When in Rome, Don’t Do What the Romans Do
I’ve been watching a lot of “American Greed” on CNBC lately, and it reminds me of someone that I know personally. For privacy purposes, I’ll call him Bob.
When I first met him, I was very impressed with him. Bob lived in a sprawling mansion in a gated community with expensive cars parked outside his home.
This week I found out he’s currently in federal custody, looking at up to 30 years in prison with a $1 million fine, as a result of his white collar crimes. He has plead guilty to bank fraud and conspiracy to commit bank, mail, and wire fraud in connection with a scheme to fraudulently obtain millions of dollars of mortgage loans from lenders.
Bob is 4 years younger than me and when I first met him I thought to myself, “Wow, this guy is doing very well. I wonder what he does for a living.” I quickly learned from Bob that he was a real-estate developer who built million dollar custom homes and he also owned a real-estate investment company.
I was interested in learning more about Bob’s business and one day he explained the process to me. Basically, his real-estate investment company helped people find homes below market values, where he would help renovate (if needed) and help to put section 8 tenants in the home, all this for a very steep fee of up to $30,000. People flew from all over the country to have Bob hold their hands to invest with him. He would wine and dine them and when they visited his mansion, they were hooked!
Bob said if I was interested in investing with him to let him know. At the time I was laid-off, so I told Bob there was no way I would be able to get a loan because I was unemployed. He told me he could help me get a loan by stating I was a consultant employed by his company. That would have been totally illegal, but at the time I didn’t think about it. However, there was no way I would invest with Bob because I would never pay his hefty fees of up to $30,000. I would do the work myself.
What Bob failed to explain to me back then, which ultimately landed him in trouble, was that he helped his client falsify mortgage applications to get loans that they probably didn’t qualify for. He also paid kickbacks to appraisers so they appraised his client’s homes for much more than they were worth so his clients could pull equity out their investment properties. He was also in bed with a local corrupt bank which went belly-up to conduct much of these transactions. The CEO/Co-Founder of the bank recently pleaded guilty to fraud and is also looking at 30 years in prison and a $1 million fine.
Another problem that caused Bob to get a lot of attention was that he didn’t take care of his customers. Once he got their money he pretty much dropped catering to them. He didn’t return phone calls, and things fell apart when transactions were not handled the way they should have been. When the real-estate market started going south, even more investors started complaining.
In following Bob’s case there are a few things I’ve realized:
- Follow the law. This is the obvious. There are no shortcuts and eventually things will catch up with you.
- Offer excellent customer service (crook or no-crook) because with the Internet people can easily ruin your reputation and get the authorities to notice you. Before the Internet had blogs and forums, it would have been difficult for all the investors to find each other to discuss their common problems.
- There is limited privacy with the Internet. I suspect Bob may have to change his name if he ever decides to look for a job in the future when he gets out of prison. Google his name and all sorts of articles with his picture appear. The Internet can be deadly!
- Nothing goes up in a straight line. Just like the Internet Bubble, the real-estate market and the economy, things eventually go down. If the real-estate market and economy was still hot, Bob would have still been in business. His clients may have complained about his poor customer service, but they may have been happy with the value of their property increasing.
- When it Rome DON’T do what the Romans do. Back when everyone was making money in real-estate, everyone looked the other way. The banks, Wall Street, mortgage brokers, real-estate lawyers, borrowers and appraisers all looked the other way. They knew most of these loans were bad but they were still processed only to get paid. We all know what happened after!
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