The FBI just released a comprehensive new report on real estate and mortgage fraud, and, as you might expect given everything we talk about here on Flipping Frenzy, it isn’t a pretty picture. The information contained in the report can get quite technical, with plenty of charts, graphs, and hard numbers. Regardless, it’s worth the read–see “The 2007 Mortgage Fraud Report.” Among the Report’s key findings:

1. Real Estate and Mortgage Fraud is clearly on the rise. Although there is no central way to track the total extent of the problem, the FBI received 46,717 Suspicious Activity Reports related to real estate and mortgage fraud last year—compared to 35,617 in 2006 and just 6,936 in 2003. Only 7% of these reports documented an exact dollar amount in terms of losses, but even so, the total loss from this 7% was $813 million. The FBI’s caseload has also escalated. By the end of fiscal year 2007, the Bureau was handling just over 1,200 real estate and mortgage fraud investigations—a 47% increase from 2006 and a whopping 176% increase from 2003.
2. The downward trend in the housing market will continue (see forecasts provided by the Mortgage Bankers Association in the report), providing further incentive for shady real estate industry insiders to look for dishonest ways to turn a profit and growing opportunities for scam artists to prey on vulnerable homeowners.
3. The subprime lending crisis is a contributing factor to real estate mortgage fraud, both directly and indirectly. Subprime loans, designed for people with poor or limited credit histories, now represent more than 13% of all outstanding loans–double the percentage of five years ago. These high-interest, high-risk loans contributed to the 2.2 million foreclosures filed during 2007, up 75% from 2006. The trouble actually began when home prices were rising a few years ago, leading to relaxed lending practices throughout the industry and the exaggeration of assets by industry insiders and borrowers under their charge anxious to qualify for loans, both of which contributed to fraud.
4. The top 10 hotspots nationwide for mortgage fraud in 2007, carefully mapped from multiple public and private sources, were:
   
   1. Florida
   2. Georgia
   3. Michigan
   4. California
   5. Illinois
   6. Ohio
   7. Texas
   8. New York
   9. Colorado
   10. Minnesota

   Other states significantly affected include: Arizona, Maryland, Utah, Nevada, Missouri, Indiana, Tennessee, Virginia, New Jersey, and Connecticut. The north-central region of the United States had the largest share of fraud, followed by the west and southeast regions.



5. The latest mortgage scams run the gamut: from builder-bailout schemes where developers unload excess inventory through financial trickery, to foreclosure rescue schemes that trick homeowners into signing over the deed to their house; from seller-assistance scams that use false appraisals to sell homes, to identity theft that leads to home equity credit lines being opened and drained.

The FBI’s report also briefly recounts the agency’s own response to the problem, including the Bureau’s participation in the Department of Justice’s Mortgage Fraud Working Group, through which the agency says it is helping to identify large-scale real estate industry insiders and criminal enterprises conducting systemic real estate fraud

The purpose of the The 2007 Mortgage Fraud Report is to provide insight into the breadth and depth of real estate and mortgage fraud crimes in the United States. The report updates the 2006 Mortgage Fraud Report and addresses current fraud projections, issues, and hot spots (as noted above). The objective of the report, according to the FBI, is to provide FBI program managers with relative data to justify real estate and mortgage fraud investigative and preventive resources and for investigators to identify real estate and mortgage fraud activity.

The latest foreclosure statistics from RealtyTrac are out, and the news isn’t very good. According to the Q1 2008 U.S. Foreclosure Market Report, which tracks foreclosure filings (including default notices, auction sale notices and bank repossessions), 649,917 properties were foreclosed upon during the first quarter of the year, a 23% increase from the previous quarter and a 112% increase from the first quarter of 2007. The report also shows that one (1) in every 194 U.S. households received a foreclosure filing during the quarter.

