Clark Howard's Tips

Beware of bridge loans and 1031 exchange scams

August 6, 2008

How would you like to make 5% on your money in less than a month? Sound impossible? It is. But that's precisely the lure a businessman named Anthony Christou used when he stole $14 million from 20 wealthy investors, according to BizJournals.com.

Christou claimed he was making "bridge" loans to developers and others who needed short-term money and charging them higher interest. He even used his mortgage firm as a front. In reality, he was running a classic Ponzi scheme -- paying early investors with money from latter ones. He also blew through $7 million on a gambling habit.

CLARK'S TIP TOPICS Consumer Tips Managing Money Banks & Credit Cards Technology Health & Healthcare Car Costs Homes Phones & Utilities Small Business Travel & Leisure Find more consumer advice in Clark Howard's book, "Get Clark Smart"

The reality is that nobody can earn you 5% a month on your money. That promise of higher-than-market rates of return is the telltale mark of a scam. Successful entrepreneurs are specifically susceptible to such pitches because they're flush with cash and have a "go-get-'em" kind of enthusiasm for new ideas.

Meanwhile, scams revolving around 1031 exchanges are also popping up. A 1031 exchange involves selling an investment property tax-free and having an intermediary hold the proceeds until you buy another property. The problem is that intermediaries have been running off with the money. The Wall Street Journal reports one intermediary disappeared and now millions are missing.

Here's the bottom-line: The tax rate on real estate is favorable right now and it's almost certain to go up in the next year or two. So you're better off paying the tax when it's favorable. So often when we get in trouble, it's when we're trying something cute. But cute doesn't work.

More Clark Howard Money Management Tips Beware of impostor money market fund investments  Investigate charities thoroughly before giving them money  Clark's 529 Plan Guide has been updated!  Mandatory private accounts may solve SS dilemma  Free budgeting tools online!  Avoid the full-commission stock broker trap  Avoid the full-commission stock broker trap  Scams heat up when economy cools down  The dangers of purchasing employer stock  Free budgeting tools online!  Full list