Phantom Equity Created by Alleged Fraud Helped Real Estate Prices Soar

Lenders rely on comps. Inflate the comps so banks will approve the deals. Here’s how some allegedly did it.

Palm Coast, FL – November 20, 2009 – My first article in this series, "Real Estate and Mortgage Fraud was Massive, Rampant" elicited several reader comments; a debate really. Choices have consequences. Aren’t buyers ultimately responsible for the consequences of their decisions? Surely you never hear anyone who made a profit blame it on someone else. But did fraud contribute to the flood of foreclosures and bankruptcies?
When we go to a magic show, we expect illusions. Just as a magician uses ploys to deceive their audience, a coordinated team comprised of a real estate salesperson, a title company, an appraiser, and a lender is able to deceive a prospective buyer, using illusions to create phantom property valuations. But unlike the audience at the magic show, the property buyer isn’t expecting it.
The 2002 to 2006 real estate market was like the Wild West. It was hot. Everyone knew it and most wanted a piece of the action. Just as the bubble spawned the day trader, the real estate boom gave birth to the flipper. Nearly all were newcomers to the complexities of real estate transactions. They had their happy ears on, only taking in what they wanted to hear. They were at the same time naive and predisposed to buy.
All too willing to drink the cool aid, this group of predisposed buyers represented a target rich environment; easily led and just as easily mislead. The general public is surprisingly uneducated in real estate matters. The complexities of disclosure, property reports, club membership requirements, HUD statements, planned community restrictions, POAs, CCDs, and legal mumbo jumbo are beyond most people.  
A large number of potential buyers were recruited from other states or countries, completely unfamiliar with Florida real estate law. They were left to rely on "professionals" to guide them through the transaction, reassured that most of the "professionals" were bound by licensing and/or regulatory requirements to do the proper thing. Surely ALL these professionals could not possibly be conspiring against them.