Foreclosure activity in the quarter increased on a year-over-year basis in 46 out of the 50 states and in 90 of the nation’s 100 largest metro areas, demonstrating that most regions of the country are seeing more foreclosures. In some areas there are also some unusual, non-market factors impacting the foreclosure numbers. For example, the city of Philadelphia in late March issued a temporary moratorium on all foreclosure auctions for April, and the city has since adopted a program that will delay foreclosure proceedings on owner-occupied properties until the owners have met face-to-face with lenders to attempt a loan workout plan that would prevent foreclosure.

While programs like those in Philadelphia are certain to have a positive long-term impact, they could be simply deferring another flood of foreclosures, and that could extend the length of time it takes the market to recover from the current downward cycle, in which we’ve already seen seven consecutive quarters of increasing foreclosure activity.

Click on the map to the left for a close up view of exactly where foreclosure-related activity is playing out across the United States. As you’ll see, one (1) in every 54 Nevada households received a foreclosure filing during the first quarter, the highest foreclosure rate in the nation and 3.6 times the national average. Foreclosure filings were reported on 19,595 Nevada properties during the quarter, up 3% from the previous quarter and up 137% from the first quarter of 2007.

Foreclosure filings were reported on 169,831 California properties during the first quarter, the highest total in the nation at a rate of one (1) in every 78 households — the nation’s second highest foreclosure rate. Foreclosure activity in California increased 32% from the previous quarter and was up nearly 213% from the first quarter of 2007.

Arizona documented the nation’s third highest state foreclosure rate, with one (1) in every 95 households receiving a foreclosure filing during the quarter. Foreclosure filings were reported on 27,404 Arizona properties during the quarter, up 45% from the previous quarter and up nearly 245% from the first quarter of 2007.

Foreclosure filings were reported on 87,893 Florida properties during the first quarter, the second highest state total and giving Florida the nation’s 4th highest foreclosure rate — one (1) in every 97 households received a foreclosure filing during the quarter. Foreclosure activity in the state was up 17% from the previous quarter and up 178% from the first quarter of 2007.

Colorado foreclosure activity increased 33% from the previous quarter and 78% from the first quarter of 2007, and the state’s foreclosure rate ranked No. 5 among the states. Foreclosure filings were reported on 18,996 Colorado properties during the quarter, a rate of one in every 110 households.

Other states with foreclosure rates among the top 10 were Georgia, Michigan, Ohio, Massachusetts and Connecticut.

Three real estate industry insiders have been sentenced in Florida for their roles in a humongous real estate fraud conspiracy. Richard Crowder, II, a former licensed mortgage broker and owner of America’s Best Mortgage Services, along with former title attorney Gary Mills (who owned Four Star Title) and a former Wachovia Bank loan officer (Karen Sullivan), all received stiff sentences on Wednesday from U.S. District Judge Jose Martinez. Crowder received nine (9) years’, while Mill and Sullivan received three years’ and eight months and four years’ and one month imprisonment, respectively. All three are scheduled to appear again in court on May 29 for a hearing to determine the amount of restitution they must pay to the victims in this case.

To carry out their scheme, mortgage broker Crowder identified residential properties, including luxury condominiums on South Beach in Miami, Florida, that were available for purchase. He then recruited buyers for the properties, representing that he could obtain 100% financing for their purchase. After finding a purchaser, Crowder would apply for equity lines of credit on their behalf with Wachovia Bank. To induce Wachovia to issue the equity lines of credit, Crowder and title attorney Mills prepared fraudulent HUD-1 settlement forms stating the buyers already owned the properties and also significantly understated the amount of the first mortgages on the properties. The fraudulent HUD-1 settlement forms were then given to Wachovia Bank loan officer Sullivan, who used the forms to facilitate the issuance of equity lines of credit from the bank.

Simultaneously, or shortly after obtaining the equity lines of credit from Wachovia, Crowder applied for the first mortgages on the properties. These applications overstated the buyers’ assets and income, and also included false verification of deposit forms prepared by Wachovia Bank loan officer Karen Sullivan. To further induce the lenders to issue the loans, title attorney Gary Mills prepared documents falsely representing that the buyers were using their own money for the down payments and closing costs. In fact, the buyers were using funds from the fraudulently obtained Wachovia equity lines credit or funds provided by mortgage broker Richard Crowder.

