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An Ohio-based company that called itself a one-stop shop for fix-and-flip real estate investors now faces a lawsuit that could cost it millions after a judge granted class-action status to a lawsuit.
Groups representing hundreds of independent real estate investors sued Build Realty, claiming deals they thought were structured to help them earn money through house flipping were actually structured to generate profit for the company rather than investors.
Investors who are suing the company said Build Realty baked various fees into its deal with investors who commonly lost money after working with the company.
“It’s in the tens of thousands of dollars for each plaintiff, so it ends up being a significant amount of damage,” attorney Bill Markovits, who is representing the alleged victims, told WCPO, which first reported about the ruling. “If there’s a racketeering verdict, those damages are tripled.”
U.S. District Court Judge Douglas Cole issued the order allowing the class-action suit to move forward in late February after the case was delayed by the COVID-19 pandemic.
According to the complaint: The company called itself a one-stop shop for finding, financing, acquiring, improving and re-selling distressed homes for just $10,000 down and with no credit checks.
But throughout most of the process, Build Realty was making money at the expense of the investors it was purporting to help, the investors alleged.
“The transaction is structured so that Build and its co-conspirators — not the Investor — profit at every stage,” according to the suit. “The vast majority of Investors lose money, in many cases their entire investment. The few that make a profit generally make far less than Build estimates.”
According to the investors who filed suit, Build Realty said it had a large inventory of properties that it bought in bulk and at a discount. The investors said Build Realty actually didn’t buy the homes until after it had a signed purchase contract with an investor.
It “then closes on the property in question through one of its alter-ego shell companies and marks up the price for the transaction with the Investor,” according to the lawsuit.
The company would then put the property under a trust controlled by Build Realty, charge an interest rate well above market levels and sell the mortgage to a long-term lender, according to the lawsuit. The process was another way for Build to generate more money from the investors, plaintiffs said.
“With the high transaction costs and interest costs, many Investors make little or no profit, even excluding the value of their time,” according to the lawsuit. “In fact, many Investors lose upwards of $20,000.”
“In many, many respects, it was a scam,” Markovits told WCPO. “They said, ‘We buy in bulk and pass the savings onto you.’ They didn’t. They bought from the market, they marked up the property, and then you paid at a marked-up price.”
Build Realty attorneys didn’t immediately respond to a request for comment.
“Class litigation is incredibly expensive for any defendant, but it is especially oppressive here, where the Defendants are mostly comprised of small companies and individuals,” the company’s attorneys wrote in a request to halt the suit. “This litigation has already significantly affected their businesses and, after the certification of the class, their prospects are even dimmer.”
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