It can be a valuable part of your portfolio, but consider the risks

When land developers talk about markets in the past tense, it's a good bet the fizz has gone flat in real estate.

But North Carolina has some pop left, largely because of mountain and coastal developments and retirement communities.

So now is a good time, financial experts say, to take note of what has happened in the past year to real estate investors and what it means for those who don't want to get burned.

"I believe 100 percent that real estate is a good investment," said Mark Tipton, a Raleigh developer and founder of the Whistler Investment Group. "But you need to know when to buy and sell. You need to do this wisely."

Do it right, and real estate can provide a nice addition to a portfolio of stocks and bonds. Get it wrong, and you'll find yourself with a soured investment.

That's what happened during the summer, when an exclusive mountain development in Mitchell County collapsed, leaving investors owing banks about $120 million. The failed development, the Village of Penland, triggered lawsuits that claim loan officers and developers deceived dozens of investors, including some from this area.

With the clarity of hindsight, it's easy to suggest that investors who get tangled in real estate losses are simply too greedy or naive to appreciate the risks. But plenty of smart people lose money investing in real estate.

Financial planners say most of those investors are successful professionals with money set aside in college funds for their children and retirement accounts for themselves.

In North Carolina, developers depend on couples who buy one or two lots in resort areas with dreams of building a home there someday. At the very least, investors expect to sell the land at a profit if things don't work out.

Others use their good credit and extra cash to buy a rental home that is already producing income. Those with a lot of cash might join a limited partnership and develop a plaza, for instance.

These are real estate investments that involve varying degrees of risk, reward and research.

"Regardless of the kind of real estate investment that interests you, you must do all your homework," said Bill Dix, president of investment firm Fortune Management in Raleigh. "You just don't take shortcuts no matter how obvious something seems."

That means making sure you get verified and independent appraisals of property. It means having discussions with area realtors about property values. It means collecting as much information as possible about developers or partners.

"I'm a little bit cynical," Dix said. "I believe thoroughly in trust -- and then verify."

Dozens of Penland investors bought as many as 10 lots each. Many never met their bank lenders or visited the property. For most, the goal was to simply make money by reselling the land.

Though land speculation is fairly common, especially in overheated markets, it's much riskier than some investors understand, said Tony Plath, a finance professor at UNC Charlotte.

"When Bob and Sally go out to buy a house, they don't need to worry about investment potential and independent appraisers and all this other stuff. All they need to do is go to the bank directly instead of a broker and the bank will do right by them," Plath said.

"But if you are buying investment-grade or speculative property, that calls for a whole different set of skills. People who get involved in spec real estate are assumed to have a higher level of understanding and skill, just like people who buy options know more than people who buy only stocks."

When clients ask Raleigh independent financial planner Frank Smith about buying land, he asks them a simple question: Can they sit on the investment for a decade?

"If you aren't in it for the long haul, you aren't likely to see much appreciation," Smith said.

Developers aren't going to turn away buyers who hope to flip property for a quick profit, but the happiest buyers are usually the ones who buy land for a second home or place to retire.

"A couple of years ago when the market was so crazy, we got a lot more investors," said Joel Brown, regional president of the North Carolina division of Waterfront Group, which has been in business since 1994.

"Now we are back to the core of our customers: people looking for a getaway or retirement home, the people who say it's been their dream to do this."

That's not a financial plan that will make anyone rich, but it will keep away the nightmares.

If that offer doesn't seem right ...

If something about a real estate deal doesn't seem quite right, don't ignore your instincts. The state Attorney General's office offers the following advice on avoiding real estate scams: • Beware of sales where you aren't asked to put any money, such as a down payment, into the deal or where you get money back at the closing. Also, beware of deals where you're asked to apply for a loan on behalf of someone else who couldn't qualify for credit.

• Walk away from deals where the seller encourages you to give inaccurate or incomplete credit information to a lender. Then notify law enforcement.

• If you're purchasing a building lot in a subdivision that will contain at least 100 lots when completed, be sure it is registered under the Interstate Land Sales Act and that the seller provides a copy of the required Property Report. Contact the U.S. Department of Housing and Urban Development (HUD) at www.hud.gov to see if a subdivision is registered.

• When closing on a real estate purchase, review the HUD-1 Closing Statement very carefully before signing to be sure that all of the information is accurate. Don't be afraid to walk away from the deal if the information isn't accurate and the seller promises that problems can be taken care of after the closing.

• Beware of offers from companies that specialize in buying your home quickly. Many of these outfits advertise with promises like "we'll buy your home in days" or "sell your home without going through a Realtor." In many of these deals, the buyer puts the title to the property into a land trust and promises to lease the home and make the payments. But the seller doesn't pay off the mortgage and you're still responsible for making payments on it.

• If you're leasing a home with an option to purchase, find out who holds title to the home, whether there is a mortgage on the home, and who is responsible for making the mortgage payments.

• Be skeptical of seminars that promise to teach you how to make money in real estate while spending little to none of your own money.

• To find out more or report a suspected scam, call the N.C. Attorney General's office at 877-5-NOSCAM.

For the S.C. Attorney General, call: 803-734-4200 or 800-922-1594 (toll-free within South Carolina.)

Do your homework

Real estate can be a productive part of an investment portfolio, but financial experts, planners and real estate developers say it's important for people to do their homework before they tie up any money. Here are a few basic tips they offer:

• Your house is not an investment. The value of your house probably will go up, but that doesn't make it a good investment. In fact, when you deduct taxes, maintenance, interest payments, remodeling and other costs, it probably loses money most years. But you have to live somewhere, so enjoy it.

• Make sure you review a certified appraisal on property you might buy.

• Talk with local real estate agents to make sure the market prices are in line with the appraisal.

• If you are buying only land that does not have access to a municipal water and sewer system, make sure the soil is suitable for a septic system. Local governments won't allow construction on lots that can't handle a septic system. You want to see the certificate.

• Deal directly with the lender. Land brokers are great for some services, but not for arranging your loans.

• Raw land is risky. A lot in the middle of a subdivision requires you do your homework. Buying 20 acres on a mountainside takes the game to a whole different level.

• Buy what you know. Throwing money at a hot property is asking for trouble.

• Don't invest money you need. If a deal promises easy money or no risk, it probably is too good to be true. Well-managed real estate can produce a nice stream of income, but it's going to cost some money to get in and it's not easily converted to cash without selling low.