At the end of the day, Crowder, Mills and Sullivan caused the fraudulent purchase of 17 different luxury condominiums at The Continuum on South Beach and at The Point of Aventura using more than $37,000,000 in fraudulently obtained mortgage loans.

A U.S. District Judge in Florida has sentenced a former mortgage broker to seven years in prison and ordered him to pay more than $2.3 million in restitution for his role in a mortgage fraud scheme that racked up more than $17 million in fraudulently secured loans. Justin D. Barker, 31, of Jacksonville, Florida, who was sentenced earlier this week in the Middle District of Florida, was also ordered to forfeit $4,419,024.15, jointly and independently with other conspirators.

According to court documents, Barker’s scheme operated in 2005 and 2006 when he negotiated the purchase of residential real estate properties, either on behalf of himself personally, on behalf of a company he controlled, or on behalf of a third-party buyer. Barker, his company, or the buyer would then enter into a purchase and sale agreement with the seller of the property in question. Barker then retained a licensed real estate appraiser to appraise the property at a significantly inflated price. The appraiser would appraise the property at the price Barker requested, using inappropriate comparable properties and other fraudulent methods to obtain the price requested.

At the closing on the properties in question (more than 40 in total), Barker or his company would receive the difference between the loan amount, which was based on the inflated appraisal, and the actual purchase price, usually described with terms such as “assignment fee” or “payoff of second mortgage” that did not exist. This difference was the proceeds of the fraud.

During the course of the scheme, fraudulent loans totaling about $17.7 million were obtained on more than 40 properties. These loans would not have been approved but for the fraud. To recover some of these illicit proceeds, the government seized from Barker the following items:

• 2004 Bentley Continental
• 2007 Cadillac Escalade
• 2002 BMW 745Li
• 2005 Chaparral 330 Signature 36′ boat
• 1997 19′ Wellcraft boat
• 2006 and 2001 Yamaha motorcycles
• 2-carat loose diamond
• 1-carat diamond necklace
• .5-carat diamond necklace
• Diamond stud earrings
• Two Movado watches

Barker’s co-conspirator in the case, a title agency manager named Robert W. Hulbert Jr., pleaded guilty to the same charges and was sentenced this past December to three years in prison.

Imagine buying your dream home. Your credit is a bit shaky but you manage to secure a subprime loan with an adjustable rate mortgage. A few years later, interest rates jump and you can no longer afford to pay your mortgage. You see an advertisement in a local newspaper for a business that’s willing to help–the ad states they can pay your mortgage for a modest monthly fee while you take the necessary time to get back on your feet. But here’s the bad part: It’s a scam. The company just takes your money and runs!

This is just one of the real estate and mortgage fraud-related schemes the FBI is concerned about, and according to senior criminal investigators at the Bureau, the problem is only going to worsen over the next 18 months. These scams–which I write about in my latest book, Foreclosure Self-Defense For Dummies–include plenty of shenanigans with mortgages and subprime loans and are costing this great nation of ours tens of billions of dollars a year, if not more.

“Greed is definitely not good for our economy right now,” says Ken Kaiser, the FBI’s top criminal investigative executive. “It’s hurting homeowners. It’s hurting honest businesses. And it’s hurting investors and markets around the world.”

With those thoughts in mind, the FBI says it is now squarely focused on proactive initiatives designed to crack down on the largest of these financial crimes, and is even shifting resources as trends emerge, all the while working hand-in-hand with a host of government and private sector partners.

In particular:

• As we wrote last week, the FBI is now investigating 14 corporations involved in subprime lending as part of its “Subprime Mortgage Industry Fraud Initiative” launched last year. The companies being investigated come from across the financial services and real estate industry, from mortgage lenders to investment banks that bundle loans into securities sold to investors.
• The Bureau now has more than 1,200 open real estate and mortgage fraud cases (that’s up about 40% from last year), mostly involving fraud for profit, where straw buyers and real estate industry insiders rig schemes to buy properties that are illegally flipped or allowed to go into foreclosure.

