Hard money lending schemes creating fiscal chaos, devastating SLO County investors

March 13, 2008

By KAREN VELIE and DANIEL BLACKBURN

A number of San Luis Obispo County investment firms have allegedly participated in schemes that may have already cost local investors more than $500 million, setting the stage for a colossal fiscal collapse unrivaled in this state’s history.

Utilizing a variety of hard money lending ploys and inappropriate management practices, the firms in question have created an environment that may shadow private finances in this county for decades, dozens of informed sources have told UncoveredSLO.com during the course of a two-month investigation.

“It’s like Enron for Paso Robles,” said David Farmer, an attorney with Farmer and Ready, a San Luis Obispo law corporation representing clients who believe they have been defrauded. “Those who claim this has to do with the downturn in the market need to take a cold shower.”

Professionals with intimate knowledge of details of the unfolding venture disaster said that hundreds of local investors who counted on these hard money lending institutions to manage and grow their savings will be lucky to recover pennies on the dollar.

One firm under particularly heavy fire from unhappy investors is Estate Financial of Paso Robles, whose president, Karen Guth, has declined comment on her alleged role in the unfolding disaster. Guth also owns Pasolivo, an olive oil producing company, with her son, Joshua Yaguda.

UncoveredSLO.com interviewed several dozen individual local investors, contractors, lawyers, law enforcement agencies, and lenders while researching this article. Some are directly involved in hard money lending; others have been watching the pending implosion from the sidelines.

Hard money lenders specialize in real estate-backed loans and short-term (bridge) loans. In these latter kinds of loans, funding is provided based on a collateralized real estate value. Higher interest rates can be charged because the loans often do not conform to ordinary bank standards.

Traditional credit guidelines that help shield banks and other lending institutions from high default rates don’t usually have a role in hard money lending. Loans are based on the value of the underlying asset rather then the borrowers credit rating. These kinds of loans originate with private investors, small groups of investors, and firms like Estate Financial that court individual investors.

A number of investors, lenders and builders contacted by UncoveredSLO.com have asked that their names not be used for a variety of personal reasons. One said he had yet to tell his wife that their entire investment was likely gone.

“Bob,” a North County barber for four decades, who thought he had retired two years ago, now faces a loss of most or all of the $450,000 he invested with Estate Financial.

“It looks now like I will be going back to work,” Bob said. “I get about $800 a month in Social Security. I built a home and sold it. I bought properties and sold them. I am 64. I have been under so much stress my blood pressure is through the roof. My plans for enjoying my retirement have gone to hell. I’ll have to cancel all my plans and go back to work. I will have to work till the day I die.”

A 62-year-old former telephone dispatch operator for GTE, “Pam” combines her Social Security and retirement package for about $1,700 monthly income. She bought a condominium in Santa Maria, sold it, and invested the proceeds with Guth at Estate Financial, thinking she had achieved financial well being.

“I am going back to work, cleaning houses,” she told UncoveredSLO.com. “I don’t know if I can clean houses until I’m 80 years old. I am very angry. We trusted her [Guth].”

To encourage investors, Guth distributed an Estate Financial brochure which claimed investors would receive trust deeds filed in the county, fire insurance policies, and title insurance.

Numerous investors told UncoveredSLO.com that their names were never placed on any deed of trust, and that they never received copies of fire or title insurance policies.

One local investor, “Mark,” discovered earlier this week that one of his investment properties had been sold in June, though he received no money.

“Estate Financial sold one of the condos for over $400,000 in June, Mark said. “They never told me. If they used the money for something else, that is not right. A couple of days ago, when I found out it sold, I asked for money. I was told I wouldn’t get it back and that Estate was researching what happened.”

Estate Financial is alleged by its investors and others to have co-mingled funds, paying from one investment to fund interest payments on another. Though similar in some aspects to a “Ponzi” scheme, Guth’s program often paid off many of the first trust deeds.

A few years ago, Shell Beach attorney and broker Kirby Gordon of Gordon Properties attended a meeting with Guth and his client, John Mielziner, to discuss the investment options available, and to learn how Guth managed those investments. According to Gordon, Mielziner, and dozens of investors, Guth claimed that funds were dispersed “progressively” (paid in steps as construction work is completed).

“We were told there was a draw system,” Gordon said. “They specifically told us that someone would inspect to make sure that the draw work was done – usually seven draws. That appears not to be the case.”

Many local properties have been fully funded, even though nothing has been built.

