Nelia Raber is raising her great-granddaughter Desiree in their North County mobile home. She had hoped her investment in an Estate Financial fund would generate interest payments to supplement her income, but she’s learning to do without.
Freddie Wright has been living for years in San Luis Obispo in an old orange Ford van, a choice he makes to save money.
In 2006, a longtime friend told Wright about the thousands of dollars he had earned by investing through Estate Financial Inc., a Paso Robles lender that pools investors’ money to make high-interest loans to real estate projects.
Based on his friend’s experience, and after meeting with the firm’s president, Karen Guth, Wright invested his life savings of $38,000 in Estate Financial’s lending fund that September.
But today, Wright, 42, is among many Estate Financial investors who worry they might have lost some or all of the money they trusted to the lender.
Last fall, Estate Financial
told its roughly 3,000 investors —including 900 from San Luis Obispo County—that the firm was in financial trouble.
Under heightened public scrutiny since then, the firm’s leaders blame their problems on the real estate market downturn and the national credit crisis that was fueled by the collapse of millions of sub-prime loans.
Investing in Estate Financial marked the first time that Wright — who has a high school education and limited knowledge in financial investments— had put his money into anything other than a savings or checking account, he said.
“I figured my money was sitting in the bank not doing anything, and Estate Financial could give me 10 percent in interest,” Wright said.
“I live out of my car to save money,” he explained. “With Estate Financial, I thought I’d make enough money to buy a piece of property of my own and build a house that I could live in, like most human beings do.”
Happy with 10 months of regular interest payments from the company, Wright accumulated and then invested $12,000 more with the company in June 2007 — for a total investment of $50,000.
Drawn by the promise of making money in a booming real estate market, Wright is now worried that he’s lost everything he saved in a deal he never really understood.
“I was ignorant of the risk,” Wright said. “I just didn’t know. I thought in my brain, ‘You can’t lose in real estate.’ ”
Regulators looking in
In late April, the state’s Department of Corporations suspended Estate Financial’s license to sell securities and take new investors’ money.
Estate Financial has appealed, saying it has complied with the terms of its state permit. The firm’s other functions — servicing loans, brokering sales and managing its portfolio— are not affected.
Regulators said they received enough credible complaints to issue the suspension. Estate Financial already had voluntarily stopped adding investors six months ago.
Among the allegations leveled by disgruntled investors is that Estate Financial took money from investors before giving them required agreements or establishing if they met net worth and income minimums.
Regulators require people who put their money in certain high-risk investments—such as Estate Financial’s lending pools and individual development projects—to be “accredited investors,” as defined by relatively high income and net worth standards.
Under rules ef fective through 2007, they could not put more than 10 percent of their net worth per year into any single investment. That limit was loosened to 25 percent effective this year.
The idea behind those requirements — part of Depression- era financial reforms — is to prevent people from putting more money in highly risky investments than they could afford to lose.
While it’s impossible to gauge the number of Estate Financial investors who risked too much money, at least some of those investors said they did not meet some or all of the net worth and income standards.
Some, like Wright, said they believed the risk in real estate was minimal, given the years of growing property values, and that they trusted their money would be safer with Estate Financial than the stock market.
Judith Baron, a home interior designer from Templeton, said she invested about $400,000. Baron said she thought she had a sophisticated background on investments and met the net worth and income minimums.
She put her money in a series of investments both in the mortgage fund and individual trust deeds, Baron said. While the amounts she invested may have been legal because they were in separate investments over multiple years, Baron said it was far more than she could afford to lose.
Baron explained that she was sold on Estate Financial because of a promised high liquidity, high rate of return and a principal value of investment that does not vary — unlike stocks and bonds — as the company advertised on its Web site and supporting literature.
She also met with Guth and trusted her ability to make investments profitable.
Ultimately Baron decided to put her money in Estate Financial’s real estate-backed loans “because I had a bad experience with the stock market where I lost a lot of money (in the six figures),” she said.
Because she is over 60, she believes she will never be able to earn that much money again.
“I thought the company had an extremely good track record (after 15 years of doing business with no investor losses),” she said. “Now my savings are gone, I think, for good. I’ll never trust anyone again.”
Slipping through the cracks
Wright not only gave Estate Financial all of his net worth in his first investment, he says he is one of the investors who gave Guth money without knowing its inherent risks.
“I went in myself and told Karen my financial situation — how I was living in my car and all—when I met her, and she told me to put my money in the mortgage pool fund because it was safer than the individual deeds of trust the company offered,” he said.
“Then she shook my hand and said out of more than 3,000 investors, no one had lost their money, so I wasn’t going to lose any, either.”
A week or so after Wright gave Guth a certified check for $38,000, he said he received the 50-plus pages of a 2005 offering booklet. He said he didn’t read it because it looked like a lot of “legal mumbo jumbo.”
But he did read, fill out and sign an “Exhibit B” investor information form that all Estate Financial investors are supposed to receive. It asks them to check off whether they meet the net worth and income limits.
