The Globe and Mail: Other people’s money, everyone’s problem: How real estate influencers are fuelling the housing crisis
Posted October 19, 2022
Originally published October 15th, 2022
Last summer, Hamilton realtor Sean St Cyr promoted a lucrative real estate investing opportunity across a number of Facebook groups. Investors could receive an average annual return of 20.2 per cent, the post stated, if they gave him a minimum of $100,000 to purchase a derelict three-storey building in the city’s east end, an area that has been in decline since a steel plant there started running into trouble decades ago.
“Have you ever wanted to learn how to make serious money in real estate like the pros?” Mr. St Cyr said in one of his many promotions for the deal.
On Facebook, Instagram and LinkedIn, Mr. St Cyr regularly shares tips with his thousands of followers about how to make money through real estate investing. They are posted alongside photos of his travels and meals from the 35 countries he says he has visited.
Mr. St Cyr, a self-described international real estate investor and foodie, is one of the many investors looking for other people’s money, or OPM, on social media to fund real estate deals.
He and legions of other promoters have helped fuel the real estate investing craze in Canada that revved up when home prices soared and COVID-19 restrictions led people to spend more time online.
Every day, across the country, there’s a steady stream of requests in Facebook groups and personal pages for money to buy rental properties. Many of the promoters are everyday Canadians who have learned investing techniques online themselves. Some of them promise mind-blowing profits and often dispense real estate investment advice.
No one knows how many investors have got involved in real estate because of this explosion of online promotion. But over the first year of the pandemic, investor buying of residential properties doubled in Canada. By the middle of last year, investors accounted for more than a fifth of the country’s home purchases.
However, with interest rates rising and real estate markets cooling, promoters may not be able to deliver the profits they have promised their investors. That has upped the pressure on them to further raise rents, worsening the country’s affordable housing problem at a time when inflation has eaten away at Canadians’ pocketbooks.
When things go wrong with real estate, they can really go wrong. Tenants, including society’s most vulnerable, can be harshly evicted in the name of investment returns. Investors, many of whom call themselves risk-averse, lose their life savings. And no one has a full grasp of the impact these investors have on the real estate market.
Regulators do not appear to be paying attention, either. Many promotions appear to be skirting securities rules. Promoters are either unaware of the rules or know they can get away with not complying with them. Without enforcement, promoters are raising capital with little to no legal scrutiny.
“It could be that a lot of this activity is going on and the regulator’s enforcement staff is just not capturing it,” said Doug Sarro, a lawyer and University of Toronto adjunct professor who is researching how securities regulators respond to financial innovations. “Gaps in detecting and responding to misconduct reduce confidence in our markets. Market participants can’t help but ask themselves what else might be going undetected.”
Many real estate investors are unaware of the laws governing private capital markets. There, individuals and businesses raise money from a small number of sources such as wealthy individuals. That’s different from selling stocks, bonds or other securities to the public on a market such as the Toronto Stock Exchange.
Private capital markets have typically been used by small businesses and startups to help grow their operations without having to go through the greater legal requirements for selling investments on an exchange.
Because there is a lack of understanding, real estate investors often rely on word of mouth for guidance, and on friends and family.
Some also pay thousands of dollars to join private investment groups on Facebook, weekly meetups and classes. They hire mentors and investment coaches, many of whom have no training in capital markets and investor protection, unlike investment advisers who have gone through rigorous training and are subject to regulatory oversight.
Carolyn Robinson relied on one of the many real estate investment influencers in Canada. The 57-year-old worked long hours as a sales rep in the construction industry and was looking for a passive investment.
After selling her house in Maple Ridge, B.C., in 2021, Ms. Robinson moved to Vancouver when real estate and the stock market were on a roll. With inflation increasing, she didn’t want to keep her cash in a chequing account. “I didn’t want it to just sit there and do nothing or sit there and shrink,” she said.
She had heard about real estate guru Jodi Vetterl, whose website said she had a 20-year career in high-tech software sales for Fortune 100 companies. Ms. Vetterl’s mantra is to “invest only if you understand the investment, ensure that you can sleep at night and determine your exit strategy.”
Ms. Robinson read Ms. Vetterl’s book and paid $5,000 to access training modules and join a network of investors.
