Avoid scams by asking right questions

By MARTIN PELLETIER, Financial Post March 14, 2012

A couple of years ago upon the birth of our second child, my wife convinced me that it was finally time to sell my two-door sports car and buy a minivan. After a couple of sleepless nights thinking about it on the couch, I agreed and placed an ad in the newspaper.
I received an offer over the phone from someone out of province who was going to fly in, potentially buy the car and drive it home. He liked the car and after the test drive he asked if I would like to go to the bank with him to conclude the sale. The teller prepared the draft and I handed him the keys and the bill of sale to conclude the transaction.
After immediately depositing the draft (we had accounts at the same bank), the teller said that I must have done my homework because a common fraud is when an out-of-towner buys a car with a fake bank draft and drives off with the car before the seller makes it to the bank.
It was quite fortunate I decided to go to the bank with the purchaser, because I had no idea about this type of scam - not surprising given my infrequency of selling cars. Many Canadians have not been so fortunate.
During our many years in the investment business, we've read and heard about a number of scams that investors, with the right questions and precautions, could have avoided. With that in mind, we've put together a Top 10 list of the basic rules for assessing new investment opportunities.
1) Ask if the investment is registered with a provincial securities commission or Investment Industry Regulatory Organization of Canada (IIROC). IIROC and many regulators have a check-first search engine on their websites where you can find out if the firm and the individual selling an investment are registered. If they're registered, check for past warnings or disciplinary actions. If they're not, stay away.
2) Beware of "Friends and Family" or "Hot Deal" taglines. If the investment is that good, you'll never see it because the seller would likely take it to an institutional investment manager who has much deeper pockets than you.
3) Be cautious when approached with a "great investment opportunity" from someone in your church, professional association or community group. Con man is short for confidence man and the quickest way to gain someone's confidence is to move in the same social circles and purport to share their values and ethics.
4) Unrealistic rate of return. Remember that if it sounds too good to be true, it most likely is. Most scams reel in investors with a pitch of "guaranteed" or "low risk returns" of 30% or more. Risk and investment return go hand in hand: The higher the return potential, the greater the risk.
5) Show me the money. Ask about the disclosure requirements and access to information, meaning access to regular financial statements audited by a well-known independent third-party accounting firm.
6) Never write a cheque payable to the person offering the investment. Just ask those who wrote cheques to Earl Jones or Bernie Madoff. In particular, look for a third party custodian who will hold your investment independent of the person managing the investment.

7) Always ask for specifics about the timing and process of getting your money out.
8) Stay away from any investments being offered by sales seminars, telephone pitches and unsolicited investment emails.
9) Always ask how the investment seller is getting paid and remember there is no such thing as a free lunch.
10) Finally, and most importantly, don't be afraid to show any investment to your accountant, lawyer and investment counsellor. Fraudsters will do everything they can to prevent you from doing this.
A little due diligence can go a long way toward minimizing the chance of falling victim to investment fraud. If, despite all these precautions, you still get victimized, make sure to immediately report it to the RCMP and your local provincial securities regulator. The vast majority of investment fraud and scams go unreported and continue to operate for long periods of time, drawing in even more unsuspecting people. Victims often feel embarrassed, or are afraid to report to authorities a member of their church or community. But the only way to stop investment fraud is to take action and report it immediately.
- Martin Pelletier, CFA, is a portfolio manager at Tri-Vest Wealth Counsel Ltd., a Calgary-based private client and institutional investment management firm specializing in discretionary risk managed balanced portfolios as well as specialty offerings including an oil and gas hedge fund.

Research and risk are key to buying a foreclosed home

Jason Holt and Jym Genesta in the Riverbend house they bought under foreclosure. Although there is money to be made, Holt says, buying a foreclosure doesn't make sense for everyone.