The FBI also says suspicious activity reports–for potential real estate and mortgage fraud–have increased from 3,000 in 2003 to 48,000 in fiscal year 2007, and are projected to reach more than 60,000 such reports in 2008.

Finally, the FBI’s latest “hotspot list” for real estate and mortgage fraud includes: California, Texas, Arizona, Florida, Ohio, Michigan, and Utah (Utah is new to the list); and, on a somewhat surprising note, the Bureau now says it sees no links whatsoever to organized crime syndicates, street gangs, or terrorist groups in its real estate and mortgage fraud case portfolio.

Some mortgage fraud cases will not be criminally prosecuted!: Amid all the anguish arising from the swelling volume of home foreclosures in and around Stockton, California, there has been much talk about real estate fraud. But most of the complaints cannot be criminally prosecuted, representatives of the San Joaquin County Office of the District Attorney said yesterday.

Foreclosure vultures prey on Portland, Oregon, homeowners: As national foreclosure rates hit their highest levels ever, people calling themselves “foreclosure consultants,” are filling Craigslist, billboards and mailers with offers to “save your home.” Detective Liz Cruthers, who investigates white-collar crimes for the Portland, Oregon, Police Bureau, says she’s spending much of her time learning the intricacies of “mortgage rescue fraud” and chasing down the bad guys.

Utah seeks stiffer penalties for real estate fraud: A Utah legislative committee is recommending the passage of a bill aimed at increasing criminal and civil penalties against people involved in mortgage fraud. The Senate Business and Labor Standing Committee on Tuesday unanimously approved SB134 for further consideration by the state Legislature.

FBI targets mortgage fraud in Hawaii: The FBI has opened multiple mortgage fraud investigations in Hawai’i as a result of the fallout from the nation’s subprime mortgage crisis, the bureau’s director said yesterday. FBI Director Robert S. Mueller III, speaking to reporters on a stopover following a trip to Asia, confirmed the subprime mortgage mess has reached Hawai’i.

Countrywide accused of mortgage fraud: Already burned in the subprime mortgage meltdown, lending giant Countrywide Financial Corp. is now under investigation in Florida for possible unfair and deceptive trade practices, state officials said Thursday. Officials say they have received more than 150 formal complaints about Countrywide since setting up a mortgage fraud hotline last year.

Arrest made in Erie, Pennsylvania, real estate fraud case: A key figure in an ongoing federal investigation into suspected mortgage fraud in the city of Erie, Pennsylvania, will plead guilty to fraud and money-laundering charges. The U.S. Attorney’s Office in Erie on Thursday filed criminal charges against Frank Kartesz II. Kartesz, 39, is accused of one count each of mail fraud and criminal conspiracy to commit mail fraud, wire fraud and bank fraud. The government alleges he was part of a scheme in which he and others bought run-down houses and sold them at artificially inflated prices. Most of the buyers were low-income people who knew little about the home-buying process.

Illinois mortgage broker in jail for selling credit histories: Homeowners already worried about with a slumping real estate market and tighter restrictions on home loans should look to the case of an Illinois mortgage broker as another cautionary tale.

Georgia real estate appraiser sentenced to prison for mortgage fraud: After submitting fraudulent appraisals on incomplete houses as part of a mortgage fraud scheme, a Georgia real estate appraiser has been sentenced to prison.

Florida’s Attorney General today announced a multi-pronged initiative to combat mortgage fraud and rescue foreclosure scams, and the filing of a lawsuit asserting South Florida-based National Foreclosure Management and multiple affiliates defrauded at least 80 homeowners out of approximately $1.7 million in home equity.

Beginning in October 2004, National Foreclosure Management–which now does business as American Home Rescue, Inc.–selected homeowners who had substantial equity in their homes but were in the process of being foreclosed upon. The company would offer to hold the titles to the homes for a year, refinance the debt, and provide cash and credit repair counseling to the homeowner, all while allowing the homeowner to remain in the house. The company claimed it would deed the property back at the end of the year after the foreclosure had been avoided and the homeowner’s credit was repaired.

