Real-estate sales tactic skates the line

High-priced real-estate seminars promise to teach unlicensed novices how to make big money buying and selling property, but Ohio state officials say there's a problem: Unwitting students who follow the advice might be breaking the law.

The officials' concerns center on a practice known as "flopping" that, according to three officials with the Ohio Department of Real Estate & Professional Licensing and two real-estate lawyers consulted by The Enquirer, is illegal without a license.

An Enquirer investigation found that during a recent three-day seminar, the instructor – Gerald Martin, a self-proclaimed real-estate guru teaching for FortuneBuilders, Inc. – indeed gave students instructions on the controversial practice, but seminar attendees weren't warned that by following the advice, they might be breaking the law. Attendees were required to sign a waiver promising not to sue the organization if any of the taught practices got them in legal trouble.

Anne Petit, superintendent of the Ohio Department of Real Estate & Professional Licensing, said that real-estate seminars have been on the rise since the housing market crisis hit in 2008. She cited several criminal cases related specifically to flopping: a 40-year-old Connecticut woman sentenced to eight months in jail for mortgage fraud, a 37-year-old California man pleading guilty to bank fraud, a bank's short-sale negotiator sentenced to 30 months in prison for accepting bribes to sign off on sketchy sales.

"You have to be very aware of what Ohio license law does and does not allow unlicensed people to do," said Petit. "Some of what's being taught is legal, but some of it never will be."

Tactics of 'education' company are not unique

A contagious grin lighting up his face, Gerald Martin knows how to pump up an audience.

"Say it with me!" the 54-year-old shouts to a hotel ballroom packed with more than 200 people who enthusiastically chant in unison: "One, two, three, crush it!"

Those attending this seminar in Columbus in late October have paid between $197 and $297 per couple to attend, hoping their investment lets them glean from Martin tips on how to get rich in real estate.

But that's not the extent of the program's money-making potential: About one-third of people in the audience shoot up their hands when Martin asks if they want to be accepted into FortuneBuilders' Mastery Program – a "coaching program" that claims to pair green investors with real-estate experts and carries a price tag of between $10,000 and $25,000.

Nick Chucales, an investigator for the Department of Real Estate & Professional Licensing, sits cross-armed in the audience. He has attended so many of these weekend seminars across Ohio, he could lead one himself.

"You can tell whenever they've come to your town because you'll see a flurry of bandit signs going up all over the place," Chucales said.

You probably know bandit signs even if you don't recognize the term: They're those small signs on the side of the road bearing messages such as, "I buy houses for cash" and "Stop foreclosure!"

As Martin touts the value of bandit signs to the FortuneBuilders crowd, Chucales watches, unimpressed. While those around him chant and cheer and stand on command, Chucales sits with his arms crossed.

Martin seems to notice. "Some of you just insist on acting cool, don't you?" he asks, his smile broad. "That's OK. The rest of us might not look cool, but we're serious about making money."

About spending money, too: It's common for at least 10 to 15 attendees of the weekend seminar to sign up for the mastery program, meaning that on top of the up to $60,000 cleared for the three-day seminar, the event might also bring in as much as $500,000 more.

FortuneBuilders is not the only real-estate "education" company out there, nor are its tactics new: For years, people wanting to learn about making it big by buying and selling property have forked over money to attend sessions that promise to teach them the trade secrets.

But law enforcement officials say the costs of these programs have skyrocketed in recent years, thanks largely due to the precedent set by the now-defunct Trump University out of New York. That program appears to have been one of FortuneBuilders' models – Armando Montelongo Seminars is another – and it similarly offered a free introductory meeting to entice people to attend a weekend seminar, which in turn enticed people to pay as much as $35,000 to supposedly learn real-estate secrets from people hand-selected by Donald Trump himself.

Trump University ultimately was so controversial that it was sued by New York Attorney General Eric Scheiderman in a case that's still pending. Separately, court filings in a class-action suit filed in federal court in California reveal that Trump University and FortuneBuilders' classes have at least one instructor in common: Gerald Martin.

Martin told the crowd attending his Columbus presentation that he graduated from Ohio State University. The Enquirer tried to confirm that through the National Student Clearinghouse but was told that no graduation record could be found.

Reached by phone, Martin told The Enquirer that he had said only that he attended Ohio State, not graduated, but he declined to answer further questions. He also refused to talk about whether the tactics he teaches are legal, or to address his history with Trump University.

"I don't have any comment on that," he said. "I don't make any comments to reporters."

Martin's online presence is sparse. The Enquirer confirmed he lives in Florida, as he said, has three daughters, was once a college gymnast and has owned several Florida properties. He hasn't paid taxes since 2013 on one of the properties, located on Cypress Avenue in Sanford, Florida, according to Seminole County records.

In Columbus, he told the crowd that he has trained more than 10,000 students and that real estate "has given my family more wealth and more security than we ever could have imagined."

"If I told you how much money I earned my second year working part time, you'd get mad at me," he said.

A wise investment or moneymaker for organizers?

Whether such seminars and the high-priced "continuing education" programs are wise investments is up for debate. They're certainly moneymakers for company owners: Forbes magazine reported in 2013 that Armando Montelongo was on track to make $50 million that year.

