For the park manager that wants to cheat you, stealing cash is old school. There are a number of bigger scams that involve an enhanced level of sophistication in today’s world. In this Mobile Home Park Mastery podcast we’re going to explore the latest embezzlement strategies that some managers deploy as well as how best to avoid them.
Episode 332: Embezzlement Scams And How To Avoid Them Transcript
Webster's Dictionary defines embezzlement is theft or misappropriation of funds, place to one's trust or belonging to one's employer. This is Frank Rolfe, Mobile Home Park Mastery podcast. We're gonna talk about misappropriation of funds by managers, but in new and profoundly different ways, because in the olden days in the mobile home Park business, the number one way that you saw a manager steal from the property owner was by taking CASH. I know when I bought my first Mobile Home Park, Glen Haven down in Dallas, Texas, the way it worked was this, the measure was tasked with bringing in all the money every month in CASH, paying all the bills themselves out of those deposits and then sending the owner of the property a cheque for the difference. So what you had is a situation where the manager controlled all the money coming in, all the money going out and you know that the amount that was sent to the owner was never even remotely what it should have been. I knew when looking over the books of Glen Haven and looking over what the Park was actually producing versus what the seller thought it was producing, there was a very wide margin, and of course, we all know where that money went, the manager took it in in CASH and pocketed a great amount of it. So many Park under to the way you would beat embezzlement going forward would be to eliminate CASH.
So many years ago, people stoped taking red in CASH, now you can't stop taking red and CASH in every state. In many states, you are required to give people the option to pay in CASH, but then again, paying in CASH has its own risk for the customer because then there's much less record of payment than if you use a cheque or money order. So many Parks today are on a cheque and money order only basis or they moved on to ACH. In our portfolio, about 92% of all payments come in under ACH, which means it's automatically debited out of an account. So then if you take CASH out of the equation on revenue coming in, does that eliminate the risk of embezzlement by managers? And the answer is no. They just became more clever. So today, the problem is that the embezzlement scams some managers utilize are so sophisticated and the numbers are so much larger in scale, it makes you look back long and lead to the days of when the Park took the red in CASH. So what are the three worst of these new embezzlement scams that you need to guard against? And then how do you solve those? Well, this first one is very, very clever. Here's how it works. Let's say you've got a Park Own Home, whether it's a rental one that you're going to sell and it's sitting there and you're supposed to be running ads and showing the home and trying to find a customer...
And if you're selling at the customer then to be vetted through a lender like pap and then approved and the customer moves in or if it's a rental, then once again, they would be vetted and they would sign a lease and then they would move in, but your manager has a more creative concept. Because he realizes that that is a marketable property that you won't really know the start date on. So if somebody comes in and they say, "Hey, I'm interested, I saw that rental you have in the paper or the sign out on the fence." And they say, "Oh yes, we do have that. And it's $800 a month and you can move in right now." And what they do is they don't tell you the owner that someone's living in the home. So if they can get away with half or two or three months, they're gonna pocket a few thousand bucks. It's an excellent scam. Very, very creative. And of course, if they got caught they'll say, "Oh well, the person must have just moved in a day or so ago, he must have moved in early." Hoping that you will brush it aside not yourself really knowing what the start date was, and of course, they can very conveniently, have the person have a lease with the start date at some point in the future, we'll never even catch that in the document.
So you hear you have an issue that can create for many managers a lot more money than they could just embezzling CASH, because every single home, let's say you've got three rental homes and they can scam you that those three are vacant when they're all occupied. Well let's assume they rent $800 a month, they're making $2400 a month with absolutely no cost out of their pocket whatsoever. So how do you stop that Scam? 'Cause gosh, that's a good one. Well, what you gotta do is you have to know that that scam is ever present and one good tool to fight that is what we call a face-time audit. Now how does a face-time audit work? It's very simple. Just call your manager, say, "Put me on FaceTime on their smartphone." And they just told to walk over to the home and give you a tour. Now, if they already have someone living in that home, that's a problem, right? Because if they go over to that home, they'll be furniture in it, posters on the walls, a car in the driveway, probably a person in the house, very hard to explain. And they will never be able to explain away all that furniture and stuff that's in there. So caught them, now you ruined it. So it's a very good idea to start doing regular random audits of those vacant homes to truly see that they're vacant.
Now, you don't have to travel out there, don't have to jump in your car to go out and do these inspections, you see the smartphone, there's all that for you. All you have to do is consistently just have a face time audit. Just to have the manager turn on their phone and take you over to the house. And I guarantee you with the first time you tell them this plan, if you call them up and say, "Hey, put me on FaceTime." "Oh, okay," And then walk over to the empty homes, we haven't given me a tour and if they won't do it, if they say, "Oh, I can't. I hurt my leg." Or, "Oh, I can't. I have to go to the dentist." Then that's what they're probably doing because nobody who's played it straight up and not cheating would have any problem turning you on FaceTime and walking over there.
