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 signed up with us and are engaging in joint legal action, but many more, including many major banks, some now in government hands, have engaged in hundreds more bad deals and counting. costs in millions!
For those of you who saw the Sunday Times front page story ‘Buy to Let Real Estate Fraud Hits Thousands’ the week before Christmas 2008 you will have seen the latest results of that misdemeanor, and the loss and heartache that this fraud Widespread real estate had on investors and their families.
For many people, taking the plunge and investing in a property for their future is a huge 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’re probably not alone. You may feel like this, and you may feel lonely, stupid, cheated, and angry or embarrassed, some of the common emotions you are feeling 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 can feel like there’s nothing to tell anyway, other than your gut instinct, 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 it all to yourself. You should try to find out if other people have been deceived in 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 selling 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 was expecting, or even get tenants at all. 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 about £500 each in monthly rent surplus.
I then began to investigate the situation further and soon identified the problem. It’s 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 chronicle the events that actually happened with my investments, of which I discovered that there were over 100 similar incidents.
Before entering into this investment, or even recommending it to others, which consisted of a series of converted houses converted 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 their property conversions, talked to their 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 consoled by the fact that these people were spending (and continue to spend) a lot of money on the big national newspapers (Sunday Times, Telegraph, etc.) claim (es.
Some of his 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 exhibition stands at several of the major UK property shows.
Everything seemed to add up so I bought several and encouraged my friends, close family and business colleagues to buy some as well. I paid my reservation fees and simply set out to wait for them to complete and start generating surplus cash each month.
The first event in the chain of things was that the houses took so long to complete that we were in danger of losing student admission for the fall of 2005, but the investment still seemed 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 or more notice.” Then when we tried to make appointments, no one could find the keys… Where were my alarm bells? I hear you ask: obviously on 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, internal brokers, mortgages, lease management of our own company’, you know, really good package for the armchair investor.’
Problem 1 was that the houses were not fully rented out upon completion and in many cases the tenants seemed to “vanish” after the contracts were signed. So much for the promises made in the developers’ glosses that tenants would be in place before completion, cross-guaranteed so there would be virtually no void periods, no rent issues, like a tenant not paying, cross guarantees meant the other tenants would be liable.
Also, in some cases (not mine thankfully) no renovation work had been carried out, and the developers had the nerve to ask for £3,000 per property to fix the ones that hadn’t been done. Then, major problems began to arise with the construction work. Basements would flood, not due to rain (although this happened on a number of occasions where basements had not been ‘tanked’ properly), but due to 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 failed to send us proper records and kept us informed of maintenance issues, tenants leaving, tenants not paying rent on time, all the standard stuff. that one was accustomed to expect. from a ‘proper’ management company that 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 rogue construction work and a total lack of proper management by the department that handles the leases. Not the kind of service you would expect from a company that does so much national marketing but of course being such a high profile company I would have thought they would have fixed the issues. Right? Wrong!
So because of all these issues, I had already started doing very intensive research on this company and the methods that are used to package the sale of these houses.
It was later learned that most of these houses had been purchased by the developer some three or four months before being sold, 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, thus adding up to 2, 3, or even 4 more bedrooms, and purportedly converted to higher standards for HMO purposes, and we they sold for around £249,950 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 on the value of the property 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 rent and consequently unable to pay the mortgage, and valuations hovered between £80,000 and £100,000 DOWN THE MORTGAGE VALUE!
Our own investigations later discovered that many of these properties had been appraised by the same company and, for comparison, had used properties from the same developer on the appraisal form.
We have come across cases in which the mortgages that were granted: –
· They were not valid for multi-occupancy housing, so why was a loan made?
· 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 not realistic. Therefore, the loans were granted with incorrect information. If the investor had put up the rent figures, he probably would have done it for mortgage fraud.
I would not have made a loan (particularly interest only) if the actual valuation figure had been known.
· They would not have awarded 85% of the assumed value if they had known that a gift deposit was being paid (along with legal and other fees by the developer). The attorney was aware, as was the broker, so how come the lender was not 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 kick the real estate market into motion, i told my attorney(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 attorney 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, mortgage loans and securities seem quite strict, I must say that I think something is wrong here, where the unlucky individual investor can fall into such an unregulated trap!
If you think you have been involved in such an investment property scam and would like to see if there are others 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.