Fake fix-and-flip real estate scheme bilked investors of $14.5 million — and sent Colorado woman to prison

A 59-year-old Colorado Springs woman who ran a fraudulent fix-and-flip real estate business has been sentenced to federal prison for eight years and must repay $14.5 million to investors.

Denver U.S. District Judge Christine Arguello also sentenced Karen Lynn McClaflin to serve three years of supervised release following prison on two wire fraud convictions.

McClaflin fraudulently issued multiple fake deeds of trust for the same home to several different investors simultaneously, according to a news release by U.S. Attorney Bob Troyer and FBI Agent-in-Charge Calvin Shivers.

“For a lot of years, the defendant lied a lot of people out of millions of dollars,” Troyer said.

Karen McClaflin took advantage of innocent investors by knowingly and wittingly creating a deceptive home-investment scheme, Shivers said.

Prosecutors allege McClaflin and an unidentified partner opened a franchise of We Buy Ugly Houses in December 2005 with the idea of using investor funds to purchase and renovate distressed houses, then sell them at a profit. Wallowing in heavy debt, the partnership ended in 2011 when the partner filed for bankruptcy. McClaflin started her own company — Homesource Partners — and dropped the franchise but kept the business model.

We Buy Ugly Houses has independent franchisees across the country, including in Denver and Fort Collins, and are not tied to McClaflin.

Between 2011 and 2017, McClaflin told clients that her company would buy ugly homes at 80 percent of their “as is” value, and her team of contractors would repair the homes and sell them for a profit of up to 15 percent in as little as 30 days, according to the news release written by Troyer’s spokesman, Jeff Dorschner.

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McClaflin sometimes did not tell investors when “their” property sold and did not return the investor’s principal upon that sale as promised, the news release says.

Starting in 2013, Homesource Partner’s debt had grown too high and the interest payments owed to investors far exceeded the gross profits earned by Homesource Partners. But McClaflin continued recruiting investors.

A steady flow of investor funds kept Homesource Partners operating, said IRS Special Agent In Charge Steven Osborne, who oversees criminal investigations in Colorado.

“Financial fraud schemes are often described as a house of cards,” Osborne said. “The underlying structure can fall apart at any time and expose the individuals responsible.”

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