Washed up coastal developer drowning in fraud claims

RALEIGH--When the high tide of the Carolinas' coastal development boom drained away, thousands of empty lots left behind started sprouting weeds.

Now, some are sprouting lawsuits, too.

More than 130 people, mostly from Virginia, who bought lots -- including dozens of teachers and administrators from the Fairfax County, Va., school system -- have sued, and a Charlotte lawyer is about to file a suit on behalf of 45 more buyers in what could become one of the largest mortgage fraud cases in state history.

They say a Virginia investment company called Total Realty Management hoodwinked them into paying prices that had been artificially swollen by fraudulent appraisals. Some of the inflated appraisals, they claim, were built upon multiple fake sales of the same lot. The buyers also are suing a major developer based in North Carolina, its marketing wing and several banks that were involved in the land sales.

"It was kind of a real estate version of the Madoff scandal," said S. Jill Pisner, a lawyer for some of the buyers.

Once her law firm in McLean, Va., had signed up 129 clients who had bought about 100 lots, it had to stop taking more. A handful of others hired two other Virginia law firms, and a Charlotte lawyer plans to file a fourth suit this month.

The North Carolina subdivisions -- Summerhouse in Onslow County and Cannonsgate in Carteret County -- were created by R.A. North Development of Charlotte. Cannonsgate is the subdivision where former Gov. Mike Easley got a controversial deal on a waterfront lot. Easley had earlier appointed Randy Allen, the owner of R.A. North, and his brother, William, to the N.C. Wildlife Resources Commission.

Easley bought his lot directly from the developer and is not a party to the suit. R.A. North is, though, as is Southeastern Waterfront Marketing in Charlotte, which is owned by William Allen and markets the developments. Another company Allen owns marketed lots at Craven's Grant in South Carolina, which was built by another developer who is also being sued.

The buyers are seeking more than $100 million in damages and most are also claiming that they have the right to walk away from the deals, according to the lawsuits. Lenders, including embattled Bank of America, are not only defendants in the case, but have started foreclosing on some of the lots and could eventually be left holding tens of millions of dollars in bad loans.

Many of the lots were sold to the final buyers at prices more than twice the market value, according to the lawsuits filed so far, which are in federal court in Virginia. Some cost more than $500,000.

Selling and reselling

Records from the Carteret County Register of Deeds office show that Total Realty Management bought and sold some Cannonsgate lots several times, with the appraised value rising rapidly. The lawsuit says TRM was selling the lots to buyers it had recruited to pump up the price, then buying the land back. Eventually it sold the lots for sometimes more than double the price that lots around it were selling for on the open market.

Deeds indicate that in some cases TRM traded a given lot back and forth with people who had the same names as TRM company officers. Records in both counties show that TRM was involved in transactions on about 230 lots at the two North Carolina subdivisions, about 200 of them at Summerhouse.

The lawyer listed in court documents as representing Total Realty Management, Martin Yeager of Arlington, Va., hung up before it could be explained why a reporter was calling.

"I've got no comment for you," he said. He did not respond to a follow-up e-mail. Court records show that TRM has been forced into bankruptcy and one of its officers also filed for bankrupty protection.

Neither Randy nor William Allen returned phone calls, though the attorney for Southeastern Waterfront Marketing issued a statement by e-mail. "My client should not have been included in this suit and strongly denies any allegation of wrongdoing," William Dolan wrote. "We will defend the case vigorously and fully expect to prevail in every respect."

About 40 of Pisner's clients are teachers or school administrators in Fairfax County, she said, and some of the buyers with other lawyers are, too.

Despite their relatively modest salaries, they were able to buy lots that in some cases cost more than $400,000. In some of the transactions this was possible because TRM falsified their loan applications without telling them, the suit says, making it appear to lenders that they were making more money.

Buying beyond their means

They were willing to buy lots far beyond their means, Pisner's suit says, because TRM said they wouldn't have to pay anything. TRM would pay the 10 percent down payment and make all the mortgage payments for up to two years. With prices rising so quickly, TRM said, they could sell for a big profit before they ever had to make a payment.

"They were told that all they needed was good credit," Pisner said.

The lawsuits say that the developer and Southeastern knew about the scheme and that Southeastern had sent one of its officers to TRM marketing seminars to help sell lots.

