American Greed

The Greed Report: Real Estate Scams Aim to Hit You Where You Live

Dale Haun
Dale Haun

It's the prime location for scams, scoundrels and suckers: real estate.

Think of it. Among the prized possessions we keep in our home is our self worth, making it impossible to separate our emotions from our most valuable asset.

Take Dale Haun and his wife, Clancy, who purchased their dream home in Tucson, Arizona, in 2000. For the first six years, they were able to make their mortgage payments and still put some savings aside.

"Financially, we were in a good situation," Dale said.

It was such a good situation, the dream house got them dreaming about the future.

"I thought, we'll buy this house and we'll pass it through the generations and have that homestead feeling where this has been our home for seven generations, you know. To be that family," Clancy recalled.

So when a sales representative from a firm calling itself Pacific Wealth Management offered the Hauns a plan that supposedly would let them refinance and pay off their mortgage years early, they jumped at it.

"We thought, gosh, if we could pay this house off early, then it's paid for and done, it's kind of out of the way, and we can focus on giving to people and helping," Clancy said.

But it turned out to be a scam, run from a house in Orange County, California. Ringleader James Duncan, who called himself "The King of Cash," simply co-opted his company's name from a legitimate San Diego firm called Pacific Wealth Management, and took millions from unsuspecting investors. He and a partner, Hendrix Montecastro, are both in prison.

James Duncan
James Duncan

Not only did the Hauns' monthly payment nearly double, but they also lost more than $70,000 in equity and $10,000 in savings. They now owe more than the home is worth.

"I feel like the little girl who is just happy all the time until something happens and then it's like, life is mean," Clancy said.

Real estate con artists sure are mean, and there are plenty of them out there. Paying attention to the scams of the past can help you avoid getting hit where you live. Here's a look at some of the wildest real estate scams ever uncovered, and what you can learn from them.

Waterfront Property

What are the three rules of real estate? Location, location, location. A North Carolina firm, Total Realty Management, hit that theme hard when it marketed undeveloped property to hundreds of Washington, D.C.-area residents — including teachers and Pentagon employees — in the early 2000s. With the wind of the housing boom at his back, owner Mark Dain was selling undeveloped beachfront lots for as much as $400,000 a parcel.

But the boom went bust and prices plunged to as little as $10,000 per lot. It turned out TRM used falsified appraisals and loan applications to allow people who couldn't afford the lots to buy in, while major banks allegedly looked the other way. The firm also attracted investors by falsely claiming prominent North Carolinians like Michael Jordan had trusted TRM with their money.

Dain pleaded guilty to a single count of conspiracy and served six months in prison. Three employees also did prison time, and civil lawsuits still abound in what authorities have called the biggest real estate scam in North Carolina history.

TRM was selling the land to people who wanted to live there, but also as investment property they could "flip" as prices rose. And with home prices rising again, flipping is coming back into vogue.

But investing directly in real estate can be incredibly risky. Most of us don't have the expertise to profitably renovate a home; fewer still know how to navigate the real estate market and not get stuck with money-losing property.

If you still want to try to make money in real estate, consider a Real Estate Investment Trust or REIT. As the name implies, it is a professionally managed organization that allows investors to pool their funds to buy and sell property. They tend to focus on a particular type of real estate — hotels, office buildings, apartment complexes, for example.

And many trade like stocks, which means the Securities and Exchange Commission monitors them. The SEC has a good primer on REITs on its website. Some things to consider:

  • Make sure you understand the tax implications of investing in a REIT. If you don't, talk to a tax advisor.
  • If you are investing in an exchange-traded REIT, you can check it out like any other company. Otherwise, be sure to read the fine print. Some REITs that don't trade on exchanges can be difficult to sell if you need to.

Midwest Two-Step

Mortgage refinancing
Courtney Keating | Getty Images

The TV commercials were impossible to escape in the Midwest during the 1980s.

Actor George Hamilton, looking as suave and perpetually tanned as he did in any episode of the TV series "Dynasty" around the same period, sits in a richly appointed office telling viewers how they can free up some extra cash each month by refinancing their homes through the Diamond Mortgage Company.

