Fix And Flipper In Colorado Pleads Guilty To Fraud

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John Triplett's picture
Colorado fix and flipper pleads guilty to fraud in federal court

A Colorado home fix and flipper who owed Homesource Partners, Inc, and formerly ran a “We Buy Ugly Houses” franchise, has pleaded guilty in federal court one count of wire fraud and one count of engaging in a monetary transaction in property derived from wire fraud, according to a release from the U.S. Attorney.

Karen Lynn McClaflin, 58, of Colorado Springs, Colorado, pled guilty to fraud that involved having multiple real estate investors invest in the same property and occasionally forging the signature of other real estate investors, according to the release.

According to the stipulated facts contained in the plea agreement, in December 2005, McClaflin and a partner opened a franchise of “We Buy Ugly Houses” named Trademark Properties and Trademark Reality (“Trademark”) in Colorado Springs.

 Trademark’s business was to use investor money to purchase and renovate distressed houses in order to resell those houses at a profit. By 2011, Trademark had accumulated so much debt that McClaflin’s partner declared bankruptcy and their partnership was terminated. Rather than declare bankruptcy herself, McClaflin transitioned to another company with the same “fix and flip” business model as Trademark.

HomeVestors of America, the “We Buy Ugly Houses” company, issued a release cautioning home buyers against unscrupulous practices and lender fraud when purchasing a house.

“A former franchise owner in Colorado, whom we stopped working with in 2011, recently pleaded guilty to wire fraud, committed after her franchise ended, which compelled us to remind our franchises of our zero-tolerance policy towards this kind of unprincipled activity,” David Hicks, HomeVestors co-president, said in the release.

“We have long had a history of condemning any illegal behavior from our current and former franchises, and incorporate information on ethical consumer relations as part of UG University, which all of our new franchises attend before operating in the field. We are also vigilant in investigating and rooting out any illegal schemes and underhanded methods that could jeopardize our brand and risk the independently owned and operated business of our franchises,” Hicks said.

Rolled investors from Trademark to Homesource

 In late 2010, McClaflin started Homesource Partners Inc. (“Homesource”), and McClaflin rolled her investors from Trademark into Homesource.

 From late 2010 through early March 2017, McClaflin owned and operated Homesource in Colorado Springs, Colorado. In seeking investors for Homesource between March 2011 and early 2017, McClaflin told all involved that Homesource was seeking loans from investors to finance Homesource’s “fix and flip” business because Homesource was not able to use traditional bank loans. McClaflin represented that traditional bank loans took too long and some of the distressed homes might not qualify as collateral for such loans, according to the release.

 Through marketing materials and verbal statements, McClaflin represented to those involved that Homesource had access to distressed houses that were deeply discounted, which Homesource could purchase for no more than 80% of the “as is” value of the house. McClaflin further represented that Homesource then had exit strategies to profit from the distressed houses, including selling them within 30 days for an immediate profit, “fixing and flipping” the houses for sale within 31-90 days, or fixing the houses and renting them if the houses failed to sell within 90 days.

 McClaflin represented that Homesource had a team of contractors who would fix and upgrade the properties so Homesource could resell the properties for a profit. McClaflin further represented that each property would be financed by an individual investor whose investment would be secured by a Deed of Trust in first position on that property, which McClaflin would record for the investor. Occasionally, McClaflin told the investor their Deed of Trust would be in second position. McClaflin further represented that investors would receive an interest rate of 6% to 15%. Finally, she represented that the properties would normally be sold in 3 months.

 Multiple investors in the same fix and flip property

However, starting in late March 2011, McClaflin knowingly and intentionally began having multiple investors “invest” in the same property and began placing multiple Deeds of Trust on the same properties, such that the amount of the investments purporting to be secured by the Deeds of Trust exceeded the value of the property.

 Additionally, starting in late March or April 2011, McClaflin intentionally did not record all of the investors’ Deeds of Trust as promised. Nonetheless, McClaflin continued to falsely represent that investors would receive a first Deed of Trust and that McClaflin would record that Deed of Trust for the investor.

 McClaflin also sometimes forged the signature of an investor, without the investor’s knowledge or consent, on a release so McClaflin could remove that investor’s Deed of Trust from a property. McClaflin sometimes did not inform investors when “their” property sold and did not return the investor’s principal upon that sale as promised.

 Additionally, starting in at least the beginning of 2013, Homesource’s debt had grown too high and the interest payments owed to investors far exceeded the gross profits earned by Homesource. By at least January 2013, McClaflin was aware of this problem and intentionally continued seeking additional investments so that she could keep making the interest payments owed to earlier investors.

 Unbeknownst to the individual investors, the amount of investment funds, which were supposed to be secured by real property, far exceeded the value of the encumbered property and Homesource’s business assets. An analysis of Homesource’s finances shows that the influx of investor funds kept Homesource operating, particularly in its latter years, and without investor funding, Homesource would have failed years ago.

McClaflin is scheduled to be sentenced January 17, 2018. She was first charged by Information, after waiving her right to be indicted by a federal grand jury, on May 17, 2017. On that date she made her initial appearance, where she was advised of the charges pending against her and read her rights. This case is being investigated by the Federal Bureau of Investigation and IRS Criminal Investigation. The defendant is being prosecuted by Assistant U.S. Attorney Pegeen Rhyne.

Homevestors warns against common indications of fraud

Homevestors said in the release that other independent house buyers that don’t have the benefit of an in-depth “We Buy Ugly Houses” education, it may be trickier to spot the signs of someone who doesn’t hold to such standards. Hicks warns against some of the common indications of fraud, which “We Buy Ugly Houses” buyers are cautioned against, including:

  • Contracts negotiated by a real estate agent, another rehabber, mortgage broker or other person with the purchase price raised above asking price. This can be a device to create a phantom down payment, or to create an artificially lower loan-to-value ratio.
  • False owner occupant statements, where a false representation is made to the lender about the buyer’s intent to occupy a property.
  • “Straw Buyer” schemes using the good credit, job history and qualifications of a person who has no involvement with a property in order to secure a mortgage loan against a property.
  • False appraisals and false values where rehabbers may induce appraisers to distort numbers in their favor. HomeVestors cautions franchises from using the same appraiser time after time or attempting to befriend an appraiser to avoid the appearance of untoward behavior.

“It is always better to lose the deal than to participate in lender fraud, even innocently,” added Hicks. “The future of the market, and of any investor or buyer purchasing real estate, depends on the example of those setting the trends, like ‘We Buy Ugly Houses.’ We have been beautifying neighborhoods, and helping individuals and families get out of ugly situations for more than 20 years.”

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