6 Guiding Principles Real Estate Investors Should Use to Avoid Investment Fraud

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One of the biggest real estate investment fraud schemes in recent history has been exposed. Wells Real Estate Investment promised investors that their money would be used to buy, renovate, and develop commercial and residential properties across South Florida. Instead, they gambled $28 million of $58 million in investor funds on speculative options and futures trading.

Surprise, surprise—they lost almost $12 million in the process.

The 660 investors who trusted Wells with their money are undoubtedly in a tough position. However, while the SEC has filed a complaint against the company, who knows if investors will ever see recourse for the crimes committed?

So let this be a cautionary tale: Fraudsters are out there. Wells had been in operation since 2017—not all that long, comparatively, but seven years is plenty of time to scam people.

So how do real estate investors—especially those just entering this industry—avoid fraudsters, scammers, and ne’er-do-wells? 

Principle 1: Do Your Research

The first thing investors must do is research. It’s not enough to read through the company website. Truly investigate.

What results does Google return on the company? What do BiggerPockets users have to say? Is the company being talked about among other investors? When problems come up, do you see the company addressing the issues? 

In the case of Wells, for example, the CEO allegedly obscured the fact that her husband co-managed her portfolio. This is notable because her husband is a convicted felon, and of financial crimes at that! That’s a glaringly obvious red flag that a lot of people missed.

Of course, you have to research as a piece of the puzzle, not a whole puzzle. People can share sad stories and examples of what they feel are misdeeds when, in reality, it may be more missed expectations and poor experiences. There is a difference between bad service and intent to defraud, and plenty of bad business owners are not committing fraud.

Further Reading: 6 Green Flags in a Turnkey Real Estate Company

Principle 2: Verify Documentation

Don’t take a company’s word at face value. Verify their claims. What about outstanding liens, lawsuits, or bankruptcies? 

On the surface, all may seem well. Every company wants to present a competent, trustworthy image. Can they back it up with real data and results?

This is also where experience truly matters. How long has this company been in business? Real estate investment often demands taking lumps in those first fledgling years. Everyone has to start somewhere, but you don’t have to invest in inexperience.

Principle 3: Know the Latest Schemes

Part of avoiding fraud is simply knowing what fraud looks like. While some scams are tales as old as time, others are capitalizing on modern technology. 

For example, do you know how to spot an artificial intelligence (AI) image? Listing photos may be fabricated in part or entirely. What about documents? AI is used to forge deeds, title transfers, and other critical real estate documents, and those fake documents can be used to show a trail of ownership that doesn’t exist! 

Cyberattacks, fake data, and other scams are getting smarter every day. Stay ahead of them and avoid getting duped!

Principle 4: Know Who You’re Doing Business With

Many investors are passive today. It is becoming easier to do business anywhere in the country, from anywhere in the country. This has made it easier for scam artists to find unsuspecting victims.  

A way to guard against fraud when doing business remotely or passively is to meet in person with whom you’re doing business. For instance, when buying a turnkey property from a company, you will often hear the most glowing stories about their abilities, properties, and expected returns. The purpose of meeting in person is to see if your eyes tell you the same story your ears heard. 

How big is their team? How clean are their offices? How safe do you feel visiting homes? It is easy to spin an upbeat tale but more challenging to control the narrative when an investor visits in person.

Principle 5: Trust Your Instincts

Looking at still-existing reviews for Wells Real Estate Investment, you’ll still see recommendations and positive reviews. Looking back now, we know what we know; it’s pretty eerie! People were duped. 

Here’s the harsh reality: Any and every investor is vulnerable. Whether you’re a newbie or a seasoned veteran, you can still fall prey to these scams. An easy question to ask yourself is, “Is this opportunity in line with this company’s past offers and performance”?  

If a company is offering some off-the-wall opportunity to invest in llama wool farms or off-Broadway musicals and they are accompanied by outsized returns, or they are offering little- to no-money-down deals and cash-back deals accompanied by outsized returns and these are off-brand and not the usual deals, maybe you take a flyer on those offers?  

Great companies stick to doing great things.  They don’t need to turn to gimmicks or new trendy opportunities. Even if they have all the right answers and everything seems to check out, but you don’t have peace about it, don’t do it. If you have suspicions, listen to them. Trust your gut.   

Principle 6: Start Slowly

One of the things we often guard against is scaling too quickly. I have responded to hundreds of threads on the BiggerPockets forums with this simple advice: Take your time! There is no rush to get started.  

When investors act too quickly, this can overextend resources. Investors, start slow. If this is new to you, dip your toes in before you go off the high dive! Beware if a company pressures you to act quickly. It means they don’t want you to think about your decisions as closely as you should.  

There can be true urgency, and there can even be high demand. However, if you feel pressured to get started today or you will miss out, find someone new to do business with.

Final Thoughts

These are my simple rules to keep from falling prey to fraud. We read the threads on BiggerPockets and hear the stories of jilted investors. Some chose to do business with bad companies or made bad decisions to invest with poor companies. 

Too often, though, investors are duped by fraudulent actors and companies and end up paying a heavy price with their hard-earned savings. Follow these rules, and you have a good chance of avoiding that outcome.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.