Flip to the next channel, and there's actor Lloyd Bridges, rugged as he used to be when he was playing Captain Mike Nelson on "Sea Hunt," but with a touch more gravitas. In an ad clearly geared toward seniors, Bridges is walking around his beach house with what appears to be his grandson on his shoulders.

"Plan for the future with an investment that grows with the years," he says before turning toward the sea.

He's pushing "secure" investments with a firm called A.J. Obie.

What the commercials left out was the fact that A.J. Obie and Diamond Mortgage were essentially two arms of the same company.

Diamond would originate the mortgages, often to high-risk borrowers who couldn't get a loan elsewhere. Obie would sell those mortgages as secure investments, typically to seniors who tended to trust real property more than the rising stock market.

Soon, the scheme began showing cracks. Individual Diamond mortgages were assigned to more than one Obie investor. Some Obie investments had no mortgage backing them at all. And some Diamond borrowers never got their money, but still found their homes mortgaged and impossible to sell. The scam bilked thousands of investors in six states out of $75 million — worth $156 million today.

Andrew Harrer | Bloomberg | Getty Images

Owner Barton Greenberg, who operated the companies with his late brother Sheldon, served six years in prison, and actually went back into the mortgage business after he got out in 1994. Regulators soon put a stop to that.

Hamilton and Bridges reached confidential settlements with investors who sued over the slick commercials.

Most real estate scams involve mortgages — an ideal breeding ground for fraud because they are so complex, and because of the sheer amount of money at stake.

The Federal Trade Commission has an entire section of its website devoted to mortgage scams. Among the warning signs, the FTC says:

Beware of anyone who guarantees they can get you a loan or avoid foreclosure.

  • Avoid anyone asking for an upfront fee.
  • Don't listen to offers to buy your house for cash for a price that is lower than similar homes in your neighborhood.

The FTC site doesn't say anything about celebrity endorsements, and since the scandal and the big settlements, celebrities have become more careful about companies and products they shill for. Still, don't be swayed by actors. They manipulate emotions for a living.

Beyond Their Means

Mortgage debt payment
Hemera Technologies | Getty Images

The biggest scandal leading up to the 2008 financial crisis had quite a bit in common with the Obie/Diamond scam, and not just the fact that one of this scam's central figures also has a permanent tan. This scam also involved lending to homeowners and selling the mortgages to investors.

California-based Countrywide Financial and its ever-bronzed founder Angelo Mozilo pioneered what came to be known as sub-prime mortgages — home loans to borrowers with low income and poor credit. But rather than risk lending money to a homeowner who might not be able to pay it back, Countrywide packaged those loans into securities sold to big investors who wanted to bet on the housing market.

When housing collapsed under all those risky loans made by Countrywide and many others, it nearly took the whole economy down with it. Mozilo was never charged with a crime, but settled with the SEC for $67.5 million. Bank of America, which took over Countrywide in 2008, agreed last year to pay nearly $17 billion in penalties.

Less discussed, though, are the thousands of people who were allowed to borrow from Countrywide even though they had no business going into that kind of debt. At the heart of the charges by the Justice Department and six states were claims Countrywide engaged in predatory lending — duping borrowers into taking out expensive loans they can't afford.

The Mortgage Bankers Association has developed a Borrowers' Bill of Rights to help you make sure you don't get taken by an unscrupulous lender.

Among the provisions:

  • You have a right to a clear explanation of the terms and conditions of the loan.
  • You have the right to obtain credit counseling before the loan closes.
  • You have the right to a fair and equitable resolution of any disputes.

The advice is equally important if you are considering refinancing your mortgage, which more and more homeowners are doing as interest rates fall.

For the Hauns of Arizona, an unscrupulous lender's promise that they could achieve their dream of financial independence by refinancing turned into a nightmare that could haunt them the rest of their lives.

It is little comfort that they were among hundreds of victims in the $125 million scam run by the self-proclaimed "King of Cash," or that they are among countless people who get taken in real estate scams every year.

Watch "American Greed," Thursdays at 10p ET/PT on CNBC Prime.