Ron Cooper, a developer for 25 years, went to Guth to help fund a project in San Dimas along with investments from his daughter, son and himself.

“She told me in writing we could start the work,” Cooper said. “She didn’t tell me she didn’t have the money. The money my family and I invested is gone. It’s ruined me. She knew she was out of money a year and a half ago. She was still taking investor money.”

Cooper received enough money to get the property’s entitlements, although no inspections of the properties were ever made.

“There was absolutely no oversight,” Cooper added. “Over the past 25 years, I have dealt with numerous banks and private lenders. I’ve never before had a lender approve a voucher and send a check without an independent inspection.”

Guth proceeded to foreclose on the property even though she failed to distribute the construction funds as promised. In response, Cooper filed three lawsuits against Estate Financial, Guth, and Yaguda.

“Phil” invested in a project on El Camino Real in Atascadero. In papers sent by mail for Phil to sign, the project was described as a 1,700 square-foot, four-bedroom, and three-bath house. When Estate Financial quit making interest payments in October 2007, Phil went to check on his investment.

“I measured the house at 1,100 square feet,” Phil said. “It only had three bedrooms and two baths. The loan-to-value is completely off.”

Another issue is Guth’s reported failure to disclose to some investors that she was a partner in numerous Estate Financial funded construction projects.

“We had no idea she was a partner in those projects,” Phil added. “No wonder she doesn’t foreclose on those properties.”

“Mike,” an investor into Estate Financial for $700,000 claims Guth told him his projects were completely funded and all they had to do was sell. Mike checked on the property. There was no house.

“All the money has been funded and all I have is a slab,” Mike said. “I will be shocked if I get anything back. She is not supposed to pay out money until the work is done. She won’t give us our money back.”

Most of the properties had no MAI or licensed appraisals preformed. Appraised value was determined by Estate Financial employees. “It’s like going to surgery to fix a broken bone without an X-ray,” said one local lender.

As a result of the alleged exaggerated appraisals and lack of oversight, many of the properties are “upside down”; even if finished, the properties are worth far less than is owed.

For example, one project, if completed, will sell for approximately $3 million. The title, however, shows 45 liens on the property that include unpaid taxes and penalties, deeds of trusts, and sub-contractor liens for flooring, electrical, landscaping, and appliances that add up to around $5 million. Add another $1.5 million to finish the property and the value is already off by 50 percent.

A group of eight investors attended a meeting with Guth to discuss issues last fall. “Guth told us if we sue we will only get 10 to 20 cents on the dollar,” Mike said. “Guth told us she is out of money; it was all paid back to us in interest.”

A few days ago, investors in the pool fund were informed that a limited liability corporation (LLC) had been started in their names. Guth is now requesting investors sign and return the documents. The agreement apparently would allow Guth to take out loans in investors’ names. Management fees would be determined by Guth, who would control distribution of the funds, according to numerous investors.

Though many investors would like to foreclose on some of the projects, they are unable to do so. Often, numerous people have invested in each project. Guth has refused to disclose to investors the names of other clients, who would need to agree on a course of action or go to court.

“Forget value, forget everything else, how do you get investors to agree?” wondered one local lender.

Attorney Farmer went to San Luis Obispo District Attorney Gerald Shea’s office searching for solutions.

“A possible remedy is for the District Attorney to start a civil suit with a receivership,” Farmer said. “Then investors could move forward with foreclosures. It is a serious problem and the public needs to demand that a public agency do something about it.”

Currently, the District Attorney’s office is directing concerned investors to contact the state departments of corporations and real estate.

“After it goes through Department of Corporations (DC) and the Department of Real Estate (DRE) we can look at taking other actions such as a receivership,” said Deputy District Attorney Steve VonDohlen. “I can understand the human fear factor. We ask that anyone who thinks they have been a victim of crime to report it. We are looking forward to getting the results from the state. Our office then will review for possible filing of criminal charges any cases that these investigating agencies submit to us after they have completed their investigation.”

Send on-line complaints to the DRE at http://www.dre.ca.gov/pdf_docs/forms/re519.pdf and to the DC at http://www.corp.ca.gov/about/pdf/doc29.pdf. Or call the DRE at 559-445-5009, option 3 or the DC at 866-275-2677.

Stay tuned to UncoveredSLO.com for more on this breaking story. Anyone with information on hard money lending issues in SLO County is asked to tip your editors at tips@uncoveredslo.com.

 Tags:, department of real estate, EFI, Estate Financial, fraud, Guth, hard money, lender, Paso Robles, yaguda