement age. The pitch: They could cash in on the lucrative real estate market with virtually no risk. He made the claim repeatedly in carefully scripted "investment seminars."

"I gotta tell you that — and this is a bold statement, but we'll back it up — not one of our clients ever lost a dollar," the mustachioed Bravata says in a video recording of one of his presentations.

BBC, which some insiders nicknamed "Billionaire Boys Club," said it could offer double-digit returns while guaranteeing investors' principal. It was simple, Bravata claimed. BBC would use its customers' investments to purchase federally insured certificates of deposit. It would then use those CDs to leverage vast purchases of real estate.

In reality, Bravata was running a $50 million scam. Most of the investors' money went not to CDs or real estate, but toward paying off earlier investors and paying for Bravata's lavish lifestyle. The scheme finally fell apart when the housing market collapsed in 2008 and investors tried to withdraw their "guaranteed" principal. Many lost their life's savings.

Bravata is serving a 20-year prison sentence after a federal jury in Michigan convicted him on 15 felony counts. A judge ordered him to pay $44 million in restitution, but a court-appointed receiver found the money was essentially gone.

Experts say the Bravata scam shows why now is a time to be extra careful.

"A lot of scams happen when the market is high," said Jenice Malecki, a securities attorney in New York. "Investors will believe that this person knows what they're talking about because the market is high, and they're in it, and they appear to be doing well."

To avoid becoming a victim of a real estate scam, Malecki says to demand documentation about the deal upfront, and read it carefully before investing any money.

"You have to ask yourself who is behind the investment, and how is it secured," she said.

That is important for any asset class, but especially for real estate.

"A lot of times investors will suspend disbelief and not use the tools that they know are there," she said. "They don't think about the location of the property, the identification of the property, and the security interest involved."

Malecki suggests thinking about real estate investments the same way you would think about buying your own home.

"If somebody was going to spend hundreds of thousands of dollars on a home, they would engage a lawyer to make sure that the contract was appropriate and that their interests were properly represented. But yet, when it comes to an investment, somehow they try to skip a step," she said.

Consult an attorney. Perform due diligence. Ask for audited financial statements. If they are not available, ask why not.

In addition to checking out the investment itself, do not forget to check out the person who is selling it. In most cases they must be registered. The Securities and Exchange Commission and the Financial Industry Regulatory Authority (FINRA) offer online tools to check out investment professionals.

Beware of any investment that purports to be "guaranteed" or offers unusually high returns.

"No investment is guaranteed," Malecki said. "So when you hear a guarantee, and a return that's a little too high, then you have to ask yourself, is this possible?"

Finally, beware of slick salespeople running "investment seminars," which Malecki says can be a sign that the firm is a little too eager to recruit clients.

"That's a huge telltale sign," she said.

John Bravata's seminars even included a complimentary meal, proving once and for all that there is no such thing as a free lunch.

Go inside John Bravata's crooked "Billionaire Boys Club" on the all-new "American Greed" -- Monday, Feb. 13 at 10P ET/PT only on CNBC.