Pros advise avoiding get-rich-quick schemes

WASHINGTON -- The sentencing earlier this month of financial guru Wade Cook to 88 months in a federal penitentiary for tax evasion should stand as a warning to anyone thinking of buying into the get-rich-quick schemes peddled on late-night television, especially those hawked by so-called real-estate specialists.

"Real-estate gurus, such as they were in the '60s and '70s, were all legit. Some were better than others, but they all were sincere," says real-estate investor and newsletter publisher John T. Reed, who keeps tabs on the purveyors of those who sell seminars, tapes and books supposedly filled with ways to reach real-estate nirvana on his Web site, johntreed.com.

"But now the real-estate information business has been taken over almost entirely by criminal con men. They push their seminars and mentoring services out of boiler rooms, and the typical seminar pushes you to sign up for additional seminars, books and tapes. But they don't provide the content promised. I get complaints every day. They are criminal enterprises."

Cook talked a good game, but pending an appeal, the one-time taxi driver is going away for seven years and four months because a federal jury convicted him of seven counts of tax fraud. Not only did he falsify his tax returns from 1998 through 2000 on royalty payments of $9.5 million, he obstructed federal investigations into his actions, a U.S. District Court jury in Seattle found.

Reed has been tracking Cook's antics for years, including his three bankruptcy filings and twice being brought up on charges before the Federal Trade Commission, once for misrepresenting the earnings potential of his advice and once for failing to comply with the FTC's order to set up a redress program and alter its advertising claims.

But even after he and his wife, Laura, were charged with tax evasion in late 2005, he started a new company and still claimed 20 percent monthly returns by using his "secret weapon."

People like Cook prey on unsuspecting -- some would say naive -- consumers who are looking for the secret of success to making millions, either in the stock market or in real estate. But there is no hidden route from rags to riches in either field other than hard work.

"It's harder than it's portrayed to be," says Alison Rogers, the author of "Diary of a Real Estate Rookie," who became a real-estate agent in New York City only because her grand plan to make a living buying run-down houses, fixing them up and selling them at a great profit fell flat on its keister.

Rogers left her job as real-estate editor at the New York Post in 2005 to flip properties in Newark, N.J., where prices had been escalating at the rate of 31 percent annually for three years. But she quickly found out that her competition -- mostly professional contractors -- was much better financed than she was.

"Their cost of capital was lower than mine because I had to go through banks, and they had cash," she says.

She also found it "almost impossible" to locate properties worth her time and money. "It was like looking for a needle in a haystack," she says. In her six or seven months of searching, she found only one candidate, and that was in such a dangerous part of town that she couldn't find a bank willing to put up the financing.

The agent-author warns against teaming up with supposed financial backers or infomercial gurus who want you to act as a "flipper" in a "you buy, we fund" arrangement. The come-on is that if you find the property, they'll put up the money.

If you get lucky and happen to be successful, they'll talk you into buying more books and tapes, she says. But if you are not, you'll be the only one with any skin in the game.

"If you fail, the only person who will get burned is you, not them, because they have no exposure," Rogers says.

And the odds against even one success are steep, especially for beginners, she says. "I was experienced. I bought and sold co-ops in New York several times and made money each time. If it was hard for me, someone with a background in real estate, I can't imagine how hard it is for someone without experience." Recently, it seems, the late-night real-estate gurus have discovered note buying as a way of selling the dream of easy money. But the business is "hard work and getting harder by the day," says Travis Creed of Avalar LLC, a note-buying firm he started after 12 years in the banking and mortgage industry. "Even in good times, it's a full-time job."

In note buying, investors attempt to purchase at deep discount the mortgages, sometimes known as "paper," taken back by sellers. In difficult markets, sellers, acting as the lender of last resort, often offer to "hold the paper" for buyers who cannot secure financing from conventional lenders.

Creed, an attorney based in Little Rock, Ark., says he's "truly concerned" about the number of unscrupulous peddlers of training courses that supposedly outline the steps to note-buying wealth. Based on the hundreds of calls he's received from struggling buyers who have no clue what a good note looks like, he says the claims being made are "absolutely wrong."

Typically, "students" are told there are notes all over the place, so all they have to do is scoop some up for themselves. Then, after they have read the books and listened to the tapes but nothing happens, they are told they need to buy mentoring services to achieve real success.

Creed says the mentor is most likely to be an hourly wage earner with "no more knowledge of the subject than what is written on the script in front of them."

"I do not wish to discourage anyone from learning about this business," the note-buying pro says. "I do want to discourage everyone from spending thousands of dollars to do so."

Creed says he has spoken with people who have spent up to $9,000 and never bought a single note. But "what really irks me the most" are those people who appear on the infomercials as successful note buyers. He talked to one guy who was represented as a superstar, but in actuality, he had never taken the course being advertised.

"People don't know this, or understand the great lengths these guys will go" to separate them from their money, the Arkansas lawyer says.

Reed, the investor-author who is based in Alamo, Calif., outside of San Francisco, lists more than 130 real-estate and financial gurus on his Web site. The questionable ones, in red, outnumber the reputable ones, in green, by three to one. "There are maybe three dozen that I consider up-and-up," he says.

The standard line is to tell people they can get rich quick with no cash or effort. "They don't say 'get rich quick,' but they offer six testimonials from people who say that," Reed says. "Every con requires a plausible scenario. If someone says they did it, it becomes plausible."

Reed scoffs at the common patterns of attending real-estate seminar after seminar to get a winning formula. "Mainly, those get-rich-quick formulas are for making the seminar company rich," he says.

Certainly, that was the case with Wade and Laura Cook. At its peak, the Wade Cook Financial Corp., which was forced into bankruptcy in 2002, only to be replaced by a new company, Liberty Network, employed 550 people and had annual revenue of $118 million, according to court documents.

Even as the company posted $1.7 million in trading losses in 2000, according to government prosecutors, the Cooks spent lavishly on themselves, including $487,000 a year to maintain their estate, $360,000 to purchase 10 cars and $200,000 to buy at least nine houses.

Lew Sichelman has been covering real estate for more than 30 years. He is a regular contributor to numerous shelter magazines and housing and housing finance industry publications.