Confessions of a Ponzi'ed Investor

Some real estate investing stories strike too close to home.

The Denver Post reported on Friday that Colorado-based real estate promoter Frederic "Rick" Dryer was sentenced to 132 years in prison following his conviction last year on 44 felony counts of theft, securities fraud, conspiracy, and racketeering. He was the founder of the "Mile High Capital Group" which took $34 million from more than 1200 investors - who thought they were investing in new duplexes in growing markets.

My husband and I were some of those investors - this was our very first real estate investment - in a duplex in Greenville, South Carolina. Since this was a pre-construction deal - we put about $16,000 of earnest money down, signed the contract, and started waiting for the updates on the construction.

In a bit- we received an update that Mile High was being placed into "receivorship" as part of bankruptcy proceedings.

The final outcome? The hubby and I were offered the chance to "transfer" our earnest money deposit into another investment that Mile High had going - that was actually already built. That's how our very first investment property turned out to be a condo in Raleigh, North Carolina - a solid investment in a great market.

It's not a perfect investment - the percentage of investor-owned units is too high in my opinion and our financing was a little expensive since the development was "non warrantable" when we closed. These are both issues that time will correct.

So how to avoid these situations? A few tips from my husband and me (after a bottle of wine & some heavy editting to keep the post rated PG-13).

1. Who Holds the Earnest Money? Before writing that check - find out who will be holding your earnest money deposit. It should have been a "red flag" that the deposit went directly to the developer - and not into escrow. If you are considering an investing opportunity where the earnest money isn't going into escrow - ask (a lot) more questions before committing.
   
2. Do Due Dilligence. So much gets written about doing due dilligence on the dirt - checking out the viability of the property itself. You also need to investigate the people who are offering you the opportunity.
3. Sleep on It. Be wary of opportunities that are going so fast that you need to make an immediate decision. Take your time - do your due dilligence on the people, their relationships, and their methodology. If you miss this opportunity - you'll be ready to move quickly on their next one.
4. Diversify. Forget about buying multiple properties simultaneously from a group you've just met - particularly in the same development in the same market! While I was concerned about potentially losing $16,000 in an investment - I know people who committed to multiple properties with Mile High - and have a six-figure loss. Ouch!
5. Take the Lifeline if it's Offered. Even with all the possible precautions - you may find yourself in a situation like this one day. If an offer is made to help you recoup some/all of your investment - seriously consider it. I am glad that we took the opportunity to move our investment dollars to Raleigh. We have friends who kept waiting for something better - and ended up with nothing.
6. Keep the Long View. If you've got a puppy - eventually you're going to step in a little poop. But that's no reason to get rid of the puppy. Some real estate investments will make you lots of money, some will be a royal pain, and some will cost you money. Just keep doing it - and learning!