How to Avoid an Investment Property Scam
This article was first published in May 2006 as a warning to potential investors to be careful when committing to real estate investments. Hundreds of investors actually registered with us and are engaging in joint legal action, but many more, including many major banks, some now in government hands, have been involved in hundreds more bad deals and are counting. costs in millions!
For those of you who saw the Sunday Times cover story ‘Buy to let property fraud hits thousands’ the week before Christmas 2008 you will have seen the latest results of that petty crime, and the loss and heartbreak this fraud widespread real estate had on investors and f their families.
For many people, taking the plunge and investing in a property for their future is a great leap of faith. Imagine how they must feel if their investment turns out to be an investment property scam?
Is there a way to get out of any investment property scam?
The first thing to realize is that if you feel like you’ve been scammed, you probably aren’t the only one. You may feel this way, and you may feel lonely, stupid, cheated, and angry or ashamed, some of the common emotions you feel right now.
But these are the emotions that developers with twisted minds will encourage you to think about. They expect you to feel ‘cheated’ and just don’t want to tell anyone. In fact, with a clever scam, it might seem like there’s nothing to count on anyway, other than your gut, until you start digging.
But inertia is just what these criminals (and they usually are criminals) want you to think. In these circumstances, you should not keep everything in yourself. You should try to find out if other people have been tricked into a similar situation. You never know, you may be one of ten, twenty, or hundreds of similar souls, and if you can find and identify with such groups, you will have a much better chance of getting retribution, believe me.
I got caught up in an investment property scam about 18 months ago (I know, gasp, shock, horror, and I sell investment property!). For a few months I thought I was going crazy, I couldn’t understand why I couldn’t get tenants at the prices I expected, or even get tenants. This was the first revelation, as I had been promised that the properties would be fully rented upon completion. Well, at least that’s what the brochures said, as well as the sales manager at the presentation I attended. And I had bought several of these ‘beauties’, each supposedly rented out in full and bringing me around £500 each in rent surplus per month.
I then began to investigate the situation further and soon identified the problem. It is a highly complex investment property scam!
So how did I, an experienced real estate investor and investment property reseller, get involved in an investment property scam?
I’ll tell you how, maybe Criminal Intent?
What I have done is chronicled the events that actually occurred with my investments, of which I found out that there were over 100 similar incidents.
Before going into this investment, or even recommending it to others, which consisted of a series of converted houses turned into student HMOs (Multiple Occupancy Houses), I thoroughly researched the company. (Note that the company and location of these houses are not mentioned in this report for legal reasons.) I’ve reviewed at least 6 of your property conversions, talked to your rental people, and talked to several existing investors. I took my business partner at the time with me to verify my findings. I was also comforted by the fact that these people were spending (and are still spending) a lot of money on the big national newspapers (Sunday Times, Telegraph etc.) claim (es.
Some of their larger off-plan developments were also featured in a two-page article in one of the UK’s leading property magazines. Not only that, but they had (and still have) very large display stands at several of the major UK property shows.
Everything seemed to add up, so I bought several and encouraged my friends, close family members, and business colleagues to buy a few too. I paid my reservation fees and just set out to wait for them to be completed and start generating surplus cash each month.
The first event in the chain of things was that the houses took a long time to complete, so we were in danger of losing student intake for the fall of 2005, but the investment still looked pretty good, and by then anyway we had all exchanged contracts. . And of course we all thought we had at least an 11% equity stake in each property, plus the usual 4-6% growth from last year. Also, when asked if we could inspect them prior to completion, we were told, “Sorry, since you have tenants in them, you need to give 48+ hours’ notice.” Then when we tried to make appointments no one could find the keys… where were my alarm bells? I hear you ask: Obviously in silent mode!
But then the dirt really started to rise to the surface…
All these houses were sold under the premise of ‘All contacts for services under one roof for the investor – use our sales services, recommended lawyers, in-house brokers, mortgages, lease management from our own company’, you know, really good package for the armchair investor.’
