Real estate investors sue brokerage over leasing scheme

A group of 16 investors have accused Marcus & Millichap of engaging in a scheme to sell them properties at inflated prices.

The lawsuit filed in a San Jose federal court seeks $70 million in compensatory damages and up to $200 million in total because of treble damages under the Racketeer Influenced and Corrupt Organizations (RICO) law. The alleged scheme worked like this: Two local businessmen bought small franchises like Jiffy Lube and the real estate where the businesses were operated. They then sold the real estate to a subsidiary of Marcus & Millichap and leased back the property at inflated prices. The real estate was then sold to investors who based their calculations on those numbers and therefore overpaid badly.

It may well be that the defendants conspired to ripoff investors on these deals, but most of the blame still lies with the investors and their advisers. Think about it: If the rental rates were inflated, they should have noticed that and based their calculations on more realistic estimates of value. Any real estate book will tell you that you should never, ever, ever assume that the rate a seller claims to be renting a property at is the appropriate value. You look at similar properties and determine what the market rate is, and use that. If these investors had done their homework, they wouldn't be in this predicament.