The book included a chapter on Saskatchewan-based real estate company Epic Alliance Inc., and a description of the company’s investment opportunities.
At the time, Ms. Vetterl was promoting promissory notes, or short-term loans, for the company that would provide an annualized return of 18 per cent. Investors could take their money out after six months and receive a return of 9 per cent.
Ms. Robinson said it seemed like a good way to take her first step into real estate investing. Until that point, she had mainly invested in mutual funds.
She also researched Epic online, and could only find glowing reviews. So, Ms. Robinson made a sizable investment in a promissory note in mid-September, 2021. In October, she invested in another. Later that month, the Financial and Consumer Affairs Authority (Saskatchewan’s securities regulator) issued a temporary cease-trade order telling Epic to stop trading securities.
Ms. Robinson was shocked. She had never heard of the FCAA. She said she received an e-mail from Ms. Vetterl, who repeated that investors had to do their own due diligence.
What Ms. Robinson did not know was that, according to other investors, in May, 2021, Epic had told investors the FCAA may contact them about their investment. Ms. Robinson had joined Ms. Vetterl’s investor group in June – one month after the Epic disclosure. “I wasn’t even aware of it when I joined the group,” she said. “There was no care taken to make sure that I knew.”
A few months later, in January, Epic’s founders shuttered operations, stating the business’s money was gone and it was bankrupt.
The company had acquired at least 700 houses in Saskatoon and North Battleford and told investors it was either flipping or renting the homes for profit. But some of the homes had no tenants. And many weren’t generating enough rent to earn the promised returns, according to a report by court-appointed inspector Ernst & Young.
Instead, Epic was using funds from share issuances and promissory notes to cover various operating expenses and shortfalls in its business, according to the E&Y report.
By early August, a bankruptcy order was issued against Epic, according to filings. More than 200 individuals, including Ms. Robinson, are seeking to recoup their investments, which totalled $211.9-million.
Ms. Vetterl did not respond to multiple requests for comment. After The Globe and Mail started reaching out to Ms. Vetterl, her personal website changed to say it was undergoing scheduled maintenance.
It’s not clear if Ms. Vetterl had a referral arrangement with Epic. She is named as an investor on E&Y’s list of creditors. Epic operated a program in which existing investors were paid $1,000 for each referral of a new one, as well as 1 per cent of promissory note proceeds.
Reflecting on what went wrong, Ms. Robinson said, “I knew that due diligence was important. I had hoped that the track record of people who know more about this added some safety. And I was wrong.”
A key tenet espoused by real estate investment gurus is to finance deals using OPM. And the search for that money has exploded on social media.
In Facebook real estate investing groups, there are all types of offerings from resorts in Ontario’s cottage country and student housing in Sackville, N.B., to small rental buildings in Hamilton, Saskatoon and Edmonton.
Some marketing materials tout investments as “money-making heaven,” and promise annual returns of 20 per cent, 40 per cent, 60 per cent, 80 per cent and even “infinite returns.”
Real estate investment promoters ask their friends, family, colleagues and pretty much anyone for money. They often say all it takes is the proper mindset to successfully find OPM – also known as capital raising.
That has led everyday investors into the world of private capital, which is dominated by wealthy people and is considered risky because the investments generally lack transparency and lock investors in for a period of time.
While securities watchdogs are only in charge of securities, not real estate, many of the requests for OPM seem to cross into the world of securities. There are two main reasons for this. The first is that securities regulators oversee private capital markets, which are also known as the exempt market because offerings can be exempt from filing a prospectus. A prospectus is a document filed with regulators that contains financial statements – normally audited – and details about the promoter and the deal.
The second reason is that many deals appear to line up with a decades-old legal test that defines a security as an investment contract. As part of that contract, an individual must invest money in an enterprise and reasonably expect to make a profit, thanks to the efforts of another party.
Securities experts say the requests for OPM generally fit that definition.
“When someone raises capital to buy and manage real estate, they’re issuing securities. There’s no ambiguity here. They need to comply with securities law,” said Mr. Sarro, who used to develop investor protection policy at the Ontario Securities Commission.
However, it is easy to play fast and loose with the rules because they are complicated and easy to evade.