Once the company had obtained the title to the house, the Attorney General’s lawsuit alleges the company would strip the equity from the homes by refinancing them at inflated prices and by assessing fraudulent fees and costs, leaving little or nothing for the homeowner to recoup. The home would then be sold outright to an investor or a straw buyer who would lease the home back to the homeowner at a rental rate far exceeding the original mortgage payment, virtually ensuring the homeowner’s eventual eviction. According to the lawsuit, the homeowners would end up with neither the titles to the homes nor the equity that rightfully belonged to them.

The lawsuit, which is the first filed by the Attorney General’s Mortgage Fraud Task Force, seeks restitution to the affected homeowners, dissolution of the rescue foreclosure companies, and revocation of the mortgage brokers’ licenses revoked. Florida’s mortgage fraud task force has been in operation since September and is made up of 25 lawyers and investigators in the Attorney General’s Office, stationed in locations throughout the state.

In addition to filing the lawsuit, Florida’s Attorney General today announced the filing of the “Foreclosure Rescue Fraud Prevention Act,” sponsored by Senator Mike Fasano (R–New Port Richey) and Representative Clay Ford (R–Gulf Breeze). The proposed legislation will ensure, among other things, homeowners are properly informed about their rights when they are signing a contract with a foreclosure rescue entity. Specifically, the proposed legislation offers the following key provisions:

1. A five-day right of cancellation period that allows the consumer to cancel the agreement with the foreclosure rescuer.
2. Requirements that foreclosure rescuers include in the contract clear and conspicuous notice to homeowners of this right of cancellation as well as a recommendation that the homeowner contact the lender or mortgage servicer prior to the signing of the agreement and a provision that states the consultant is prohibited from accepting any form of payment until all services are completed.
3. Definitions of such terms as “Equity Purchaser,” “Foreclosure Consultant,” “Foreclosure-related Services,” and “Foreclosure Rescue Transaction.”
4. That all violations of the new Foreclosure Rescue Fraud Prevention Act are defined as an unfair and deceptive trade practices and are subject to the penalties included in Part II of Chapter 501, Florida Statutes.

Parties named in today’s lawsuit include:

• National Foreclosure Management, Inc.
• American Home Rescue, Inc.
• National Property Holding Group, LLC
• The Mortgage Practice, Inc.
• Southeast Capital Mortgage Company
• Barrister Title Services, Inc.
• GMC Land Services of Florida, Inc., doing business as Richmond Abstract, Inc.
• Bernard Williams
• Wyman F. Roberts
• Lakeisha Marion
• Anna Silva
• Albert Nae
• Linda Rubinchik
• Rhona Oliver
• Tracy Needleman
• Gina Rock
• John Sarlo
• Dianna Brown-Flournoy
• Reina Roman

A copy of the lawsuit against National Foreclosure Management is available here.

Those of you who have read my many blog entries on real estate and mortgage fraud, know that cash back at closing is a form of fraud that is particularly prevalent and destructive. The reason I focus on it so much is because many people think that cash back at closing is acceptable and that at its very worst, it is a victimless crime. A buyer simply agrees to pay more for a property than what it is really worth in order to receive the excess proceeds as a refund when the transaction closes.

More and more people are beginning to realize that cash back at closing is illegal, so the con artists are starting to do what they usually do when the public wises up — they modify the technique and give it a new name. Recently victims of a large-scale real estate scam in Florida, Texas and Nevada called my attention to a new adaptation of cash back at closing called lease back at closing. In a letter from Ricky Stokes (who was selling these investment opportunities on behalf of Cay Clubs Resorts) to an investor, Stokes acknowledges that “kickbacks” at closing are illegal, so the company uses lease backs instead:

… at closing, as the investor, you get a 15% kickback they call a “guaranteed lease back.” They make this legal by calling it a lease back instead of a kickback. These kickbacks more than cover your out of pocket expenses for two years! This also allows them to have free will to renovate and then rent it to vacationers/snow birds..