Wright kept one copy and mailed the other back, he said. According to Wright’s copy, he checked off that his annual income exceeded $50,000.
But he also needed to have a net worth of more than $75,000. Although Wright checked on the form that he did not have that much net worth, he said he was unaware that that would disqualify him as an Estate Financial investor.
Wright said he also did not know he was limited to putting up to 10 percent of his net worth in the investment — and, while that requirement is stated on the fourth page of the offering circular he received, there was nothing on the form that directly asked him to sign off on it.
“If I knew then what I know now,” he said, “there’s no way in heck I’d have put myself into something so unstable.”
Guth, who said she could not find a copy of what Wright signed — nor could recall meeting him—said she could speak only to how she handles her investors in general.
Although Wright and Baron do not recollect Guth having warned them in person about the investment risks, Guth said she or other Estate Financial representatives, such as her son Joshua Yaguda—the company’s vice president—always counseled their investors, particularly newcomers, about the high risks inherent in their investments.
It would be “foolish,” she added, to make an investment in Estate Financial that exceeded the firm’s investor net-worth minimums, as defined by the state Department of Corporations.
The offering circulars required by regulators, and that Guth distributed, also warned potential investors in bold capital letters that the investment “involves significant risk” and had other caveats intended to help ensure they would not be putting in more money than they could afford to lose.
But if someone still chooses to invest, Guth said she has no way to force them to do as they are required.
“I’m not the investor suitability police,” Guth said. “I can only counsel good judgment. If they gave the money first, then signed the document, that was their choice. We didn’t force them.”
Guth has sought to ease investors’ pain by stressing her expectation that the real estate portfolio will turn around and people who are patient will get at least some of their money back.
At this point, she estimated her $170 million Estate Financial Mortgage Fund has lost 20 percent of its value — which she considers a reasonable approximation of the overall decline in real estate values throughout California.
“People are afraid of having lost everything, and that’s a reflection that people are forgetting they’ve invested in real estate, and that always has value,” she said. “We expect that as the market improves, so will the value of the fund. I can’t imagine a circumstance where everything will be gone.”
An uncertain future
In the meantime, North County resident Nelia Raber is figuring how to balance her budget now that she is getting little to no interest money from Estate Financial — payments she used to supplement her income.
Raber, 73, a former childcare provider who is raising her 5-year-old great-granddaughter, first paid a visit to Guth about a year and a half ago.
“I had heard from my neighbor it was a pretty established business — professionally run,” Raber said.
Raber had just sold her home and had $215,000 in cash, which she described as more money than she had ever had in her life. She said she decided to put part of it toward the purchase of another home and wanted to invest the rest.
She said she told Guth about her financial situation and that she was advised the mortgage pool would be a better investment choice than putting her money into an individual trust deed. That way, the money would be spread over a diverse number of properties. Guth also thought the mortgage fund’s investor suitability requirements were within her limits, Raber said.
“She didn’t give me a hard sell, and I trusted her advice,” Raber said.
Raber did not put her money down right away, preferring to study the matter first, she said.
She received an investment offering circular from Estate Financial in the mail, which she read word-for-word, she said. Raber said she understood the type of securities the firm offered and decided they were less risky than stocks.
“The stock market puts someone else in charge of the money. I felt I knew Karen Guth personally, it was real estate and I was more in control,” Raber said. “I also thought I could get the money out easy — at least after the first six months — if I needed to.”
Raber said she didn’t understand — either from her conversation with Guth or the offering circular—she was supposed to invest less than 10 percent of her net worth.
She also said she didn’t understand why, if she had subtracted the anticipated purchase price of a home, she would no longer qualify as a suitable investor.
What she was focused on, Raber said, was that she could count on a monthly interest check, annualized at about 10 percent of her principal.
“I was trying to augment our income. Estate Financial’s $425 a month brought me and my (great) granddaughter up to a total of $2,000 a month, and that was comfortable for us,” Raber said.
Raber said she eventually gave the Estate Financial Mortgage Fund $40,000, placed an additional $20,000 in gold and silver, paid off a $20,000 loan to one of her daughters, then used $80,000 to buy a mobile home.
Without her expected monthly interest checks, Raber is stoic about her decision and said simply that she’ll figure out a way to make ends meet.
“I’m resourceful, I’ll sew baby clothes, maybe we’ll give up our satellite dish and the Internet,” Raber said. “I’ll get by like I’ve always done.”
McClatchy Interactive is pleased to be able to offer its users the opportunity to make comments and hold conversations online. However, the interactive nature of the internet makes it impracticable for our staff to monitor each and every posting.
Since The SanLuisObispo.com does not control user submitted statements, we cannot promise that readers will not occasionally find offensive or inaccurate comments posted on our website. In addition, we remind anyone interested in making an online comment that responsibility for statements posted lies with the person submitting the comment, not SanLuisObispo.com.
If you find a comment offensive, clicking on the exclamation icon will flag the comment for review by the administrators, we are counting on the good judgment of all our readers to help us.
Print
E-Mail
