Real Estate Topics Forum :: View topic - Are Russ Whitney’s property improvement loan techniques 3

Guest

Are Russ Whitney’s property improvement loan techniques illegal? by John T. Reed 3

Mail fraud and wire fraud
When the government prosecutes this sort of stuff, they also often invoke the mail fraud statute 18 USC 1341. Mail fraud is a misnomer. You do not have to mail a fraudulent document to be guilty of mail fraud. You cannot avoid mail fraud by using Federal Express or hand carrying everything. All you need to do is commit fraud, and anyone in the deal send or receive anything by mail as part of the transaction. Wire fraud is similar (18 USC 1343). The feds also often invoke the money laundering statute (18 USC 1956) in mortgage fraud cases.
If you commit mail fraud or wire fraud more than once in a ten-year period, you can be charged criminally or civilly under the federal racketeering statutes: 18 USC 1961-4. A bank could actually sue Whitney civilly under 18 USC 1964 if he did two deals that involved mail fraud in a ten-year period. Furthermore, if they win, they get triple damages.
Another statute the government frequently invokes with regard to mortgage fraud is 18 USC 371 or conspiracy. This would be a hazard to both Whitney and the previous owner/second mortgage lender. The essential elements of federal conspiracy are two or more people not only conspiring to defraud someone connected to the federal government, but actually doing some act to bring the conspiracy to fruition.
Actual prosecutions
The HUD Inspector General publishes an annual report. In part, it details prosecutions of the above crimes. You can read it on the Internet. Here are some examples from the 2002 report.
An LA federal grand jury indicted Louis Reyes on one count of conspiracy, two counts of wire fraud, and one count of money laundering. Among other things, Reyes falsely stated that Title I loan proceeds would be used to improve the properties in question.
In a Texas investigation code named Operation Straw House, the feds obtained numerous convictions. In that case, proceeds of Title I loans were used to pay bills of the borrowers unrelated to the improvement of the properties in question, as well as cash being pocketed by the borrowers instead of spending the money on improvements.
• Kevin Mei sentenced to 97 months in prison and pay $3,398,893 in restitution for money laundering
• Frank Mei, Jr. sentenced to 78 months in prison for money laundering
• Daniel Mei sentenced to 63 months in prison for money laundering
• Frank Mei, Sr. sentenced to 14 months in prison for misprison of a felony
• Thomas Polcyn sentenced to 51 months in prison for bank fraud
• Vivian Bond sentenced to 12 months in prison for mail fraud
• Janet Cooper sentenced to 12 months in prison for mail fraud
• David Lasko sentenced to 6 months home confinement and pay $22,500 restitution for receiving a $19,000 kickback from a contractor who did no work on the property in question after receiving a $24,000 Title I loan on the property
• John Charles Carlisle convicted of mail fraud, conspiracy, and making false statements for kicking back cash to Title I borrowers
• Alfonso Villareal pled guilty to making false statements, namely that he was not receiving any inducement to apply for a $20,900 Title I loan when, in fact, he received $7,750 in cash and had $4,000 of his bills paid for him.
The 1/6/03 Sports Illustrated “Catching up with…” column featured Chuck Foreman who had been on the cover of the magazine on 10/18/76. Foreman played seven years for the Minnesota Vikings and went to three Super Bowls. He had three straight 1,000-yard rushing seasons as a running back and was All-Pro five times. But he also did this:
“In February 2000 he was charged in connection with a 1995 scheme to defraud mortgage companies and later admitted he had used falsified documents to obtain two loans totaling $157,800. …Foreman, who assisted prosecutors in their investigation of similar real estate cases, pleaded guilty to one count of mail fraud in March 2000 and was sentenced to three years probation in February 2001.”
Whitney used improvement loans for other purposes
Whitney frequently makes statements that indicate that he did not put all of the improvement loan money into improving the property in question. The whole contractor’s-profit-and-overhead concept constitutes at least some of the loan proceeds going somewhere other than into improvement of the property. That, in turn, means that the lender was misled, which sounds likes fraud.
In fact, down payment money for rental property purchases is akin to venture capital, one of the riskiest types of financing. Congress passed the National Housing Act in the depths of the Depression to help small property owners and to create jobs, not provide venture capital to greedy convicted felons. Institutional lenders like banks and savings and loans are generally not allowed to make any venture capital type investments.
Here are some of Whitney’s comments indicating that his improvement loan proceeds did not go into improvements.
Source
Whitney comment
p.5 Overcoming the Hurdles and Pitfalls of Investing in Real Estate
“We applied for the [Title I] loan and…received the $15,000. …the work only cost $5,000. We compensated ourselves $5,000 a piece for two week of labor.”
