What is Bleeding a Project?
Bleeding a project involves two primary unethical practices within real estate:
- New Construction: Overstating expenses and fees to divert a larger portion of project costs to the developer’s profit margin.
- Property Management: Managing a piece of real estate to obtain the highest possible current income, often by forgoing normal operating expenses. This typically leads to rapid deterioration and a significant loss of property value.
Examples
Example 1:
In new construction, overstating expenses and fees so as to divert a larger than normal amount of the project costs to the developer’s profit.
- Scenario: Bugsy’s girl, Virginia, was bleeding the Flamingo project while putting millions aside in a Swiss bank account.
Example 2:
Managing an existing piece of real estate so as to obtain the highest possible current income from it, neglecting normal operating expenses.
- Scenario: Maurice owns an apartment building. Instead of maintaining it, he bleeds the project by pocketing the money that would typically be used for maintenance and repairs, leading to rapid property deterioration.
Frequently Asked Questions
Q: What is the impact of bleeding a project on property value?
A: The most significant impact is the accelerated deterioration leading to a lower property value over time, which can make the asset less attractive to future buyers or investors.
Q: Can tenants take action against a landlord for bleeding a project?
A: Yes, tenants may have legal remedies available depending on local landlord-tenant laws. They could file complaints with housing authorities or take legal action for repairs and maintenance neglect.
Q: How can investors identify if a project is being bled?
A: Investors should conduct thorough due diligence, including reviewing financial statements, maintenance records, and visiting the property to inspect its condition.
Q: What are the legal ramifications for developers or property managers found bleeding a project?
A: Legal ramifications could involve lawsuits, fines, and restrictions on operating future projects, especially if tenant laws are violated.
Related Terms with Definitions
- Embezzlement: The act of dishonestly withholding assets for the purpose of conversion (theft) of such assets by one or more individuals to whom such assets were entrusted, often for employment purposes.
- Fraud: A deliberate act to secure an unfair or unlawful gain, typically involving deception.
- Property Management: The operation, control, and oversight of real estate, involving tasks such as collecting rent, maintaining properties, and dealing with tenant issues.
- Due Diligence: The investigation or audit of a potential investment, serving to confirm all material facts in regard to a sale.
Online Resources
- Investopedia - Real Estate Terms
- National Association of Realtors
- HUD.gov: Resources from the U.S. Department of Housing and Urban Development.
- Property Management Insider
References
- “Real Estate Principles: A Value Approach,” by David C. Ling, Wayne R. Archer.
- “The Millionaire Real Estate Investor,” by Gary Keller.
- “Property Management Kit For Dummies,” by Robert S. Griswold.
Suggested Books for Further Studies
- “Real Estate Investment: Strategies, Analysis and Trends” by David Smigiel
- “Professional Real Estate Development: The ULI Guide to the Business” by Richard Peiser
- “Real Estate Management Law” by Richard Card, John Murdoch & Sandi Murdoch
Real Estate Basics: Bleeding a Project Fundamentals Quiz
### What does "bleeding a project" typically involve?
- [x] Overstating expenses in new construction or neglecting maintenance in property management.
- [ ] Selling a property under market value.
- [ ] A term for sudden property damage due to unforeseen circumstances.
- [ ] Increasing property taxes through reassessment.
> **Explanation:** Bleeding a project involves either overstating expenses and fees in new construction to profit more or neglecting maintenance for higher current income in property management.
### Which of these scenarios is an example of bleeding a project in new construction?
- [x] An individual overstating construction costs and funneling the excess funds.
- [ ] A developer using premium materials to enhance project value.
- [ ] A construction company outsourcing labor to reduce costs.
- [ ] An architect receiving bonuses for early project completion.
> **Explanation:** Overstating construction costs and funneling the excess funds into personal accounts is an example of bleeding a project in new construction.
### What is the long-term effect of managing a property by forgoing normal operating expenses?
- [x] Rapid deterioration and loss of property value.
- [ ] Increase in tenant satisfaction.
- [ ] Appreciation in property value due to cost savings.
- [ ] Enhanced safety standards for the property.
> **Explanation:** Forgoing normal operating expenses to maximize immediate income leads to rapid deterioration and loss of property value over time.
### How can tenants respond if they suspect the property manager is bleeding the project?
- [x] File complaints with housing authorities.
- [ ] Move out without any legal repercussions.
- [ ] Take immediate possession of the property.
- [ ] Increase rent payments voluntarily.
> **Explanation:** Tenants can file complaints with housing authorities or take legal action if maintenance and necessary repairs are neglected.
### What term describes the dishonest withholding of assets for personal gain?
- [ ] Misalignment
- [x] Embezzlement
- [ ] Overbilling
- [ ] Underpayment
> **Explanation:** Embezzlement involves dishonestly withholding assets for personal gain, often seen in the context of overstating expenses.
### Why is conducting due diligence essential for investors?
- [x] It helps confirm material facts and identifies potential risks or unethical practices.
- [ ] It allows them to invest without property inspections.
- [ ] It shifts legal responsibility from investors to brokers.
- [ ] It ensures immediate profit with minimal capital.
> **Explanation:** Thorough due diligence helps investors confirm all material facts about an investment, including identifying potential risks and unethical practices like bleeding a project.
### What could be a likely legal consequence for a developer found bleeding a project?
- [x] Lawsuits and fines.
- [ ] Obtaining tax breaks.
- [ ] Receiving governmental grants.
- [ ] Acquiring more development permits.
> **Explanation:** Legal consequences include lawsuits and fines for developers found engaging in unethical practices like bleeding a project.
### In what scenario would property management not be sustainable due to project bleeding?
- [ ] When prioritizing tenant satisfaction and regular maintenance.
- [ ] When streamlining operational efficiencies.
- [x] When maximizing immediate income by neglecting maintenance.
- [ ] When implementing environmentally-friendly practices.
> **Explanation:** Managing a property to maximize immediate income by neglecting maintenance is not sustainable and leads to long-term issues.
### What should investors check during due diligence to avoid entering a project being bled?
- [ ] Property aesthetic features first.
- [ ] Market ads and promotional material.
- [x] Financial statements and maintenance records.
- [ ] Number of tenants currently in contract.
> **Explanation:** Reviewing financial statements and maintenance records during due diligence helps investors identify potential risks, including project bleeding.
### Why might tenants file complaints with housing authorities against property managers?
- [x] If maintenance and necessary property repairs are neglected.
- [ ] If rent is reduced without notice.
- [ ] If new facilities are added to the property.
- [ ] If landscaping is improved.
> **Explanation:** Tenants may file complaints if maintenance and necessary repairs are being neglected, potentially due to bleeding the project.