The setups are basically identical. Each company has a celebrity real-estate guru attached. For Trump and Montelongo, it's the companies' namesakes. For FortuneBuilders, it's a trio: Than Merrill, Paul Esajian and J.D. Esajian. Like Montelongo, the three were part of the reality TV show "Flip This House." Montelongo was featured as part of the San Antonio team, while Merill and the Esajians comprised the bulk of the New Haven team.

Attendees are given some basic real-estate information, but a good chunk of the weekend is spent promoting the Mastery Program. People are encouraged to max out credit cards, cash in their 401Ks and tap their emergency funds to come up with the tens of thousands of dollars needed to sign up for the mentor program.

Martin presented a slide titled "The Common Myths to Bust!" that chided people who believe that "all debt is bad debt" and who "don't believe in credit."

People who don't sign up that weekend are hounded for weeks, as salespeople in the Glengarry Glen Ross mold offer to share "exciting information" to those "still serious about (their) real-estate investing business." If that doesn't work, a different salesperson makes one final call, invoking Martin's name and offering entry into a free program called The Blueprint.

Chucales is skeptical, saying that much of the information presented could easily be found in library books. But some seminar-goers have posted glowing reviews on consumer websites, claiming that the seminars jump-started their real-estate careers.

Indeed, Columbus investor Shane Hunt (no relation to the author) spoke during the weekend seminar and credited the success of his business Integrity Homes to FortuneBuilders. He also mentioned, in the spirit of "full disclosure," that he's involved in at least one lawsuit.

Petit, Chucales' boss, said the seminars themselves are legal and even feature some "good, legitimate, legal instruction."

But not all of it.

For example, on Day 1 of the seminar, Martin delved into a practice called "wholesaling," which, as he described it, isn't permitted in Ohio. He never told the audience that.

"Wholesaling" is sometimes called "flopping," a relative of "flipping." Here's how it works:

A homeowner is in dire straits and needs to get rid of his house. Let's say he's getting divorced and can't afford the house on a single income. A buyer swoops in and offers him less than market value.

No problem so far. But then, without putting a penny down on the house, the buyer lines up another buyer for the property, and on closing day, Buyer #2 is the one who actually pays for and takes possession of the property. The homeowner sells the property, unaware that Buyer #1 had another buyer lined up willing to pay more money, and Buyer #1 walks away with the difference, leaving the original lender with a bigger loss than needed.

According to Ohio law, no one can advertise or "assume to act as" a real estate broker or salesperson without a license.

At first blush, it might seem like a victimless crime, state officials concede. The desperate seller has a buyer, the buyer has a new property, and the middleman brings the two together. But, said Petit, in reality, the bank is shorted money, and ultimately, other home buyers suffer.

Not only that, but the original homeowners – the ones in dire straits that prompted the sale – could be hit with taxes they didn't see coming.

The federal Mortgage Forgiveness Debt Relief Act of 2007 allowed taxpayers to exclude income from the discharge of debt on their principal homes. That means that debt forgiven by banks on underwater homes wasn't taxed.

The law expired in December 2013, but Congress recently extended it retroactively to cover 2014.

Beginning Jan. 1, anyone who sells a house at a loss that's been forgiven could be expected to pay on the loss as taxable income, Chucales said.

"The reason I feel this hasn't been seen as a big issue is because of the Debt Relief Act," he said.

To be sure, flopping has been commonplace since the start of the housing market's troubles, officials said. But until flopping hits sellers' wallets, it will largely go unnoticed.

Tactic in question can be legal, state concedes

Ohio officials were careful to emphasize that while they take issue with some of the tactics taught in real-estate seminars, not all of the info is bogus.

"We need to be clear: Flipping when done properly is absolutely legal," Petit said. "Flopping, which are these scenarios we're describing, is never going to be legal, because people and businesses are unknowingly shorted funds."

Seminar attendees have little recourse if they follow the advice they paid for, for two reasons: because teaching the tactics is legal, even if the tactic itself isn't, and because attendees are required to sign waivers agreeing not to sue the company.

Among the legal disclaimers: "I understand (FortuneBuilders) makes no representations, promises or warranties as to the reliability, success, or legality of the information contained in the written materials provided by FB. I assume responsibility to abide by all laws in connection with any real estate or business transaction I engage in using the materials provided."

And another: "I release and waive any claims I could assert against FortuneBuilders, from liability for any actions or inactions I may undertake during and after the seminar in reliance on the information, products and services provided by FB."

Because hundreds of people attend each of these popular seminars, Ohio officials are anxious to spread the word: Call state regulators before acting on any techniques taught. Be suspicious if anyone in a sale is purposely being left out of the loop and not informed of all aspects of the sale. And always be skeptical of any sales pitch that promises to make you money with little to no investment.

"We're trying to educate our licensees to these different types of scenarios so that if they see any red flags, they know to say, 'Whoa' and either get a hold of their own attorney or call us for guidance," Petit said.

Read Ohio's relevant laws:

http://codes.ohio.gov/orc/4735.01

http://codes.ohio.gov/orc/4735.02