Another big scam, this has been going on for a long time, is vendor collusion. Now, on the vendor collusion scam, here's what happens. You got a plumbing company and the manager calls you up one day and says, "Hey, we got a problem in the Park, we've got a major water sewer back-up thing kinda going on and... Oh, it's just terrible. And the city's been out here and they said they're gonna shut our water off if we don't get it fixed by 5 o'clock, and I know we gotta move quickly." So I call this plumbing company and they said, "Hey, we can start it up, we can get it going but it's gonna cost about $7000, but I don't see any other option, Mr. Owner, what do you think?"
And then you say, "Oh gosh. Well, I don't wanna have my water turned off, I don't wanna be on the news, so I guess let's go ahead and do it." And then later you get a bill for $7000 from ABC plumbing or whatever the name is, and you said in the 7000 and what do they do? They take $3500 down to your managers commission. Because there never really was any kind of sewer or water issue, there never really was any fixing of it since there wasn't really a problem, it was just a quick way to scam you out of a large amount of money. Now, we see that typically, it was frequently in the plumbing business, I don't know what it is with plumbers as opposed to other tradesmen. I don't know why it's not normally electricians, but it always seems to revolve around plumbers, and how do you guard against that scam?
Obviously, not only a very expensive scam one that came can make very bad decisions on the future of the Park. You might replace the water or sewer system because you had so many repeated big capital calls, not realizing all of them are fabricated. So what do you do? Well, again, it's kind of like the person who's renting out homes, you've got to put a great microscope over exactly what is going on. When a manager calls you today with some kind of problem, water sewer issue, you wanna see it. You wanna say, "Put me on face time, let me see what you got talking about here." At a minimum, they should take photos and text you a million photos or videos or what is going on to show you that there is a problem. Number two, you gotta get three bids. Those kind of scams always revolve around having one dominant plumber that you get lazy with and don't constantly get other opinions. You've gotta get at least two bids on a major project like that, just to make sure that it is a major product.
Because if they have a scam going on, they won't be able to get that second bid the other plumber say, "I can't give you a price, there's nothing wrong with that thing." Number three have to follow along with it continuously. It's not enough just to see the problem, you wanna see additional action pictures or face time of them digging it, what the problem truly is, them patching it and then them burying it. And then finally, if it happens in a recurring basis, you need to get a different plumber. The strange how some parts can have no plumbing issues at all, and then suddenly frequent big issues and you know what's really going on? There's a collusion going on with the manager and the plumber and they're fabricating these and they can't help themselves from the... Gosh, darn it the manager thinks the money is a lot of fun to have around.
Finally, another big one right now is where people collect up parts for the Mobile Home Park as the manager's role and then they sell them on eBay or even in yard sales. So here's how it works. They say, "Oh yeah, well, we broke another chainsaw, no other chainsaw." And then not long after that, "Oh, gosh, darn it. We're doing so much chopping off the trees with the chainsaw. We broke another one, we need another one." And what really happened was there was nothing going on with the chainsaw, all they did in fact was they just got three chainsaws, the three chainsaw was on eBay for $250, a chainsaw.
So how do you battle that scam? How do you battle the person who collects in parts and then sells them again on a website or even throwing them on a sheet in their yard is a yard sale? Well, again it's a good idea to use a company called Purchasing Platform. We use that all the large operators use it, but everyone can use it, even if you're just on one Mobile Home Park. And one of the big benefits of purchasing platform is it tracks everything exactly where it goes, and it can tell you how many parts were purchased by any certain part as what homes they are related to. And you can start seeing unusual high flows of tools and parts to homes. And as a result, you can start seeing managers who have gone bad. They've gone from not having many parts at all to having lots of them, and then suddenly, once again, you'd have to say, "Wait a minute, I'm putting the brakes on this. This seems really, really odd." You might call them out on it to say, "Hey, I see we've got through a normally high number of chainsaws, let's do a face time audit, show me your chainsaw collection. Show me that recent chainsaw that you have going on." Again, it's like the old Ronald Reagan concept of trust, but verify.
The problem is too many Park owners trust, but they don't verify trusting without verification leads to such issues as embezzlement, but you have to remember that you can't let your guard down for a minute because even though you don't take CASH today, that's not going to stop the manager from doing very creative stunts for self-enrichment. This is Frank Rolfe of the Mobile Park Mastery podcast. I hope you enjoyed this. Talk to you again soon.