Page 3 of 5A Sure Bet
Hill Erickson then uses its capital to buy the property. Meanwhile, other Koerber graduates are ready to purchase the property back from Hill Erickson at ideal market value. These students are part of a “preferred buyers” program, Koerber says.
For example, Hill Erickson buys a distressed property listed at $500,000. Under better market conditions, it might go for $600,000. Then, a “preferred” buyer steps in and buys the property back from Hill Erickson, for the increased value.
This may seem like a raw deal for the preferred buyer. But that is when Koerber’s other company—New Castle Holdings—buys a lease option from the preferred buyer and seeks renters for the property.
“It doesn’t remove the [preferred buyer] from liability, but there is a cash flow of a couple hundred bucks a month,” Koerber says. That’s on top of the cash from the lease option of “good and valuable consideration”—a sort of down payment on the lease, which could be tens of thousands of dollars or more, depending on the sale.
“If New Castle defaults, worst case scenario is you got a house that you can still sell,” Koerber says, adding that buyers “prefer” this arrangement. “Our preferred buyers are usually high-end professionals: doctors, lawyers with good credit.”
Usually, but not always. In 2004, when real estate agent George Bible came across a “preferred buyer” from Koerber’s school, he soon realized he wasn’t so lucky.
In less than a month and a half during the fall of 2004, Bible stood to earn more money in commissions than most real-estate agents would clear in a year—more than $130,000 from seven properties. He says now a thought lingered in the back of his mind—if something is too good to be true, it probably is.
In Bible’s Orem realty office, he has kept a file for four years labeled “FranklinSquires.” He considers it insurance against the day he might be called to account for the period between late September and November 2004, when Koerber’s real-estate investment company, FranklinSquires, enlisted him to find and close on residential homes.
“I have no quarrels with anyone making money. I love making money,” says Bible, sitting back in his chair, smoothing out his cash-patterned tie. “But, at the same time, I have no interest in being involved in something that’s going to harm people in the long term.”
In the summer of 2004, Bible helped find a home for Gabriel Joseph, former vice president of FranklinSquires Investments. Bible impressed Joseph with his efficiency, and Joseph hired him to find investment properties.
The money Bible stood to acquire off fast turnarounds on the seven properties gnawed at him. He began more closely investigating the transactions. One of the homes— a ’70s vintage in Alpine—listed for $730,000. Bible says Joseph had arranged for a simultaneous close, which involves the property being simultaneously sold again to another buyer. (Such closings have since been outlawed in Utah without full disclosure to all parties involved.)
The second buyer was a secretary from Springville. She had been recruited into the “preferred buyers” program and had used her credit score in securing the loan to purchase the property. The home Joseph was going to buy for $730,000 would be sold immediately to the secretary—who earned a little over $38,000 annually—for $1.2 million.
Bible found out that the secretary regularly earned $3,200 per month—roughly the same amount she would be spending on house payments for a home she was not even living in.
Although Joseph and Koerber assured him the transaction was legal, Bible decided to walk away from it and the $130,000-plus in commissions.
If New Castle Holdings kept up with payments, Bible estimated the secretary might have banked an additional $3,000 to $4,000 annually—but if, for some reason, FranklinSquires couldn’t make payments, she would be left holding the bag. “She would likely go bankrupt or foreclosed on, or both.”
If the home wasn’t appraised at fair market value, if the value was inflated, the house wouldn’t sell on the open market. “If it’s artificially inflated by asking for 14 different appraisals and you go with the one that’s more than double what the others said, then you’ve got a problem,” Bible says.
Under good market conditions, it’s possible to cycle through appraisals until the buyer finds one offering a bloated value—equity pay dirt. But, if foreclosure occurs, the preferred buyer’s credit gets ruined. And the home gets dumped back on the market—pulling down property values in the surrounding area.
Such “straw buyer” deals can throw off the housing market and force banks to tighten loan requirements. That leaves some lower-income buyers no choice but to seek predatory subprime lenders.
“If it looks too good to be true, it probably is,” Bible says. “And, if anyone ever tells you that you can make a profit using your credit score, you should ask why aren’t they using their credit score then? The answer is because they’re skimming [the equity], and you’re going to pay the bill.”