In the same letter, Mr. Stokes provides the following example to show how the lease back scheme would work on a $500,000 property:

Let’s say you buy a townhouse conversion for $500K. You get 100% financing and get a check cut back to you at closing for $50K (return of your deposit). Ten days later you get another check for $75K (this is their guaranteed lease back…kickbacks are illegal). This cash back at closing will more than cover your outflow for the next 2 years. With appreciation sitting at around 23%, you can roll out of it in 18 months, and make $320K.

In other words, Ricky Stokes is claiming that simply calling cash back at closing a lease back rather than a kickback makes it okay. This is absurd. Using the same logic, we could simply refer to murder as killing to avoid a conviction for first-degree murder. Dress it up however you like, call it whatever you like, cash back at closing is illegal.

What Cay Clubs Resorts was doing was simply refunding a portion of the mortgage loans used to finance the purchase of the property to the investor. This was not Cay Clubs Resorts’ money to give away or use however it wished. This was money that the lender was led to believe was to be used solely for purchasing the property and that the property’s value was sufficient collateral to secure the loan.

Lying to the lender, which is essentially what Cay Clubs Resorts was doing, is mortgage fraud, plain and simple, no matter what you want to call it. For more about Cay Clubs Resorts, including stories from investors who fell victim to the scam, visit the Cay Clubs Resorts category here on FlippingFrenzy.com.

Mortgage Fraud Surging in Florida: More potential mortgage fraud cases were reported by lenders in Florida in 2007 than in the entire country the previous year, William Stern, a supervisory special agent with the FBI, said today. And Tampa, he said, ranks seventh on the agency’s top 10 list for mortgage fraud, joining another Florida city on the list, Miami, which is No. 4.

Several face charges in Canadian real estate fraud probe, including…: Ready for this one? Hold onto your hat… A 70-year-old Canadian man is among five people charged and police are looking for others in connection with a massive real estate fraud totalling nearly $4 million. Toronto, Canada police laid 135 fraud-related charges this against five people, and Canada-wide warrants have been issued for two more suspects.

Las Vegas escrow officer arrested for mortgage fraud: Sheila Katherine Williams (pictured below), a Las Vegas, Nevada escrow officer, was arrested after fraud investigators say she pocketed more than $500,000 in escrow funds. Authorities say this case is just the tip of the iceberg in what they believe will be a deluge of mortgage fraud cases in the weeks and months ahead, and that this particular arrest is another ripple effect of Nevada’s worsening foreclosure crisis.

Gary, Indiana attorney sentenced for real estate fraud: According to the AP, Gary attorney Willie Harris has been sentenced to four-and-a-half years in prison for his role in a real estate fraud scheme. Harris was convicted in September on fraud and tax evasion charges for skimming $50,000 from the profits of a 2000 real estate deal involving a now-defunct local enterprise association. The Indiana Supreme Court suspended Harris’ law license earlier this month.

Woman receives $3.5 million judgment in mortgage scam case: A Great Neck, New York woman victimized by mortgage fraud when she unknowingly gave away her house has won a $3.5 million judgment against the mortgage broker who scammed her. Priscila Nano, 66, said she was “scared” and on the brink of losing her longtime home to foreclosure in 2004 when she received an advertisement from a company called Foreclosure Options Inc., and called the company’s number. In court papers, Nano’s attorneys described her as “an underemployed, senior citizen and immigrant with a modest command of the English language … desperate to keep her home.”

Maryland expects significant rise in mortgage and foreclosure scams: A dramatic rise in foreclosures and related scams is expected in Maryland in the coming year, prompting that state’s governor and the General Assembly to roll out several initiatives intended to help people keep their homes and avoid mortgage fraud. Governor Martin O’Malley this week proposed a set of emergency regulatory reforms and bills to target predatory lending and mortgage fraud, more efficiently inform homeowners about foreclosures, and create stricter licensing regulations. In addition, there are at least five more foreclosure-related bills that have originated in the state’s legislature this year. Maryland had 6,969 foreclosures in October and November 2007 alone.

