Real-Estate Investors Should Beware of Scams

By GENE J. KOPROWSKI

No money down!
Make a million dollars now!
No-risk offer!

Maybe you've heard these come-ons, or similar ones, offering you the chance to learn how to become a real-estate investing millionaire? These high-volume, low-brow pitches are common from promoters of real-estate investing seminars.

Joe Pianecki, a real-estate investor in Atlanta, recently attended a weekend seminar that seemed like a rip-off to him. The first part was just a goal-setting exercise. "The middle part gave some information about what could be done, but taught very little about how to do it," he says. "At the end, it all led to having to take more expensive -- $3,000 to $5,000 -- seminars and boot camps to receive the actual hands-on experience you needed. They made you feel that you would fail if you didn't take it."

"These seminars are fascinating from a sociological perspective," says Stephen Roulac, a professor of real estate at Stanford University, and a real-estate investment consultant for the past 30 years. "They play to people's greed and fear."

Not all real-estate investing seminars are a bad bet, of course. Indeed, many will help you learn about the business of investing and can be a worthwhile place to start, experts say. But, how can you tell the desirable from the dross?

"My general theory about these seminars is that if it seems too good to be true, it usually is," says John H. Vogel, a professor of real estate at the Tuck School of Business at Dartmouth. Savvy would-be investors should take their time developing their knowledge of the real-estate industry and shouldn't look to get rich overnight.

What to Look Out For

The U.S. Federal Trade Commission advises consumers to be suspicious of claims that money can be earned fast, despite lack of experience, that making money using the seminar operator's formula is a sure thing, and that the money-making opportunity is only available for a short time.

The number of seminars offered to would-be real-estate investors has exploded along with the booming real-estate market. "If you go on Google.com and search under 'real-estate seminars,' you'll find hundreds," says Mr. Vogel. These seminars are distinguished from professional or academic courses that focus on specific topics, such as real-estate demographics. It isn't unusual to see ads for public seminars promising to teach you "everything -- in three days," says Mr. Vogel. Such seminars often are free, but are intended to entice you to pay for additional knowledge at a future conference.

Eric Janssen, a real-estate manager in New York, takes seminars regularly at New York University's real-estate program, as well as those offered by trade groups, on topics from "how to put together deals in real estate to how to buy and sell property to how to negotiate the best deals," he says.

But he's cautious about seminars offered by individuals, even if the presenters are famous or featured in television infomercials. "Some want you to invest in their real-estate scheme somewhere, or they want you to buy some sort of program whereby you can apply formulas to investment in real estate," says Mr. Janssen.

The 'Greater Fool' Theory

Public seminars may be fine for an introduction to investing, but clearly the business of real-estate investing can't be learned in just a few days, experts say. "The skills it takes to be successful in real estate take years to accumulate," says Mr. Vogel. "You've got to be cautious."

Aspiring investors, therefore, are advised to walk out of seminars that offer advice, for example, on how to trick others into buying a property you're selling. Many get-rich-quick offerings rely on the "greater fool" theory of marketing, which is based on the assumption that there's always someone "out there" willing to do a deal, even if it's disastrous financially.

"They're not really teaching you how to sell real estate," says Diane Saatchi, president of Dayton Halstead Real Estate, a firm that sells property in the Hamptons on Long Island and other exclusive locales. "They're teaching you to look for a fool who will sell you something or go along with a deal that's bad for him. And they never in these infomercials and seminars give both sides of the story."

Highly Leveraged Opportunities

One primary reason that real-estate investments attract newcomers is that leverage -- debt -- is an accepted tool for doing business. Thus, you can get into the business with no money down. "There really is the opportunity to do extraordinarily well," says Mr. Vogel. "So there are success stories and credibility. But the same leverage that allows you to do very well allows you to go bankrupt as well." Moreover, there are low barriers to entry in the real-estate business. "It's easy for everybody to get into it," he says. "That's what lends itself to hype."

But budding investors should realize there's a high cost of getting into, and getting out of, real-estate transactions. "If you're buying a piece of real estate in the East Hamptons, or wherever, there are legal fees, surveys, title costs, mortgage fees, a mortgage-recording tax, and that adds up to thousands and thousands of dollars," says Ms. Saatchi. "That affects the cash you need upfront. When people say you can buy with no money down, well, you can't. It's expensive."

And some seminar promoters run afoul of the law. In March, a real-estate seminar promoter was sentenced to 30 months in federal prison after pleading guilty to charges of mail fraud and wire fraud stemming from his real-estate seminars, according to a spokesman for the U.S. Attorney's Office in Pittsburgh. Michael Enelow allegedly defrauded more than 1,000 seminar attendees from 1995 to 2000. He had placed advertisements offering to "share in the profit" of any real-estate transactions that attendees brought to him. Attendees paid $1,500 each to "join" him in his real-estate business. The Federal Bureau of Investigation alleged that the seminar promoter lived off of the proceeds of the seminars and that his real-estate deals were paltry.

Mr. Enelow was also ordered by the court to pay $1.7 million in restitution to those who had attended his real-estate seminars. He must also forfeit some real-estate holdings, according to the U.S. Attorney's spokesman.

The FTC has been active in policing real-estate seminar operators in the past. In 1998, the FTC investigated real-estate seminar operators in a probe called "Operation Showtime." Eleven states brought 18 legal cases against seminar operators selling a variety of business and investment schemes.

If you have been taken in by one of these pitches, you don't have to feel victimized. You can fight back. Mr. Pianecki did.

"I found the seminar so distasteful that I wrote to the company after the weekend and asked for a partial refund and received it," he says. He received back $500 of the $1,500 he'd paid for the weekend.

Read the FTC's booklet on real-estate seminar scams: "The Seminar Pitch: A Real Curve Ball".

-- Mr. Koprowski is a free-lance journalist in Chicago

This article reprinted from the Wall Street Journal online at:

http://homes.wsj.com/buysell/agentsandbrokers/20030502-koprowski.html