Eric: So Mhari, this story starts with a Utah-based company, a business with the unlikely name of Go Invest Wisely. What exactly do they do?
Mhari: Go Invest Wisely buys and sells bank-owned or vacant properties. In 2008, it bought hundreds of houses across the midwest. In Cleveland, Lorain, Akron, Canton and their neighboring suburbs, Go Invest Wisely purchased about 330 houses - many of which were dilapidated and condemned - at an average price of about $4000 a house.
VIDEO: Hi! I'm Tiffany Tift reporting for America's Premier Experts!
Eric: Mhari, what is this? A news report?
Mhari: No. It's an online marketing video that CEO Brad Hess used to publicize his company, Go Invest Wisely.
Brad Hess: We specialize in the lower income homes throughout the midwest, mostly. And we buy them up from banks that want to get rid of them, that are a liability to them. We turn them into cash-flowing assets and then sell them off to our investors.
Eric: Can we parse that sentence? 'Turn them into cash-flowing assets and sell them off to our investors.'
Mhari: The idea was to essentially sell these houses twice. First, the company would find someone to pay to live in the house on a rent-to-own basis. The company stuck up red and white for sale signs on the houses to find buyers. Secondly, Go Invest Wisely would sell the deed to an investor who would collect the payments from the person living in the house. In order to find investors, Go Invest Wisely hit the road.
Mike Lathigee, FIC: Welcome to InvestFest 2008, how many people want to make a lot more money?
Mhari: That's Mike Lathigee. In Vancouver, he headed the Freedom Investment Club or FIC, a group that boasted about 5,000 members. He's also the founder of InvestFest. InvestFest 2008 went to five Canadian cities, Seattle and Los Angeles. There are clips on youtube like this that show what this road show was like: teaching investment philosophies then offering products in which to invest. That year, one of those products was vacant houses in places like Northeast Ohio.
Tyrell Gray, Go Invest Wisely: It's purchasing power. The more of us that are a part of this group, the better opportunities that we [are going to] get.
Mike Sarwari, The University of Commercial Real Estate: We're going to make more millionaires in real estate, you can mark my words, in the next ten years then we did in the previous ten years. I guarantee you that.
Mhari: People who went to the conference could buy Go Invest Wisely's houses for $17,500 a piece. For another $1,000, a sister company of Go Invest Wisely would manage the properties. Lathigee's company, Go Invest Wisely and another partner called Mohawk Investments split the profits.
Eric: You said early on that in Northeast Ohio, Go Invest Wisely spent on average about $4,000 a house. So if they are selling them for $17,500 that's a decent profit right? But I'm having difficulty believing people would buy them.
Mhari: Well, I called investors up and asked them:
(ON PHONE) Mhari: 'What would it take to get a person of modest means to buy a house, sight unseen, in another country?'
Malcolm Bayes: Oh my god. I shake my head all the time and wonder why I did this...
Mhari: That's a 65-year-old cabinet maker from Edmonton, Canada named Malcolm Bayes. He bought two houses, one in Shaker Heights and another in Detroit for which he has never received a deed. He now calls the purchases a huge mistake and believes he will have to put off his retirement by ten years just to pay for it.
Malcolm Bayes: I figured, oh, that would be really great, it might just help some family in the states who is in financial hardship. They would be able to live in the house for a modest amount of money every month. And I would get that little bit of money and they would have a home to live in and it sounded great. I'm not kidding you at the end of the seminar there was a line up of people to buy those houses. Literally, a line up.
Eric: How many houses did these companies sell?
Mhari: Court records show that about 1200 houses were sold at investor conferences. Most investors say they were given a property address, but never actually a deed. In Northeast Ohio, most of the houses stayed in Go Invest Wisely's name. On its website, Go Invest Wisely says it is returning money to investors. None of the investors I spoke with seems to believe it will happen.
Eric: Ok, so we've talked about the investors buying these houses. Did anyone here actually pay to live in these houses?
Mhari: I met Tonia Kirkwood, a 54-year-old Cleveland grandmother. She saw the for sale signs, figured the monthly payments were cheaper than rent, and picked one because it was on a nice street and was in better shape than the others she was offered.
Tonia Kirkwood: I wanted a house. I wanted a home. I didn't want to rent it. I wanted to be buying it for the future. Something for me. Something for my grandkids. Something to leave them.
Eric: What kind of shape were these houses in?
Mhari: They ranged from sadly neglected to ready for the wrecking ball. Tonia's was a shell. All the pipes were gone.
Eric: So, an investor from one of these 'buy dumpy midwestern houses tours' owns the house Tonia Kirkwood found?
Mhari: Yes, a woman from Alberta, Canada.
Eric: Is Tonia Kirkwood paying this Canadian rent? Or mortgage?
Mhari: Neither. Tonia Kirkwood has a land contract which is essentially a rent-to-own plan for a house. Under a land contract, the buyer doesn't get title to the property until they've made all the monthly payments. In Tonia's case, that's after 30 years or $35,000.
Eric: Do we know how many NE Ohio houses have these land contracts?
Saito: No. Under Ohio statute, these land contracts are supposed to be filed with the county recorder but they're not. I found maybe half a dozen land contracts on Go Invest Wisely properties in Cuyahoga, Lorain, Summit and Stark Counties. Like many others, Tonia Kirkwood's isn't filed.
She is frustrated because after investing nearly $25,000 to fix up the house, she learned the house had been slated for demolition prior to moving in. She also found that while she had been making her payments to this Canadian woman, the investor may not have owned the house.
Eric: Wait, what?
Mhari: Kirkwood signed her contract in September 2008. The Canadian investor signed a deed taking ownership of the house 18 months later in March 2010.
Tonia Kirkwood. They sold me a condemned house. They sold me a tangled up deed. They messed up my dreams and goals that I had.
Mhari: Kirkwood is now working with CSU's Cleveland Marshall College of Law Urban Development Law Clinic to try and figure out what is going on.
Eric: How are cities responding to this?
Mhari: The city of Cleveland has filed 50 lawsuits for housing code violations against Go Invest Wisely. Law Director Robert Triozzi says the city wants out-of -state companies to be responsible for their properties.
Robert Triozzi: What you see now is a second and third wave of institutions, companies trying to take advantage of a situation with their own variation on the scheme. We have fought it every step of the way and we will continue to fight it.
Eric: What are these out-of-state companies doing?
Mhari: Go Invest Wisely is trying to sell off its properties. The Vancouver-based Freedom Investment Club, or FIC, is in receivership, which is a form of bankruptcy.
Eric: And did you talk to some of these companies?
Mhari: Yes, and they're all in court. Two investors in California are suing the companies that sold them houses. In a separate suit, the Canadian group, FIC, is suing Go Invest Wisely and the other company involved in the sales. None of the attorneys would talk on the record but at least in the FIC suit, one attorney said there may be a settlement. But what that means, if anything, for the hundreds of land owners and rent-to-owners who lost money in the deal and for us, the taxpayers left to pay the bill for the upkeep or demolition of the houses Go Invest Wisely has ignored is unknown.
Eric: Thanks very much.
Mhari: Thank you.