We’re long overdue to have an open discussion about your research into real estate investment. You’re bombarded with every day information concerning research into the market and analyzing your portfolio. Investors are engrossed in earnings estimates, conferences and professional analysis. But when confronted with the prospect of diversification to real estate investment, they tend to fall for flashy presentations and personal connections. Insufficient due diligence and disinclination to consulting experts prior to making an investment in real estate often result in losses. Then, in the month of August we discovered that Equity build is a real-estate investment firm that was operational within Chicago since 2010, and a favorite with investors who live long distances as a Ponzi scheme, was in fact a Ponzi scam. It was discovered that the Security and Exchange Commission (SEC) brought charges that $135 million received from 900 investors was not being invested correctly, and that the money was used to pay off debts from the past. Investors who were promised 15 to 20 percent return on their money are now undergoing long-running litigation hoping they will be able to recover a portion of their investments.

The concept behind Equity build was straightforward. Instead of buying a property for income at $500,000, investors would buy a house at $200,000, invest $200,000 on restoring and renting out the property. In the end, the investors would own a profitable and income-producing property with instant equity of $100,000. The investors were eager earn massive profits and realize the idea of owning a properties that produced income that they didn’t take the time to study at the property or employ local counsel to guide them through the procedure. I spoke with one investor who was over the moon about the potential and the potential that he deposited $750,000, which represents all of his life’s savings and investments.

A few years back, I talked to a customer who wanted to invest in Equity build. He asked me to examine their portfolio and make a report. In the nick of time, I discovered “red flags.” On its face, the property they claimed investors bought for $200,000 was actually sold for a much higher amount of $100,000. The Cohen family who run the company did not accurately represent the cost of purchasing the properties to generate a large profit right from the start. This was a glaring and, honestly, a simple to find out. It raises the question of whether others investors had the courage to investigate the issue. The more I dug the deeper, there were more warning signs I saw. To purchase properties that would yield the promised profit, Equity build was adding buildings in areas that had historically been poor performers. The buildings were adorned with fantastic Pro Forma rent rolls, however their actual rent roll after taking the evictions, problematic tenants, and opposition to increasing rents were not taken into consideration.

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Following Equity build for many years, I was aware of the issues they faced to do with City of Chicago Department of Buildings. If the city believes that the building is in poor state, they will file suit and put an obligation upon the land to guarantee compliance. The lien can also make financing or selling the property, without disclosing the state of repair difficult. The continual flow of uninformed investors from outside the state let Equity build to continue to bring in new capital when a conventional investor could have shut them out. These Equity build shareholders I spoke with did not realize the amount of money was being invested and how many investors were involved in each property. They were so impressed of the presentation that they didn’t even bother to inquire how a fractional-interest investment operates.

At the end of the day, Equity build found themselves in the middle of a crisis. They’d taken money in the beginning of the transaction, and overstated rehabilitation costs (and I’m assuming they skimmed rehab funds) but failed to complete repairs, allowing liens to stay on the building in order to stop refinancing and removing investors’ money. They were unable to have the buildings appraised at the price they that was advertised, and the rental income wasn’t yielding the promised earnings. Instead of stopping the rent, the Cohen family decided to continue to seek out new investors and to use the new money to pay the old investors the promised return. The SEC needed to intervene to stop further losses Investors have also expressed their concern that the Cohen’s fled the country.

Would this situation have been avoided? Absolutely. After doing research in Equity build I strongly advised my client to turn down the investment opportunity and stay away from the enticing emails. I’ve spoken with many investors who either haven’t thought of consulting with an attorney in the area or they didn’t want to “waste” the money. Investors must take a look at real estate investments with the same care and planning as they do with their stock portfolios. Before taking the plunge into investing with a firm promising to earn money from real estate, it is important to look back and talk to an attorney in your local area. My office offers a wide range options of solutions, however among the most crucial is to help examine and evaluate the potential of investing in real estate. Many investors steer clear of this procedure due to the risk of the attorney analyzing documents too much or slowing down the process. An experienced real estate attorney will be able to investigate quickly and for less than most investors. It’s true that you require a set of eyes to look over the sure-fire money-making opportunity to ensure that it isn’t “the next Equity build.” When someone comes up with the idea of pitching you an investment in real estate think about what would you think you would do in the event that had been one of those Equity build investors who hoped to get their funds back? Ask yourself, can you be able to afford to pay to employ an experienced real estate lawyer in your local area?

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