Photograph by: Ted Rhodes , Calgary Herald

After a month-long search for the perfect home to remodel, Jason Holt and Jym Genesta were eager to follow the lead of their real estate agent to a foreclosure in the southeast.
But when they walked inside the premises of a bank-owned home that was just hitting the market, the couple discovered a grisly scene.
"It was like a total CSI DNAfest in here," says Holt, a manager at IKEA, pointing out the stains on the subflooring.
What greeted them were walls formerly used as dartboards and punching bags, living quarters that had served as a hockey rink, and a colour palette that featured curry brown and shocking pink.
The foreclosure has become emblematic of our times, at least in the U.S., and stories of Canadians getting steals on distressed properties there abound. Genesta, who runs a salon in Los Angeles, was well aware of the opportunity this sort of property can present to home buyers, but wondered what value they might find here in Calgary.
On his first visit, he kept an open mind, pulled the sleeves of his cashmere sweater below his hands and cautiously peeked around the corner.
The duo uncovered a four bedroom, 3.5-bathroom family home in Riverbend, complete with a backyard next to a green space with a walking path.
"You know, Jason, it does have a lot of potential," Genesta ventured.
Holt couldn't help but agree.
As the U.S. economy spiralled down, Canadians were turning their attention south of the border.
"We had clients who were going down and buying foreclosures from the banks in big blocks," says Jeff Kahane, senior partner with Kahane Law Office in Calgary. "They were buying big houses with a pool for 25 cents on the dollar for what they're worth."
Canadians now represent 60 per cent of business for some U.S. real estate agents.
The hype surrounding foreclosure sales surfaces in Calgary as well. One bank-owned property in the northeast of the city visited by the Herald for this article was shown to 20 interested parties over the course of just three days. Yet Canada is a completely different ballpark.
"I don't see tremendous deals," says Kahane, who founded what is now one of the busiest real estate law firms in Alberta. "There's one every once in a while. . . . There's always been a rationale for it."
The biggest discounts are often former grow ops or properties that need significant work. Since foreclosures don't come with any guarantees, the risks can be jaw-dropping - and there are costs homebuyers may not have considered.
To get a Real Property Report, a survey showing property lines and structures, the new owner can expect to shell out about $700 plus $100 for a stamp of compliance from the city. And what the documentation reveals can be the real surprise.
If a garage or a fence is in the wrong place, you may have to pay for an encroachment agreement, which could cost anywhere from $500 to $20,000. Plus there's a chance you'll discover structural damage or serious mould problems after the fact.
Foreclosures can be a good buy, however, if you're purchasing with the right perspective, says Ann-Marie Lurie, chief economist with the Calgary Real Estate Board.
"It depends on your objective," she says. "Are you going to be able to buy it, hold onto it and expect those strong appreciations that we saw in the boom years? Unlikely."
At one point Lurie herself considered purchasing a foreclosure, but decided against it, realizing she wasn't interested in a fixer-upper.
A month into their reno, Holt and Genesta are still in the thick of it. They're saving a bundle doing all the labour themselves. They've ripped up the carpets, removed all the door moulding, and are constantly patching and sanding the walls. They feel lucky they haven't come across any serious problems - yet.
"You have to look beyond what you're going to walk into," Genesta says. "You make it amazing."
Having saved 17 per cent off the sale price of the average benchmark home in the area that month, and sticking to a $25,000 remodelling budget, they're confident they'll come out ahead, whether they decide to live in the house or flip it.
Holt says buying a foreclosure wouldn't make sense for every-one.
"This would be very difficult to do with children," he offers, adding necessary renovations could also present a cash-flow issue. "For most people, it takes them some time to save down payment money, let alone a whole other pot of money to then start doing renovations."
And they've started to become part of the community, too.
Neighbours wave as they drive by and pass along horrendous stories about former occupants.
"This place was a disaster," remarks Genesta. "But the thing is, would I do this again? Absolutely."
Tips for purchasing a foreclosure
- Pay for a home inspection before making an offer, if you can
- Neighbours can be an excellent resource when researching the history of the property.
- Do your homework on average sale prices for similar homes in the area
- Set a budget and stick to it
- Before making an offer, ensure financing is securely in place
- Check furnace for efficiency and gas leaks
- Do renos yourself if you have the skills, time and expertise required; obtain any city permits needed
- Seek lightly used instead of new appliances
- Home insurance may end up paying for itself
- Buy necessary items in bulk
- Search the Internet for DIY ideas to help speed up home reno projects

By Drew A. Penner, The Calgary Herald