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January 11, 2024 Admin

House-Flipping Scams Are Draining Millions Out of Wannabe Real Estate Investors

Maria D’Avanzo weighs in on house-flipping scams.

A surge in home prices and a rise in high-profile real estate influencers are fueling the promise of easy returns.

Published 01/11/24
Sasha Jones

During the past decade, real estate TV shows documenting luxurious agents and developers have exploded in popularity, from “Property Brothers” to “Million Dollar Listing” and “Selling Sunset” — along with the numerous spinoffs. The home-buying craze, heightened further during the pandemic, brought new attention to the seemingly easy opportunities in residential real estate.

At the same time, however, scams began to proliferate targeting the average investor looking for quick profits, particularly within one sector: house flipping.

High-pressure events and ads are coercing participants to quickly spend thousands to learn the secret sauce behind buying and swiftly rehabbing a house to sell quickly. The events typically are endorsed by a trusted celebrity who has gotten rich quick by doing the same.

But many of these pitches to would-be investors often fail to fulfill any of the promises for returns. Recently, those schemes have caught the eye of the Federal Trade Commission and lawsuits — resulting in a crackdown.

“The complaints that get filed are just the tip of the iceberg, because that’s the nature of the enforcement capacity,” said Sarah Bolling Mancini, co-director of advocacy at the National Consumer Law Center “Any increase in enforcement activity points towards an overall increase in the problem.”

In June, home prices were 44% higher than before the pandemic, according to Redfin data. Looking to capitalize on a surge in sales, more people pursued real estate.

More than 400,000 single-family homes and condos were flipped in 2022, up 14% from 2021 and 58% from 2020 — the largest number of homes since at least 2005, according to real estate data firm ATTOM. House flipping is generally defined as when an investor buys a home or distressed property at a low price, rehabilitates it and then resells for a profit over the course of several months to a year.

To illustrate the mad rush to flip, there’s such an abundance of homeowners flipping now that it’s begun to dilute profits. For example, gross profit margins on flips in 2022 sank to the lowest level since 2008. The typical gross return on investment dipped to 27%, compared with 42% in 2020.

Meanwhile, the FTC has been busy trying to root out scammers.

In May, a $16.7 million judgment against Response Marketing, and the celebrities involved with the company’s training program, led to the ban of six different training programs. The programs took over $400 million from participants, according to a complaint filed in Utah federal court.

Response Marketing would advertise a coaching program that cost up to $30,000. Through the company, students were told that they would have access to a network of buyers who would purchase potential properties for them to flip.

Aspiring house flippers were lured to free events through infomercials and social media advertisements, according to the FTC.

The vast majority of consumers did not become successful in real estate and did not recoup the money that they spent on the programs. The group, and its celebrity endorsers were also involved in burying online customer complaints that reported the scam, according to the FTC.

As part of the case, Scott Yancey, the star of the home-flipping show “Flipping Vegas” on A&E, and Dean Graziosi, the author of “Millionaire Success Habits,” were fined, paying $450,000 and $1.25 million, respectively — the FTC’s first monetary settlements with celebrity endorsers.
Yancey and Graziosi did not respond to The Messenger’s request for comment — nor did the FTC.

“People are more comfortable with residential real estate. It doesn’t seem as complicated as stocks or ETFs,” said Maria D’Avanzo, a partner with law firm Coffey Modica who has worked in the real estate industry for 20 years. “This is an area where people are really vulnerable.”

On April 11, 2018, a group of wannabe real estate entrepreneurs and one wired Federal Trade Commission agent crowded into the Sheraton Pentagon City hotel in Arlington, Virginia, for a free coaching session on home-flipping. It’s one of many events hosted by the now-banned company Zurixx, from which participants have yet to recover tens of thousands of dollars.

On stage, a Zurixx representative boasted about his rags-to-riches story — going from bankrupt to a millionaire — thanks to home-flipping. He shared photos of him with rapper Pitbull and a video of Tarek El Moussa and then-wife Christina Hall, co-stars of HGTV’s “Flip or Flop,” endorsing the program. He told the audience that the TV personalities’  lending partners would “fund all of your purchases, all of your renovation, regardless of your credit or your background,” according to a transcript of the event.

El Moussa did not respond to The Messenger’s request for comment.

As long as participants paid a discounted rate for continued workshops, they were told they could just sit back and watch the money roll in. Except that wasn’t true.

Zurixx settled with the FTC in 2022 for $12 million, but unanswered complaints with the Better Business Bureau have continued to roll in. One, filed in 2023, documents an instance where a participant paid the group $16,500. Another, filed in 2022, states they paid $29,000 for a year of unlimited coaching — for which they have yet to receive a refund for.

Older Targets

Marcelo Diaz-Cortes, an attorney who specializes in commercial litigation in state and federal courts, compared the rise in such real estate scams to crypto schemes that have emerged in recent years. Both are industries that have become perceived as increasingly lucrative and both use similar advertising techniques with celebrity ties.

“The older generation sees [crypto] with skepticism, because it’s hard to explain after having transacted in tangible things for all their lives,” Diaz-Cortes said. With home flipping, “the audience that may be more susceptible is the older crowd who believes in real estate because for the past 40, 50 years, it’s been a solid investment.”

“There are lots of iterations of these kinds of services that will continue to pop up,” Diaz-Cortes added.

However, it does not take a TV star to entice consumers. In October, New Jersey social media influencer Cesar Humberto Pina, known as “Flipping NJ,” was charged with engaging in a multimillion-dollar Ponzi-like investment fraud scheme.

Pina allegedly partnered with a radio personality to conduct real estate seminars and other appearances, promising 20% to 45% returns within five months on investments into his home-flipping projects. While he did buy properties, most investors did not see any returns, according to a complaint filed in New Jersey federal court. Instead, Pina would continue to grow his social media following and solicit more people, using funds for renovations for personal spending and additional building purchases.

The case remains ongoing. Lawyers for Pina did not respond to requests for comment.

In June 2022, YouTuber Mikki Lynn Fox, known online as both Michaela Pink and Summer Black, was sentenced to five years in prison after pleading guilty to swindling eight investors out of over $136,000.

In the scheme, Fox, who posted lifestyle and dating videos, would use her platform to encourage investments into homes she was planning to renovate. Though she paid victims in bits overtime, she made excuses and eventually stopped responding.

“She was very charming. People would look her up online and say, ‘Oh, she is somebody.’ No, she just created that persona,” Sheila Hansel, who prosecuted the case in Harris County, Texas, said in a statement.

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