16 People Indicted in Austin, Texas Mortgage Fraud Scheme: The United States Attorney for the Western District of Texas announced that a federal grand jury has returned an indictment charging sixteen individuals for their roles in a multi-million dollar mortgage fraud scheme.

Con artists have seemingly limitless scams and schemes at their disposal to pick the pockets of honest, hard working people, and they continue to modify their scams to remain undetected. They even resort to calling obviously illegal transactions by other names to make them seem acceptable.

Hundreds of highly intelligent professionals were taken in by smooth-talking Cay Clubs promoters. The warning signs were there, but these con artists were so convincing that even the most careful investors were scammed.

A visitor to FlippingFrenzy.com recently related her experience with Cay Clubs promoter Ricky Stokes. I am including the story here to demonstrate just how convincing these con artists can be. Read the story in its entirety and see if you would have spotted the warning signs. At the end of the story, I highlight the warning signs, so you know what to look out for before investing in something that seems too good to be true.

I met Ricky Stokes through my friend Craig. Ricky wrote me an email letter outlining the specifics of buying a Cay Club unit. Here is the email he sent to me in September 2006:

I want to make sure that I tell you as much as I know concerning Clear Crystal Companies/Sunvest Communities and this way of investing. I’m only telling you about this because you were recommended as a friend of Craig. I’ll see if I can get you into this opportunity. I know the developer, Dave Clark, he’s a friend I met singing in the church choir. I’ll talk to him and see if he will let you into this investment but don’t worry I’ll put in a good word for you.

The minimum amount any investor has made per year in the last 7 years is 48%, the most anyone has made is over 300% and the average year over year for everyone is 164%. I have never found any investment to yield this return on my money year after year. To show you how secure this investment is, you may use your IRA or 401 account to do the investing for you tax deferred (at least until you retire). To do this, one needs to transfer the portion needed to invest of their IRA to a different, self directed custodian. After looking at the information, I feel very sure you will agree it is the best investment going, and if you decided to invest now, you could be totally independent very soon.

There are two ways to invest with this company. First is condo/townhouse conversion. This is by far the most profitable, and the easiest to accomplish. Currently, this is the only available investment vehicle available. A conversion is where the developer/company has purchased what use to be a hotel or townhouse rentals, renovates, upgrades, and adds amenities to the project, and then they are put on the market to the end retail buyer. Only 70% of the available units at a particular project are available to the investors. The remaining 30% is sold by the retail sales people onsite. While the sales team is selling their 30%, the renovations begin. Renovations include all tile/marble floors and granite counter tops, full $30,000 furniture package, etc. Once the renovations are completed, the sales team then resells our units to the end retail buyers. For the investor, these units are always made available to us at $100/SF below replacement cost which equals about .70 on the dollar. You have to close/own when investing in conversions. Please don’t let closing scare you because it is very low risk and is more of a paper shuffle than anything else.

First the conversion is offered to you at below replacement cost. Since you are purchasing for below cost, their lenders will give you 100% financing. Conversions do require a 10% deposit which is given back to you at closing if you choose the 100% financing option. Here is the kicker… at closing as the investor, you get a 15% kick back they call a “guaranteed lease back.” They make this legal by calling it a lease back instead of a kick back. These kickbacks more than cover your out of pocket expenses for two years! This also allows them to have free will to renovate and then rent it to vacationers/snow birds.

Your profit taking is when the unit is sold to the end retail buyer and it is quite substantial. There are sizeable tax advantages owning investment property. You may sell your unit at anytime, however I would play their game and let them sell it for me after 18 months.

Example: In Clearwater, let’s say you buy a townhouse conversion for…

[Editor’s Note: To read the rest of Ricky Stokes’ letter to this investor, please click here.]