On Facebook, there are reams of real estate investment pitches that appear to be securities. They include offerings to so-called accredited investors (who are wealthy and assumed to be sophisticated) or the promoter’s close relations, including friends, family and business associates. The two categories exempt the promoter from filing a prospectus, but the trade must still be filed with regulators.
Many real estate promoters who pitch deals on Facebook appear to be completely unaware of securities rules. Others show some awareness and say the deal is for accredited investors or close relations. But in many of those pitches reviewed by The Globe, there was no evidence promoters filed the required documents with regulators.
As well, Facebook feeds are teeming with promoters looking for joint venture partners to provide capital for a property that is expected to generate high double-digit returns. But the promoters seem to lack knowledge that it could be a security.
For example, a company called Serenity Business Facilitators Inc. pitched a “money-making heaven” for an investment in a resort in Coboconk, Ont., in cottage country. The Facebook posting, from fall of last year, said the return on investment was 62.77 per cent and the 11-unit waterfront property qualified by itself for a mortgage. The company said it was looking for one or more joint-venture investor partners and the minimum investment was $300,000.
A former securities regulator called these types of double-digit returns ludicrous.
“People have to worry about, you know, good stuff versus bad stuff. Forty per cent ROI annually? That’s like, that’s ridiculous,” David Gilkes, a former Ontario securities regulator who helped the province develop exempt market rules and now runs compliance firm North Star Compliance and Regulatory Solutions Inc.
Serenity is not registered with regulators. The company’s chief executive, Sergio Amatller, said his offerings were not securities and he had never heard of the exempt market. Mr. Amatller has taken courses by prominent Canadian real estate investing educators. He said he was taught that as long as it was a joint-venture deal, it was not a security. “I have to explicitly show that I’m looking for partners,” he said.
Mr. Amatller said he works with a lawyer who specializes in real estate investing and has never been told otherwise. After talking to a Globe reporter, Mr. Amatller said he would consult a securities lawyer immediately. “If it is a security, well I will start working properly,” said Mr. Amatller, adding he could not imagine having troubles with regulators because of a misunderstanding or lack of education.
Serenity included a disclaimer in tiny print in its offering documents. Disclaimers are used to warn potential investors of any risks associated with the investment. They are not supposed to be used to shield the issuer from all responsibility.
In Serenity’s pitch, the disclaimer said it was an “estimate only and cannot represent the exact return for this property as it may fluctuate depending on the market.” In Mr. St Cyr’s pitch, his disclaimer said the pitch “is intended for informational purposes only and should not be relied upon by recipients hereof.” Other common disclaimers say the pitch is “for educational and discussion purposes only.”
Securities lawyers dismiss boilerplate disclaimers and say there are rules against misrepresentations.
“You can’t cover yourself like that. ‘I plan on boldface lying to you. So I think that I’ve covered myself by saying, or putting a disclaimer you know that these numbers may not be accurate,’” said Alixe Cormick, a lawyer who runs Vancouver-based securities law firm Venture Law Corp.
A common use of OPM is a business arrangement that real estate investment gurus call a joint venture, or JV.
The JV is typically set up as an agreement between the experienced promoter (active partner) and an investor (money partner).
JVs are often used by promoters who can no longer qualify for residential mortgages in their name because they’ve reached borrowing limits. Many promotions specify they’re looking for an investor who can also be a mortgage qualifier.
Here, the investor provides the down payment, gets the mortgage, goes on the property’s title and becomes the legal owner of the property. The promoter manages the property and renovations. The partners have a separate agreement – the JV agreement – that stipulates they both own the joint venture and will split the proceeds (or losses) when it comes time to sell.
Mandy Branham is known in the real estate investing world as the JV Queen because that is how she has built her real estate empire of more than 100 properties in Canada. Ms. Branham tells her followers it is important to sign the JV agreement after the money partner, or passive investor gets the mortgage. She calls the two parties co-venturers and said what they have signed is a profit-sharing agreement. She has told her followers her JVs do not cross any lines with banks.
“There’s no money transferred from them to me to be able to close on the property. The property is not in my name, I am not on title,” Ms. Branham said in an interview.
Federal banking rules stipulate that “any equity investor or arrangement that may impact equity should be disclosed to the lender,” according to the Office of the Superintendent of Financial Institutions. The regulator said the guideline focuses on the due diligence leading up to the mortgage qualification.