Bobby Ginn is reportedly dealing with some 30 lawsuits, many brought by disgruntled buyers. One recent lawsuit is the first to link the activities of the entire cast of transaction facilitators (from the sales person to the banks) into one giant alleged conspiracy. Ginn does not stand alone. The same allegations found in the Ginn lawsuits are repeated in other lawsuits, filed against other developers, other title companies, other appraisers, other loan originators, and other banks.
ginn blimp from gotoby.comBobby Ginn self promoted himself in a very visible way, becoming the de facto poster boy for highly amenitized private community development. As such, the allegations against his organization and those associated with his affiliates are most illustrative of what I believe is a much broader industry phenomenon.
I have many readers who are skeptical of the culpability of developers given the rabid behavior shown by buyers during the real estate boom. Many think Ginn and other developers simply benefitted from gullible buyers willing to pay outrageous prices for piles of dirt and a list of promises. Left holding the bag when property values tanked, they want to blame someone. "Caveat Emptor," many readers say.
I understand their argument. Losses on my last piece of investment property nearly cancelled all earlier gains. There was no fraud involved. In retrospect, I was caught up in the euphoria of the rising market and simply made a bad decision with no one to blame but myself. I am not a victim.
But my experience does not characterize that of several others. I started nosing around some of the lawsuits looking for fire whenever I smelled smoke. Early last year, I was introduced to a Foreign National who had signed a contract to purchase a lot in Reunion in February ’05. As he was about to close on the transaction in May ’05, he noticed several irregularities in the documentation. Ultimately, he was able to unwind the transaction but remains under a non-disclosure agreement with respect to specifics. 
The experience ignited a passionate and ongoing search for similar transaction irregularities, yielding a treasure trove of evidence. I’ve seen it. The accumulated evidence constitutes the foundation for many recent lawsuits. The Foreign National’s friends have nicknamed him "The Bank Slayer," because of his success connecting the dots of the deception all the way to major banks.
The initial view of Slayer’s early discoveries prompted my June ’08 article "A Horse, a Horse, My GINNdom for a Horse." In it I said:
"Over the past few months, it’s become harder to be a fan [of Bobby Ginn] and easier to empathize with those Ginn property owners who feel they were deceived. I no longer believe that "let the buyer beware" is the only appropriate comment to those who experienced losses due to declining property values. It is becoming more apparent to me that from sales and marketing tactics through the appraisal and mortgage process, some individuals may have stepped over the line."
At this point, the lawsuits are allegations. They are not proof of misdeeds. The court, not I or Bank Slayer, will be the ultimate determiner of guilt or innocence. But I have seen the ever growing pile of evidence. It consists of emails, appraisals, public records, HUD statements, videos, and more which support the allegations. One cannot help but be impressed by the sheer volume and its apparent implications. It paints an apparent picture of a well-oiled machine fueled by greed, often enabled by the greed of the buyers themselves.
But it was one against many. Law abiding buyers, trusting but predisposed to buy didn’t have a chance against those who are alleged to have crossed the line. If the defendants are guilty, the buyers are in fact victims.
To see the entire 134-page Lawrie Class Action Complaint, CLICK HERE. Allegations in the complaint, supported by the abundant evidence, describe methods used to artificially inflate property values.
There are several examples of false information with respect to property sales being recorded in public records. In one example, two lots were purchased by a single buyer for a total of $707,800. One deed was submitted for recording showing the purchase price of $1. The deed submitted for the other lot showed a purchase price of $707,800. The second lot was subsequently used as a comparable for future appraisals as having sold for $707,800. This pattern was repeated several times in other examples.
Several appraisals included the values of furniture packages and leaseback agreements. These items are both inappropriate to use as part of the subject property’s appraised value. Their inclusion substantially increased the appraised value, setting the stage for use as a comparable property in future appraisals.
One email to a prospective buyer outlines a proposed structure for such a purchase:
  • Purchase Price – $589,900
  • Furniture Package – $60,000
  • Two-Year Leaseback – $144,000 (cash back at closing
  • Net Price – $385,900
This transaction, if recorded as proposed, would provide a "comparable" selling price 52.9% higher than the actual selling price.
Another lawsuit filed earlier this month against Blue Spring Lake (story) also stems from evidence gathered by Slayer. While its allegations are aimed at a different developer, it names several of the same  appraisal, loan origination, and lending parties as the Lawrie Complaint.

In the next article in this series, will examine the roles allegedly played by title companies, mortgage companies, and banks.


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5 replies
  1. Ted Lesher
    Ted Lesher says:

    De rigueur for Selling Stuff?

    I read your excellent article. it called to my mind several instances of similar sales approaches…including political campaign promises-where it all may have started! It’s certainly and unfortunately growing more common.

  2. John
    John says:


    Good article. I have heard for a while the same theory most likely from the same source. My issue is, and has always been, the thought that this was one giant conspiracy. Do I believe that individuals acted immorally and perhaps illegally, yes.

    It is common sense that a job which bases a large part of compensation on performance will result in people getting loose and fast with the process when it is allowed.

    The sales guys were "selling" using the tactics as outlined. The bankers were doing the deals that they did because everyone else was doing the same deals. The appraisers were submitting the appraisals they did because everyone else was doing them. This created a scenario where if at any point any of these individuals opted not to "do their job" as required at the time then someone else would have.

    Again, I do believe that some certainly had a con running but overall I do not believe this was one big conspiracy as Bank Slayer would have most believe. It is just too big and too many parties were involved.

    I truly believe that most of these people were just doing what the current market demanded. None of the buyers had a gun to their head to purchase. To the contrary, most of the innocent plaintiffs (in the Ginn lawsuit) were people that had profited handsomely on prior deals.

    Take a look back on some of the names in the complaint. Billington, Lawrie, Sobel, even poor old Mike Adams was mentioned in the document. Are you kidding me? All of these people made money hand over fist on prior deals and they got caught with their hands in the cookie jar – WAY in the cookie jar.