After reading the above four-page email, I called the 239 phone number and spoke with Ricky Stokes, who told me he was a pilot for American Airlines. He went through the entire Cay Club concept of purchasing condo conversions with nothing down at a wholesale pricing structure, getting a 15% leaseback, and then letting the appreciation in the property grow while the developer transforms the property into a world class 5-star resort. He talked of the principals of the company and stories of how Dave Clark broke off from Earthmark because of conflicts of interest in the partners getting too greedy and cutting out incentives for investors which were necessary in order for investors to continue to back Earthmark.

Sept 2005 through February 2006

I did my due diligence and researched Sunvest Communities, Cay Clubs International, and Waterfront Resort Realty. I scheduled a trip out to Clearwater to visit the property and to meet with Ricky Stokes. Ricky’s schedule was very tight when we were out in Clearwater. I brought a girlfriend and we stayed onsite at the Clearwater project the night before meeting him. While at the sales office, we took a tour of the grounds and then Ricky did a full multimedia presentation in the clubhouse. All the while he continued telling us of the wonderful integrity of everyone in the company.

He constantly reiterated the importance of not going through the retail “sales” side of the house. If that side of the house were to ever get our contact information in their database, we would not be able to get the wholesale pricing offered to the investors.

He also talked to us about Cay Clubs and the privileges of being a member in this elite group. There was a $15,000 membership fee that was paid as part of the equity investment. This Cay Club fee was a mandatory part of the transaction. As an incentive for us to close quickly, this membership was fee was cut in half. We were told that the investment would appreciate at the same rates as the properties and that when the properties were sold the memberships would also be sold and that we would get all of our initial investment back as well as 80% of the increase in value. Supposedly the retail side of the house was selling the same memberships for $30,000.

I continued in close contact with Mr. Stokes. He had given us a history of his real estate investing, business ventures, and his educational history, which included a Masters degree in finance and a license as a CPA. He also told us of numerous units he owned in Clearwater Cay Clubs. He repeatedly mentioned that he was an investor, just like us. Our confidence in Cay Clubs and in Ricky Stokes was very high. He was attentive, returned calls and emails within a day, and befriended me. He referred me to a friend of his, a preferred lender — Jose at TransAtlantic Mortgage. Jose was disorganized and expensive and I refused to do business with him. I searched for my own lender.

Ricky assured me that with the built-in equity and the exit strategy, he would help me sell and get me out of the loans and turn a profit of $100 per square foot within the next two years, because I was buying at preconstruction pricing.

While the mortgage was being processed, Ricky told me about the Las Vegas project. I was told that this was nearly sold out but that he could get me on the waiting list for units. He said that he personally had 16 units there, that the property was across from the Rio Suites Hotel, and that there would be a relationship between the properties. An elaborate CD ROM was given that showed renderings of the property, showed five towers with roof top pools, a tram/rail between Rio and Cay Club, and descriptions of world class spa facilities, concierge services, fine dining, room service… all comprising a “world class resort.” I was assured that these units were “keepers” and that they would be “cash cows.” Given what I saw in Clearwater and the trust I had developed in Ricky Stokes, we decided to move forward.

Meanwhile, I was waiting for my leaseback from Clearwater and after multiple delays, and plausible explanations, my 15% lease back monies arrived after 60 days, although promised to arrive after 30 days.

Ricky “found” me a unit in Las Vegas and again tried to get me to use his “preferred lender,” Ross Pickard. His rates and fees were exorbitant and I refused to do business with him. Ricky put pressure but I continued to refuse.

I found another lender for much less money, closed on the Las Vegas property, and waited for my leaseback money in order to pay the mortgage. The lease back came through 4 months later after multiple phone calls. Ricky offered to pay me himself, which I accepted. Obviously he never came through and he never returned my calls for weeks at a time.

After multiple threatening calls from me, I got my check. By now I’d sent $25K for a retainer for an Orlando unit because the Clearwater property was gorgeous, the Las Vegas site was outstanding, and Orlando was going to be the site of an elite sports academy called IMG.

October 2006

All the while Ricky was befriending me and would call me “a friend” and in the inner circle and telling me he was getting me special access to properties. Most of the people allowed to buy these properties were a part of block buying groups such as ICG and were paying a premium of 6% to the buying group for access to these units.