And lenders say they are strict about beneficial owner disclosures. Royal Bank of Canada, the country’s largest mortgage lender, said all individuals with an interest in a residential property must be disclosed.
If the co-ownership arrangement is signed after the bank provides the mortgage, the borrower must get approval from their lender. “The client is required by the terms of the mortgage to obtain the consent of the bank of the change in beneficial or legal ownership,” said Beth Herrema, RBC’s vice-president of home equity financing. “Failure to obtain the bank’s consent would give the bank the right to demand immediate repayment.”
Ms. Branham reiterated that she does not own the property. “There’s no lines being crossed because I am not, I’m not vested in the property, I am vested in the profit or loss of said property.”
She compared her role to that of a glorified property manager. “To a lender, I’m a property manager and anything that a property manager can do, that’s what I do,” she said.
Real estate JVs can also be considered an investment contract. A recent FCAA enforcement case determined that a JV-owned rental property in Regina was an investment contract, according to a panel decision dated March 7.
Even though the investors owned the land and the building through the JV agreement, the FCAA panel said it was an investment contract, not real estate, because the investors were only responsible for providing the capital and therefore were passive investors. As well, the promoter was responsible for the management and success of the property – components of the legal test that determines whether an asset is an investment contract.
However, the issue is not clear cut. The Canadian Securities Administrators, the national umbrella group for provincial and territorial securities regulators, would not comment on whether a JV was a security. The CSA said it is best to consult a securities lawyer.
Like Serenity’s Mr. Amatller, Ms. Branham said none of the major real estate investing educators have mentioned securities rules. “If there’s something that somebody said to me ‘Mandy, you need to legalize.’ Tell me. Tell my accountant. Tell my lawyer and I will make sure that I can conform to that,” she said.
Sean St Cyr’s Hamilton investment mentioned using a popular real estate investing method that involves renovating the building to attract higher rents. That method is known as BRRRR and stands for Buy, Renovate, Rent, Refinance, Repeat.
“This property has MASSIVE uplift potential and will be an excellent BRRRR opportunity!” wrote Mr. St Cyr in his Facebook post dated July 5, 2022.
He was offering $100,000 stakes in a limited partnership that would form a corporation to own the property. The plan would convert the building from nine residential units to 14, and increase rents by 75 per cent.
Tenant Matt Logie was one of the last holdouts at 573-577 Barton Street East in Hamilton in the months after it was sold to Mr. St Cyr and his investors.
Mr. Logie rented a single room on the second floor of the three-storey building for $550 a month. There were broken doors and windows, electrical problems, bedbug and mice infestations, and no smoke alarms. Neighbouring business owners said for years the previous owner had rented out the boarded-up, ground-floor commercial space for people to live in.
It was all the 54-year-old Mr. Logie could afford. He is a carpenter, but has been unable to work for the past two years. His injuries began when a beam fell on his shoulder while on the job in 1999. Now, some days he can’t walk. “I’ve got pins and wires in my shoulder, herniated discs in my back and my nerves – sciatica.” The social assistance income he receives all goes to rent. He can’t afford a phone.
Mr. Logie lived in a room not much bigger than a closet and shared a kitchen and bathroom with a good friend. They kept their section neat and tidy, and tried to make it livable. They sealed up cracks with steel wool to keep the mice out, and paid for pest control and smoke alarms out of their own pockets.
Many people on this stretch of Barton live in deep poverty – more than a quarter have a household income under $25,000 a year.
Mr. St Cyr’s plan to deliver a 20.2-per-cent annual return to investors relied on increasing rents by 75 per cent after evicting tenants and renovating the building.
But Mr. Logie and another tenant in the building say they never received an eviction notice for renovations.
Mr. St Cyr said several eviction notices for renovations were served to tenants, according to a letter Mr. St Cyr’s paralegal, Andrew Choubeta, sent to The Globe. The letter declined to provide documentation, citing confidentiality.
On Sept. 15, 2021, The New Colonial Ltd, of which Mr. St Cyr is a director, purchased the property for $1.6-million.
As soon as the new company took ownership, tenants say the new owners relentlessly put pressure on them to move out – entering units without notice and threatening to throw their belongings out if they didn’t move right away.
In response to the allegation, the Choubeta letter said he served the tenants with eviction notices and then filed the required paperwork with the province. The letter said landlords are encouraged to work with tenants under provincial rules.
