What is Equity Milling?
Equity Milling generally describes a means of generating cash to make an investment by borrowing against real property.
Typically, a promoter will locate undervalued properties for investors to purchase. Once purchased, the property is appraised at a higher value (sometimes fraudulently), allowing the investor to secure a new loan thereby capitalizing on the increased value of the property. In some instances, the highly-valued property may then be sold to a new buyer (possibly located by the promoter). Whether sold or kept by the investor, the difference between the lower purchase price and the higher appraisal value (or sale price) represents equity, which the investor can pull—or “mill”—from the property. The promoter may present equity milling to investors as an investment program in itself or as a means to finance some other investment.
Equity Milling may also refer to the milling of equity from anything with value. For example, an investor might borrow against their home to buy a car, but borrow an amount more than the cost of the car so they can invest the difference.
In each case of equity milling, the promoter offers a rate of return higher than the interest rate on the loan. Investors are sold on the idea that they can earn enough to repay the loan and have some profit leftover. Equity milling is a risky game. By borrowing against something of value (i.e. your home), you endanger that asset if the returns are insufficient to repay the loan. Often investors are left responsible for large liabilities.
Concerns with Investments that Use Equity Milling
A promoter who seeks investor money for Equity Milling will typically require the investment to:
In many cases, promoters fail to properly follow securities laws and offer unregistered securities to Utah investors, which is a violation of the law.
Many promoters fail to provide investors with adequate disclosure documents. Some will mislead or misrepresent the information and risks in their disclosure documents. The omission or misrepresentation of material information in the offer or sale of a security is considered securities fraud. Utah is so concerned with abuses in this area that in 2001 the Utah Legislature increased penalties for violators who knowingly accept money representing equity in a person’s home.
A promoter may or may not need to be securities licensed as a Broker-Dealer or Investment Adviser. Licensing is required anytime a sales agent or promoter sells a security and receives compensation or renders advice regarding a security for consideration.
A promoter may also be required to license with the Utah Division of Real Estate as a broker or real estate agent.