Smart People Can Make Stupid Investments

On a crisp fall afternoon in 2002, a crowd gathered under a big tent near the Penland School of Crafts, an artists’ colony tucked in the Blue Ridge Mountains of North Carolina. While a harpist played, real-estate developer Tony Porter talked up a plan he promised could bring big financial payoffs to the isolated community and anyone who invested in it.

Mr. Porter and others at his company, Peerless Real Estate Services Inc., described his vision for a 2,000-lot residential and retail development called the Village of Penland and said the village would provide places for artists to live and sell their work to baby boomers and retirees, who were flocking to the area in droves and rapidly driving up land values. But the developer said he needed investors to launch the project in time to catch the real-estate wave. To help them get in on the action, Mr. Porter promised to arrange loans of as much as $2 million, according to offering documents and other materials circulated by Mr. Porter’s company and reviewed by The Wall Street Journal.

Even more enticing, Mr. Porter and documents promoting the project said investors would receive large cash payments — as much as 10% of the proceeds — when the loans closed. The investors also were promised they wouldn’t have to make down payments with their own money and Mr. Porter or one of his companies would make their monthly mortgage payments for at least a year, according to the documents in a civil suit filed in June by the North Carolina Attorney General against Mr. Porter and more than a dozen associates and related companies.

Over the next several years, nearly 200 investors – mostly sophisticated, educated professionals, including real- estate lawyers, doctors and Air Force officers – borrowed more than $100 million from a handful of banks. Nearly five years after the tent party, no houses have been built. Weeds are invading the lawn at the empty sales office, payments stopped on many loans, and the sophisticated, educated professionals learned that they, too, were susceptible to that all-too-common human sin called greed.

“I feel like an idiot now,” said an engineer in Cary, N.C., who worked with Mr. Porter to borrow $375,000 and then invested it in Penland, purchasing four vacant lots. Another investor bought 10 lots for $125,000 apiece – for a total of $1.25 million – and received $250,000 cash back at closing. Fairly quickly, Mr. Porter had to admit that the lots purchased weren’t rising in value as quickly as predicted, and he stopped making the promised mortgage payments. As investors tried to unload their properties, they found that many lots, which originally sold for as much as $125,000, were actually worth no more than $20,000.

It isn’t clear what happened to the money Mr. Porter collected, but it is perfectly clear that investors who should have known better ended up with severely depressed property, mortgages they couldn’t afford or refinance and damaged credit scores.

In a couple of notable cases, however, potential investors had turned to trusted advisors who told them to pass on the too-good-to-be-true deal. For awhile, they appeared to be the overly conservative naysayers and wet blankets around town whenever conversation turned to the topic of Penland Village. Everyone else seemed to be getting in on the gravy train, why didn’t they? But time has now shown the value of and wisdom in heeding sound financial advice. The moral of the story is a variation on the theme of that classic children’s story about the tortoise and the hare. Just as the steady, plodding tortoise beat the flashy, over-confident hare, steady and prudent investment principles eventually out perform riskier, trendy investment schemes. Sometimes the only difference between the two is the experienced voice of a trusted advisor.

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