Then, the new owners started demolition work, tearing out walls, kicking up a storm of dust and piling construction debris that blocked hallways and fire escapes. Mr. Logie says that one day, the vibrations coming from the work above his room were so strong a heavy pane of glass fell from his cabinet. Mr. Logie had to move quickly to stop it from falling on his cat, but it smashed his TV.
Mr. Logie’s elderly neighbour started having trouble breathing and her nose wouldn’t stop bleeding, according to the superintendent. She was hospitalized for six days, the superintendent said. According to the letter, Mr. St Cyr was unaware of any medical issue resulting from the construction.
Then one Saturday morning in November, the power was shut off. A notice posted on the front door of the ground floor said: “We will shut off the electricity of the building for safety purposes. Please contact my paralegal Andrew Choubeta for any questions or concerns.” The tenants said Mr. Choubeta and Mr. St Cyr didn’t answer the phone. Tenants also said power was restored on Sunday night, but that only occurred after they contacted a local news station.
In response to the allegations, Mr. Choubeta’s letter said his office fielded calls from more than 33 tenants and provided a timeline for the repair, which he said was necessitated by someone tampering with the electrical panel.
The few remaining tenants could have fought to stay, but they were at their breaking point. They eventually agreed to leave. Mr. Logie received $3,000. Others got less or nothing. The tenants say the compensation was offered only after advocacy group ACORN stepped in and told the landlord they couldn’t terminate the tenancies without an eviction order.
Mr. Choubeta’s letter said the landlord had offered additional compensation above the guideline required by the province long before ACORN’s involvement.
At the end of January, 2022, Mr. Logie and his friend moved out. They helped the couple move into a seniors’ residence.
On April 2, 2022, Mr. St Cyr posted a video promoting a networking event. It included footage taken at the property, including altercations with tenants, photos of their personal belongings and lock change notices. It also showed ripped-out walls and ceilings – the work done without permits and while tenants were living there. “We are going to be walking through our gutted 15 unit conversion and showing how we nearly doubled our investor returns in just 7 months!,” said a caption on the video.
By mid-April, the property was transferred to 13785840 Canada Inc. for $2,750,000. The price jumped $1,150,000 in just seven months, without any completed renovations or tenants. It’s not clear if Mr. St Cyr relied on any exemptions for capital raising. No reports of the trade were filed with regulators by any companies named in the deal.
According to the letter, Mr. St Cyr declined to comment on the structure of the deal and whether he had complied with securities rules. Confidential reasons were also cited for not providing information.
Mr. Logie says he and the other tenants were forced out. “Jeez, I’m crippled and I got to run around trying to find a place. Find a place, no phone, no nothing.” He managed to find another room, this one for $580 a month, but it’s also in disrepair. He’s living without his friend. He says they had a good thing going at the old place. “We were driven out.”
One of the perennial problems for regulators is the lack of resources. Securities watchdogs don’t have the time or people to investigate every potential investment opportunity that pops up on Facebook.
At the same time, securities regulators can take an expansive view of what a security is, particularly if no other financial regulator seems to be policing transactions that look like promoters soliciting investors for money-making opportunities.
A spokesperson for the Canadian Securities Administrators would not say whether regulators were looking at broadening enforcement to take in a wide range of real estate fundraising solicitations, including those posted on social media.
Ilana Kelemen, the spokesperson, said the exempt market is inherently higher risk but “anyone who is seeking investors to raise capital” should know the rules and “operate in compliance with investment regulations.”
She said regulators have generally increased their focus on digital spaces. Provincial securities regulators are monitoring online communities and social-media platforms to detect potential misconduct, she said. Asked if regulators were looking at capital raising among real estate promoters on social media, Ms. Kelemen said, “We have not publicly announced a review of this issue.”
There’s a school of thought in policing called “broken windows” that says a small sign of disorder leads to more disorder, and eventually more serious crimes. If the broken window does not get fixed, it shows that no one cares and it is okay to break more windows.
The U.S. Securities and Exchange Commission employed a broken-windows enforcement strategy to go after minor securities violations, saying when they are ignored, that can “foster a culture where laws are increasingly treated as toothless guidelines.”
Perhaps Canadian regulators could take a page from the SEC’s playbook.