Problem 1 was that the houses were not fully rented upon completion and in many cases the tenants seemed to “fade out” after the leases were signed. So much for the promises made in the developers’ glossaries that tenants would be in place before completion, with cross-assurances for virtually no void periods, no issues with rent, like a tenant not paying, cross-guarantees meant that the other tenants would be liable.
Also, in some cases (not mine thankfully) no renovation work had been carried out at all, and the developers had the nerve to ask for £3,000 per property to fix those that hadn’t been done. Then, major problems began to arise with the construction work. The basements would flood, not because of the rain (although this happened on several occasions where the basements had not been ‘tanked’ properly), but because of faulty plumbing, but if we had a 12 month warranty contract, would we? TRUE? Wrong?
Even after constant phone calls and emails, the management company didn’t send us proper records and didn’t keep us informed about maintenance issues, tenants leaving, tenants not paying rent on time, all the standard sorts of things. that one was accustomed to expect. from a ‘proper’ management company who charged 10% of the rent as a fee.
And the hassle I had moving management agreements to another company is another story for another day when it can be told.
Ok so this seemed like a rogue construction job and a complete lack of proper management by the department that handles the leases. Not the kind of service you’d expect from a company that does so much marketing nationally, but of course being such a high profile company I would have thought they would have ironed out the kinks. Right? Wrong!
So because of all these issues, I had already started doing some very intensive research on this company and the methods that are used to package the sale of these houses.
It later emerged that most of these houses had been bought by the developer some three or four months before selling them, some the morning before, for around £90,000, in the words of the developers, derelict houses that were totally destroyed; 3-bedroom properties that had basements opened up or roof conversions done, adding up to 2, 3, or even 4 more bedrooms, and supposedly converted to the highest standards for HMO purposes, and we they sold for around £249,950 up to £325,000 and up.
Ding Ding Ding – Alarm bells…
Why were we so happy to buy them? Because they all came with RICS (Royal Institute of Chartered Surveyors) valuations of property value and anticipated rental income.
All of which matched the developer’s claims.
But when we realized that a number of investors from other groups were repossessing some of these similar houses, as they were not receiving the rent and consequently could not pay the mortgage, and valuations were in the range of £80,000-£100,000 DOWN THE MORTGAGE VALUE!
Our own investigations later found that many of these properties had been appraised by the same company and, for comparison, had used properties from the same developer in the appraisal form.
We have come across cases where the mortgages that were granted:-
· They were not valid for multi-occupancy dwellings, so why was a loan given?
· They would not have been granted if the banks had known that the properties were already leased and not sold as vacant possession. So why was a mortgage granted?
It would not have been granted if the rental valuation was unrealistic. Therefore, the loans were granted with incorrect information. If the investor had put in the rental figures, he probably would have done so for mortgage fraud.
I would not have made a loan (especially interest only) if the actual valuation figure had been known.
· They would not have awarded 85% of the assumed value if they knew a gift deposit was being paid (along with legal and other developer fees). The attorney was aware, as was the broker, so how come the lender wasn’t informed?
Now, as I like to think of myself as a ‘smart investor’, knowing that gifted deposits, cash back etc. they happen and quite often they propel the real estate market in motion, i told my lawyer(s) what the extra deal was, the broker told me what the deal was, so no problem right?
Wrong… Then I find out that neither the lawyer nor the broker had informed the lender.
Somewhere along the lines, something was wrong here.
The question is – Was it the fault of: –
· The Attorney?
In a society where regulations covering lawyers, brokers, home loans, and securities seem pretty stringent, I have to say I think something is wrong here, where the unfortunate individual investor can fall into such an unregulated trap!
If you think you’ve been involved in such an investment property scam and would like to see if others are in the same boat, please visit my blog where you can voice your opinion and even add your name to a structured list if we want so we can create a database of similar events that can be easily analyzed for trends or ‘watchdog’, for example.