  3. Dan
    Dan says:

    unhappy investor

    I am one of the "greedy investors" that I see commented upon whenever Ginn developments seem to be the issue. I am currently suing Ginn in another case. I am not, however, someone that made lots of money on prior Ginn properties simply upset because this one went stright down. Rather I and my wife have worked long and hard raising our daughter, paying all of our bills always on time, and scrimping and saving with the hope to someday be able to retire on what we have earned over the years, not on money from someone else or the government. Unfortunately we have seen our savings disappearing thanks to one very bad investment. I know alot of the investors in Ginn developments have similar stories because I have met them since these developments have collapsed. We were told about Ginn from a friend who regretably made the same mistake we did, listening to what we were being told when we invested. Did we make mistakes, in retrospect obviously we did. Were we also gullible, I suspect so. But were we asking the right questions of the right people? I thought we were. I understand there can be puffing in any business transaction but have never seen the excitement with which Ginn employees pushed their product. Months and months of phone calls, mailings, e-mails claiming how great this opportunity was for us and telling us about their prior successes. Then the grand event where they serve extensive food, drinks and fine cigars with even celebrities, like Tom Watson in our case, coming in to talk to the investors about the great opportunity awaiting. But that was just the start, we did talk with the banker that was the "preferred lender" and were told it was a great development and assured by his office that the property was sure to appraise for at least the sales price. We talked with a paralegal in the attorney’s office handling the closing and were again told it was a good deal and would appraise. Then we relied upon the appraiser, retained by the bank, but paid by my wife and I, to tell us that the property was worth what we paid for it. I am not a real estate expert but have learned so much because of this disaster. I have learned not to trust what the seller claims as to the value of something because he may have set up straw men to establish false comparables that you won’t know about until its too late. I have learned that loan officers with banks are paid on commission and work with the developer, lining both their pockets at the expense of the investor. I have learned that even though you pay an appraiser to do a job, that he is often more interested in making money with more referrals from the lending officer of the bank than giving his loyalty to the person that paid him and that may be relying upon him to keep from losing that life savings.

    If the lot we bought had dropped in value due to a market correction, we could live with that. But when you pay 450,000 for a piece of property that you have been assured is worth 450,000 and then find out you would be lucky to get 50,000 for it, there is something terribly wrong. That is not a correction. My wife and I are not suing because of having made a bad investment but rather because we want a chance for 6 people in a courtroon to hear all that went on and then decide what is right and what is just. We will live with their verdict.

  4. John
    John says:

    RE: Dan

    I appreciate your situation and honestly, I find myself under very similar circumstances. Given your law background I’m sure you have a better feel for what can be accomplished in a lawsuit. I for one just want to lick my wounds and move on with life.

    In case things don’t go your way in the courtroom, you may find the attached article interesting and to some extent comforting. I just read it last night and I can honestly say it made me feel better about the decision I have made. Again, I hope you do win and are able to recoup some losses.

    Take a look at the article. It is the one dated Saturday, November 21st. I would encourage everyone else take a read too regardless which side of the blame you find yourself.

    I hope everyone manages to have a great Thanksgiving. At the end of the day there is always something to be thankful for and now is the time to focus on the good!

  5. Toby
    Toby says:

    Reply to John

    As I said in my article, the buyers were often willing suckers. The law does not (and should not) try to prevent you from making poor decisions. A certain amount of puffery and exaggeration is allowed and should be expected. But the evidence I saw leads me to believe laws were broken. The line was crossed. It appears that they conspired together.
    If you think buyers should suffer the consequences (financial loss) of bad investment decisions, it stand to reason the defendants, if found guilty of breaking the law, should likewise suffer consequences (jail time or fines). The fact that some of the buyers made profits on previous deals is irrelevant and does not mitigate this fact.

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