Appraisers are supposed to determine the true value of real estate so that lenders know how much they can lend. A key tool that they use is the value of similar property nearby. With nearly identical lots -- in some cases next door -- selling for half as much, the lawsuits say, the scheme couldn't have worked without appraisers who knew that they were putting vastly inflated values on the lots. In most cases, the lots changed hands twice on the same day, jumping hugely in price in sales to the final buyers.

An appraiser based in Sneads Ferry in Onslow County lost his license in March after he was accused of inflating lot values at Summerhouse, and another is under investigation for appraisals there, said Philip W. Humphries, director of the N.C. Appraisal Board.

A written summary of the appraisal board investigation of the appraiser who lost his license doesn't name TRM, but describes a scheme involving an investment company, vastly inflated appraisals and buyers from another state.

"It appears that there were two price points," the summary says, "with out-of-state buyers paying up to twice what others were paying for comparable lots."

That appraiser told investigators "that he was aware of the two-tiered pricing scheme, but he felt that buyers wanting to pay as much money as they were offering for the lots must have had a reason to do so," according to the summary. "He did not feel it was his responsibility to reveal to his client that there were additional sales occurring at the same time for up to one half the prices of the sales he chose [to compare], or that the majority of sales he selected had transferred twice in one day with prices doubling from investment purchase to individual buyers. It appears that the sales he chose were not exposed to the market."

Some appraisers refused to get involved with the deals.

R.A. North sold TRM the lots at what appears to have been the prices they offered everyone else. Tony McLamb of Wilmington said in an interview that he did appraisals on some of the lots when they first changed hands at proper market rates, but refused to get involved with the later transactions when it became clear that the prices TRM and Bank of America loan officials wanted him to support were wildly inflated.

"I looked at the price and I called the bank back and I said, 'Look, do you want me to continue this, because I can't justify this price,'" McLamb said.

The loan officer argued with him and then told him to stop the job, and sent another appraiser, he said. The bank then quit using him for TRM transactions.

McLamb thinks none of the TRM buyers were actually interested in building a vacation home, because none even visited Summerhouse.

"If you were going to pay $300,000 or $400,000 or $500,000 for something, don't you think you'd want to come and see it?" he said.

'You feel taken'

One buyer, Susan Warren, a nurse who lives in Ashburn, Va., said that she and her husband, William, who is in sales, are tormented by their bad decision. With four children and other bills to pay, there's no way they can afford payments on their lot. According to Onslow County records, they paid TRM $389,000 for their lot on the same day that TRM bought it from R.A. North for $180,000.

They now figure it may not be worth $70,000.

They got hooked in by a friend involved with TRM, she said, and planned to flip it for a profit rather than build a vacation home.

"You think about it and think about it, and you feel stupid and you feel taken," she said. "It's not like we were out to get rich quick, but it was maybe going to help with college for the kids."

Four people who bought lots in the subdivisions have filed complaints with the consumer protection division of Attorney General Roy Cooper's office, and anyone else who thinks he or she was treated illegally should contact that office, too, said Noelle Talley, a spokeswoman for the state Department of Justice.

Talley declined to talk about specific investigations, but said her office had seen an increase in all kinds of fraud cases as the economy has worsened, and that mortgage fraud was one of the biggest problems.

Fallout from the burst real estate bubble and the current recession have caused a huge jump in the number of mortgage fraud cases. The FBI opened 734 cases in fiscal 2008, up from 295 in 2003. The U.S. House and Senate passed a bill recently that would give the bureau $532 million to double the size of the staff assigned to those cases and securities fraud investigations.

FBI special agent Michael Young, a mortgage fraud expert in the bureau's Charlotte office, said that he's working on several cases involving up to 200 lots.

Consumers, he said, should be wary of any land deal in which they're offered a guaranteed profit or extraordinary rates of return. Another red flag is an offer of money back in the form of down payments or mortgage payments if that money is not clearly listed on the disclosure form.

"There are a lot of resources out there to help, so ask questions," he said. "If it sounds too good to be true, it probably is."

Staff writers J. Andrew Curliss and Jim Morrill and news researcher Lamara Williams contributed to this story.

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