Les Jones

Mortgage Crisis > John T. Reed on the Mortgage Meltdown - Sort of

I was curious what my favorite real estate guy, John T. Reed would have to say about the meltdown in the subprime mortgage market. Nothing, as it turns out, at least yet.

Something he wrote about old time "nothing down" huckster Robert Allen reminds me of the last few years of real estate investing.

Author of best-selling books Nothing Down, Creating Wealth, and The Challenge. One-time seminar guru and founder of many Robert Allen Nothing Down clubs around the U.S. Allen’s advice is generally terrible. Although I did like a chapter he wrote on property-wanted ads. Otherwise, he is little more than a financial publicity stunt man.

My book How to Buy Real Estate for Little or No Money Down photographically reproduces documents from his famous “Send me to any city” nothing-down deals. The L.A. Times accepted his “challenge” and made him do them in San Francisco which is near where I live. I went there and got all the documents on each of the seven deals. Some were also done in the county where I live.

On one, which was apparently typical, the documents seem to show that Allen lied to the first-mortgage lender—Bank of America—about whether there was any secondary financing (there was—a seller mortgage) and about his intention to occupy the San Francisco condo as his principal residence (He lived in Provo, UT at the time and never occupied the SF unit). At that time, June, 1981, when home mortgage interest rates were at 18%, Bank of America would only make loans to owner occupants and prohibited all secondary financing. I have their loan policy for the date in question in the book, too. My wife was a loan officer for Bank of America at the time. [Note to bogus gurus: do not brag about deals that you do not want me to look into—especially in the San Francisco area. John T. Reed].

At best, you would have negative cash flow following his books. At worst, you would go bankrupt and wind up in jail. He doesn’t put it this way, but his nothing-down techniques almost all require you to mislead an institutional lender or take advantage of an unsophisticated seller or both. The president of his Atlanta Robert Allen Nothing Down Club literally went to federal prison (at Eglin AFB, FL) for doing illegal nothing-down deals. There is virtually nothing in his material about how to make a profit. Rather he simply assumes that real estate goes up so much every year that you need only buy it to cash in. Click here for a little story about his association with probate guru Jim Banks.

Allen himself got into financial difficulty with the IRS as early as 1984. In 1986, IRS filed a $346,395.79 lien against Allen. In September of 1987, when I wrote an article exposing his financial difficulties, he also had:

* another $65,649.90 IRS lien
* more than $76,000 of delinquent tax warrants filed by the State of Utah
* lawsuits and judgments regarding over $100,000 in unpaid fees to fellow gurus who spoke at his meetings

Allen declared Chapter 7 (total liquidation used when the bankrupt has a negative net worth) bankruptcy in San Diego on July 10, 1996 (Bankruptcy Petition #96-09323-LA). Bankruptcy creditors sometimes get pennies or nickels on the dollar. According toAllen’s bankruptcy papers, his creditors got nothing. The Initial Meeting of Creditors was held on August 9, 1996. A lawyer tells me that Allen would have been asked quesitons under oath about his assets during that meeting. A copy of the transcript of that meeting would be interesting. It would typically be in the case folder. See my 8/96 article.

The Allen’s attorney, Richard V. Vermazen, got $2,000 to handle their bankruptcy according to court papers. The Allen’s were discharged from their debts on 10/17/96. The case was closed with no distribution to the creditors on 10/31/96.

The creditors who were stiffed in the bankruptcy file were:

* American Express Optima Card
* Bank of New York
* Citibank Visa
* Farmers InsuranceGroup (San Diego)
* Ferrette & Slater ALLC (San Diego)
* Franchise Tax Board (California income tax)
* Internal Revenue Service
* John Graff (Highland, UT)
* Mark IV Properties (San Diego)
* McKay, Burton, Thurman (Salt Lake City)
* Neiman Marcus
* Nordstrom
* Robinson-May
* Saks
* Scalley & Reading APC (Salt Lake City)
* Scott Meredith Agency (New York city)
* Shirl and Gail Loveless (Provo, UT)
* Simon & Schuster (New York City)
* The Broadway (Phoenix)

[...]

I think Allen has an interesting story to tell. But it’s not the one he sells. He should speak about real estate investment the way a reformed alcoholic speaks about drinking.

It's 2007 and there is a national wave of guys like Robert Allen who bought overpriced real estate with liar loans, and a bunch of irresponsible mortgage brokers who let them.