p.6 Overcoming…
“I applied again to the trust company for another FHA Home Improvement Loan for $12,000. I needed some more investment capital. I used about $4,000 for improvements and kept $8,000 for some investments.”
p.37 Overcoming…
“My cash was very low…I had literally no income at all. I didn’t feel really pressured yet, though. I knew I could go out and find some properties, then arrange a Home Improvement Loan and start rolling again.”
p. 70 Overcoming…
“…we could put a home improvement loan on them and pocket some tax free money…”
p.74 Overcoming…
“…plus a $15,000 home improvement loan (of which only $7,500 would go to renovation)…”
p.87 Overcoming…
“…borrow $15,000.…I will probably get the job done for $6,500 to $7,500 and pocket the rest. You keep the difference as a consulting fee, or whatever you want to call it. Just make sure you get paid…”
p.111 Overcoming…
A list of 9 “Techniques for starting capital” includes “Home Improvement Loans” as number 2.
p.20 Overcoming the Hazards and Pitfalls of Financing, Locating, and Analyzing of Real Estate
“We have a house for no money down, which is overfinanced for $10,000, of which we get to keep $4,000 (because the rehab only cost $6,000…)”
p.20 Overcoming… Financing, Locating, and Analyzing of Real Estate
“I…applied for a home improvement loan of $9,000…and only used $3,000 to complete the work…and put $6,000 in my bank account…”
p.20 Overcoming… Financing, Locating, and Analyzing of Real Estate
“…I went and bought my own ‘contract and proposal’ forms and wrote my own estimates for the cosmetic [improvement]s. I jacked the estimates up to cover the entire …$30,400. Consequently, whatever is left after I sub the work out at a cheaper cost, I get to keep. In this instance, that figure was a handsome $9,000.”
p.85 Overcoming… Financing, Locating, and Analyzing of Real Estate
“Home Improvement Loan—Here lies a source of seed capital that generated over $60,000 for me in my first year of rear estate investing at age 21. I have used the FHA Title I loan several times.”
p.86 Overcoming… Financing, Locating, and Analyzing of Real Estate
“The Title I is an excellent source of seed capital and continuing capital.”
p.122 Overcoming… Financing, Locating, and Analyzing of Real Estate
“…look for some FHA Title I or regular home improvement monies to generate yourself continuing seed capital.”
p. 69 Building Wealth
“Here’s how you would do it and pocket some of the easiest money you’ll ever make. (This example is drawn from my personal experience with numerous home improvement loans.)”
p. 70 Building Wealth
“I have marked up $3,000 worth of work to a retail price of $17,000 on a consistent basis and never had a lender question the figures. That means I’m able to pay myself as much as $14,000 to get the work done on my own property. Remember, when you form your own contracting company, you’re taking the markup yourself instead of giving it to someone else.”
p. 71 Building Wealth
“Depending on how much of the work you do yourself, the actual costs of the improvements could be as low as $3,000 to $7,000, which leaves you with as much as $7,000 in cash as your general contractor profit.”
p.72 Building Wealth
I made $117,000 in spendable cash in my first year of real estate investment by acting as my own general contractor and securing home-improvement loans on my properties.”
p.122 Building Wealth
“The secret cash machine of the 90s” subhead for two-page discussion of home-improvement loans
p.122 Building Wealth
“Home improvement loans are basically designed to finance home improvements, but for the creative thinker they can be consistent and profitable sources for sizeable lump sums of cash.”
p.123 Building Wealth
“You can take out a home-improvement loan on the house you live in, improve your property, and still be able to generate capital for another project.”
p.123 Building Wealth
“…home-improvement loans…have provided me with millions of dollars in working capital over the years.” [Reed note: Millions? At $10,000 a pop, that would take at least $2,000,000 ÷ $10,000 = 200 improvement loans.]
p.123 Building Wealth
“…two ways to generate quick cash with a home-improvement loan…act as your own contractor and take the contractor’s profit from the improvements…”
p.127 Building Wealth
“Used correctly, a rehab/construction loan can finance your down payment and all of your rehabilitation costs, and put some tax-free working capital in your pocket for your next investment.”
pp.19-20 Building Wealth Keys to Real Estate Financing Locating & Analyzing
Says he got a $33,000 loan to pay for costs related to moving a house, used $16,200 for that purpose, $4,000 for a down payment, and pocketed $12,800 “Net Profit to Me”
p. 23 Building Wealth Keys to Real Estate Financing Locating & Analyzing
$9,000 home improvement loan, $3,000 to complete the work, $6,000 “in my bank account”
Remember, when you apply for a property-improvement loan, you tell the lender that you will put 100% of the improvement-loan proceeds into the improvements you described in your loan application. If you do otherwise—like use the money for “profit and overhead,” “working capital,” or “seed capital”— you have almost certainly broken a number of laws.