Property management fraud way up here since recession

First the rent checks from Mark Poppe‘s tenants — processed by a property manager — started arriving a little late. Then a month late.

Within six months, by October 2012, Poppe couldn’t even reach property manager Gregory Goldshteyn, whose real-estate license was revoked the following year. By the time he was indicted on more than 20 charges related to real-estate fraud and theft, Poppe was out $7,300 in lost rent payments and security deposits.

“He ran into financial problems and basically borrowed money from accounts he shouldn’t have touched,” Poppe said. “I think it was just a spiraling effect.”

Arizona was among the states hit hardest by the housing crisis, making affordable properties appealing for local and out-of-town buyers. Those investors contributed to rising demand for property-management services — and a surge in property-management violations.

“We are a paradise for investors,” said Judy Lowe, commissioner of the Arizona Real Estate Department. “They choose their property manager and then they go home.”

Most violations identified by the Arizona Department of Real Estate are mistakes by well-intentioned agents who got in over their heads, Lowe said. But a minority of cases are “blatant embezzlement,” she said.

“The largest majority of our brokers don’t want to do it wrong,” she said. “It’s just a lack of accounting expertise.”

Last year, through regular and complaint-driven audits, the Real Estate Department found 16 companies with trust-account violations, resulting in seven cease-and-desist orders. That’s compared with zero violations identified in 2008, which was also partially due to the low number of audits performed back then, Lowe said.

While most property-management violations involve trust account shortages, other violations include failure to maintain records, failure to respond to department requests for information or failure to maintain monthly trust fund reconciliations, said Sarah Dobbins, chief of staff of the Arizona Department of Real Estate.

VIOLATIONS UP

In recent years, crashing home prices — and sales revenue — drove many real estate agents to try property management, said Steve Schultz, designated broker for Tucson-based Blue Fox Properties property-management company.

“Ten years ago, nobody wanted to do property management. It’s hard work,” and it was less lucrative than real estate sales when the housing market was hot, he said.

While the majority of new property managers sought out training, some moved into the field with very little know-how and zero accounting background.

Property management requires handling rents and security deposits, maintaining those funds in trust accounts and reconciling those accounts regularly. But becoming a property manager in Arizona requires only a real estate license and no specialized training in accounting.

Real estate licensing requirements include 90 hours of in-class training, but those courses barely touch on property management, agents say.

Earlier this year, Goldshteyn claimed in police reports that he never intended to hurt anyone — he simply didn’t know what he was doing. He told police he was not qualified or trained in accounting, and never should have been licensed as a broker or allowed to practice, the investigation report said.

“The numbers got away from me,” Goldshteyn said in a police report. In May, he accepted a plea bargain and pleaded guilty to one count of attempted fraudulent scheme and artifices. He was sentenced to five years’ probation, ordered to do 700 hours of community restitution, and pay back more than $77,000 to his former clients, court records show.

Goldshteyn did not respond to a request for comment, conveyed through his attorney.

CRACKING DOWN

Since she was appointed in 2009, state real-estate Commissioner Lowe says she’s sought to crack down on property-management fraud through stricter auditing that has led the department to shut down dozens of property-management companies in the past few years.

She refers potentially criminal cases to the state Attorney General’s Office’s criminal division, where prosecutors are also making property-management fraud one of their priorities. Convictions are rare, but not unheard of:

• In February 2014,

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• Lester Curry

• — a former councilman in Coolidge — admitted to stealing $50,000 in deposits from clients and tenants after a department audit. His real-estate license was revoked in May, and he was convicted of fraud and theft. He was sentenced to six months in prison, followed by seven years’ probation.
• In April 2013,

• Dawn Anderson

• of Maricopa Properties in Maricopa was ordered to cease and desist after an audit found a massive shortfall in her trust accounts. In March 2014, she was indicted on charges of theft, forgery and fraud for using funds for personal expenses, including a trip to Hawaii. She pleaded guilty and is serving six months in jail, with a work-release provision that allows her to work toward paying back her victims, said

• Aaron Ludwig

• , assistant attorney general. Anderson, who still must spend nights and weekends in jail, faces more jail time if she doesn’t pay back the $367,000 she owes her former clients.

Another case involved Tucson-based Rathbun Realty, which once managed 800 properties here and declared Chapter 7 bankruptcy in September 2012. An FBI investigation into embezzlement charges is ongoing, a spokesman said. In July 2013, a U.S. Bankruptcy Court ordered Rathbun to pay back nearly $1 million to creditors. But the list of the company’s creditors is long, and tenants and landlords are at the bottom of it, so they may not get reimbursed, Isaac Rothschild, the estate’s bankruptcy attorney, said at the time.

NEVADA

Other states have implemented heightened property-management standards to protect consumers.

Nevada, where the number of property-management permit holders has grown by 30 percent since 2009 to 3,650, requires a permit and extra training for agents doing property management.

Arizona isn’t likely to boost training requirements anytime soon. Since most real estate licensees still don’t practice property management, it doesn’t make sense to add it to the required curriculum, Lowe said. Since there’s no certification required in Arizona, Lowe said the department doesn’t know how many agents are practicing property management here.

In Nevada, property managers must submit an annual reconciliation of all trust accounts, which must be used to store tenants’ rents and security deposits. That has allowed the department to quickly head off impending damage to consumers, said Jan Holle, chief compliance and audit investigator for the Nevada Real Estate Division.

“On at least a dozen occasions over the past year, we’ve prevented the public from harm because we’ve caught it soon enough,” Holle said.

Although Arizona statute requires brokers to balance trust accounts each month and to maintain those records, brokers aren’t required to submit them to the department regularly. In cases involving trust account irregularities, however, the department can require a company to submit a monthly reconciliation as part of the disciplinary action imposed.

BAD ACTORS

Many property managers support efforts to boost training requirements for the field. Higher standards help weed out the “bad actors,” who cast a shadow on reputable property managers, said Ginny Huffman, designated broker for Imagine Realty Services in Tucson.

Media reports of property-management fraud have bred deep skepticism among the public, especially among clients of companies that have “gone down in flames,” she said.

“They’re very gun-shy,” said Huffman, who minored in accounting in college and got extensive property-management training from her first employer, EMS Realty. “We’re always battling, ‘Prove to me that you’re not going to steal my money.’ I have no problem with that, because my trust accounting is an open book, ... but it can become hostile.”

But the violations have also created opportunities to spread the word to practicing property managers — and consumers — about what training is available, said Schultz, with Blue Fox Properties.

The National Association of Residential Property Managers offers educational courses and awards designations such as “residential management professional” after an agent has enough field experience, course work and service to the association, said Schultz, who is involved in the group’s Southern Arizona chapter.

The Arizona Association of Realtors is also planning to launch an optional certification program for property managers this spring.

“The spotlight has been on property management for the last several years,” Schultz said. “The bad news is, it was in the spotlight for all the wrong reasons. ... This is our opportunity to get the word out: This is why we need the education.”