Until then, anything goes in the world of real estate investing. No one appears to worry about the rules because nothing ever happens.
Real estate lawyer Barry McGuire, who runs a real estate investing education group on Facebook, sums up the prevailing attitude. In one of Mr. McGuire’s YouTube videos called “joint ventures: legal level 2,” he said that one of the best defences is to ensure the joint-venture investment is a “roaring success.”
“There is probably, you know, a 99.999-per-cent chance that if you’ve worked with someone and you have a very successful joint venture, you’re never gonna be in trouble with the securities commission because you’re never going to be reported,” he said.
In response to a query from The Globe, Mr. McGuire said that was a “practical observation, but definitely not legal advice.”
Common terminology used by real estate investors
OPM – other people’s money
A key tenet espoused by real estate investment gurus is to finance deals using OPM, or other people’s money. Typically, investors use OPM to help build their real estate portfolio and finance more properties than they could acquire on their own. OPM is also known as raising capital.
Exempt market – private capital markets
Private capital markets are known as the exempt market because offerings can be exempt from filing a prospectus – a document filed with regulators that contains financial statements that are typically audited, as well as robust details about the promoter and the deal.
Using an exemption to raise capital does not exempt the issuer from regulation. They do not need to get approval from regulators for the exemption, but in some cases they must register with regulators and file reports of trade.
Accredited investor exemption
The accredited investor exemption is a way for promoters to raise money from wealthy members of the public without filing a prospectus. An accredited investor is typically an individual who has enough income and/or wealth to withstand losses and hire experts to thoroughly vet the offering.
Family, friends and business associates exemption
Another popular exemption allows issuers to offer securities to some people – defined as family, friends and business associates – they have a close relationship with. That does not, however, mean any Facebook friend qualifies for this exemption. According to the Ontario Securities Commission, an individual “with whom a friendship is primarily founded on participation in an internet forum or social media” is not considered “to be a close personal friend or close business associate.”
Buy, Renovate, Rent, Refinance, Repeat or BRRRR
BRRRR is a strategy used by promoters to manage their deals. The first step is to buy a distressed property with below-market rents if it has tenants. The owners renovate the property, then rent it out at the highest possible rate to increase the value of the real estate. Owners can then refinance the property with a mortgage at a lower interest rate, allowing them to take out 80 per cent of their equity in the property. Then, they can repeat the method by using the equity from their previous property to buy their next property.
Joint venture or JV
The JV structure is often used to buy small rental properties, such as single family homes or a duplex, triplex or fourplex. In a JV, there are typically two partners: an active partner, known as the managing partner, and the passive partner, also known as the money partner.
The active partner typically cannot qualify for a mortgage, either because they have reached their borrowing limit with lenders or they do not have enough income to qualify for a mortgage. So, they seek out the money partner.
The active partner typically finds the property to purchase, oversees the renovation, places the tenants and manages the property. The passive partner provides the down payment, qualifies for the mortgage and goes on the property’s title.
The JV partners sign an agreement that states the partners will split the profits (or losses) from the property. The agreement typically includes a timeline to turn the property around and sell, also known as the exit strategy.
Limited partnership or LP
An LP is used by a group of investors who come together to buy a property. Typically, the promoter or the investor with the most experience is the general partner or managing partner, and is in charge of managing the investment. The other investors are called limited partners, or LPs, and they contribute passive capital and have no say in how the business is run.
The Pacific Coast Coin decision
The Pacific Coast Coin decision comes from a 1977 Supreme Court of Canada ruling that defined when an asset is considered a “security” subject to securities regulation. The test defines a security as an investment contract in which an individual invests money in an enterprise and reasonably expects to make a profit, thanks to the efforts of another party.
As recently as 2017, the Canadian Securities Administrators, the national group for provincial and territorial securities regulators, relied on this test to determine that certain cryptocurrencies were securities.
Some securities experts believe certain joint venture real estate deals promoted by a managing partner can qualify as securities subject to regulation based on this legal test.
When a promoter can no longer qualify for a mortgage, they will look for an investor to qualify for the mortgage. That investor needs to have a good credit rating and enough income to qualify for the mortgage.
Cash for keys
When property owners want tenants to leave, some give tenants cash to convince them to move out and hand over the keys.