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.

Late in 2007 I received a tip about exclusive opportunities to invest in Cay Clubs Resorts. Apparently, several investors had already seized the opportunity, and more than a few of them felt that they had fallen victim to a scam. I decided to take a closer look.

I fired up my computer, headed to Google, looked up “cay clubs resorts,” and clicked the most promising-looking link. This took me to the official Web site of Cay Clubs Resorts at www.cayclubs.com, where I learned that Cay Clubs Resorts had “headquarters in Clearwater, Florida and operations throughout the Florida Keys, Orlando, Las Vegas, Sarasota and Colorado.” (Soon after I began investigating Cay Clubs Resorts, access to its Web site was blocked.)

I found a phone number for Cay Clubs Resorts and placed a call. A few weeks later, a representative by the name of Dani Potter, a licensed real estate agent for Jet Realty (5526 W.13400, Suite 501, Herriman, UT 84096), called me back and delivered her sales pitch. She informed me that the company had different investment opportunities in Florida; Las Vegas, Nevada; and a new project in Galveston, Texas. She sent me pricing on a few units and information for two of their “preferred lenders.”

She also offered me the option of participating in what she referred to as “the fund.” As Potter described it, the fund was the creation of Ren Richardson and Mike Hansen, who set up a company that managed the fund — H & K Asset Management LLC. If I chose to invest in the fund, I could expect to receive a 4% to 7% percent return per month!

The fund was actually part of a cash back at closing scheme. If I invested in the Texas property, the company would lease the property back from me for two years while it was being developed. I would receive a lease back payment of $30,000 at closing and $30,000 at a later date for a total of $60,000. This would cover my down payment on the property along with my monthly mortgage payments for the first two years I owned the property.

To earn some additional income, I could choose to invest my $60,000 of leaseback money in the fund, in which case, they would pay me the entire $60,000 at closing rather than in two separate payments. I would then earn interest on that money — 4% to 7% per month.

Potter told me that if I were interested, she would send over a couple documents for me to sign, so she could set up a conference call with Richardson and Hansen, who could explain the secret fund in greater detail. Potter sent me two documents:

• Non-Disclosure/Non-Circumvention Agreement: This document had two purposes: 1) To prevent me from sharing information with anyone — I suspect that they were most concerned that word would leak to law enforcement authorities. 2) To force me into dealing through their investment organization rather than directly with anyone they introduced me to — in other words, they wanted to be sure they were not cut out of the deal, which is understandable.
• Non-Solicitation Letter: To protect themselves from any claims that they had solicited my involvement in this scheme, they wanted me to sign the Non-Solicitation Letter. The letter was also worded in a way to protect them against any future accusations of security fraud.

You can view these documents in their entirety by clicking the following links: Non-Disclosure/Non-Circumvention Agreement or Non-Solicitation Letter.

I never signed or returned the documents, but Potter, Richardson, and Hansen proceeded with the conference call anyway. They seemed very eager to explain the fund and how it worked. During the conference call, I was told the following:

• According to them, they had never experience a month in which the fund lost money.
• Even though Potter said I would get a 4% to 7% return, they actually cap it at 5% a month for investors. The way they make their money is that they take anything above 5%. If my investment earned 30%, I would get 5% that month, and they would keep the other 25%.
• Ren Richardson is a self-proclaimed expert, mentor, and instructor in the area of investing.
• Mike Hansen received his experience working for the Trump organization.

One of their investors, a licensed RE/MAX-affiliated real estate agent in Salt Lake City, let me know that he was fully satisfied with the fund. He told me that I should have no concern about getting my money out of the fund if I needed to. He once tested the fund by requesting his money, and he received it in full within 24 hours rather than the promised 48 hours.

Whether or not I could get my money out of “the fund” is a moot point. What is important here is that this organization is involved in cash back at closing — a commonly recognized form of mortgage fraud. Even though the cash is rolled into a fund, it is still cash back at closing. The lender is being fooled into approving a loan for more money than the property is worth, and the excess money is being used for another purpose. The value of the property could not possibly be securing the loan, because the purchase price of the property was lower than the mortgage loan taken out to purchase the property!

Although these “investment gurus” pretend that they have discovered a new twist on cash back at closing that makes it legal, don’t be fooled. Although it’s dressed differently and called something else, it is still cash back at closing, and it is still illegal.

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.

Above, I say: “If you think this letter describes a nightmare scenario, check in with us tomorrow as we share the story as told by the investor and his wife, revealing additional details about what happened when Cay Clubs Resorts became insolvent and was taken over by a company called Desert Tides. Click here for Part II.

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