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This article was first published in May 2006 to warn potential investors to be cautious about real estate investments. Hundreds of investors have actually signed up with us and are involved in a joint legal battle, but many more, including many of the leading banks that are now partially state-owned, have engaged in hundreds more bad deals and are running into the millions !
For those of you who saw the Sunday Times front-page article “Buy To Let Property Fraud Hits Thousands” in the week leading up to Christmas 2008, it will be the latest findings of this misdemeanor and the losses and suffering that this widespread real estate fraud entails caused the investors and the investors have seen f their families.
For many people, it is a huge leap of faith to take the plunge and invest in real estate for their future. Imagine how to feel if your investment turns out to be an investment scam?
Is there a way out of the investment property fraud?
The first thing to realize is that when you feel cheated on you probably won’t be the only one. It can feel like this, and you can feel alone, stupid, betrayed, and angry, or embarrassed – some of the most common emotions you experience during this time.
But these are the emotions that will get crooked minded developers thinking. They hope you feel “drained” and just don’t want to tell anyone. In fact, with a clever scam, it doesn’t seem to tell anything anyway, except your gut instinct, until you start digging.
But indolence is exactly what these criminals (and they are usually criminals) want you to think. In these circumstances, you must not keep everything to yourself. You have to try to find out if other people have gotten into a similar situation. You never know you could be one in ten, twenty, or hundreds of similar souls, and if you can find and relate to groups like this, you have a much better chance of retaliation, believe me.
I got involved in such an investment property scam about 18 months ago (I know – gasp – shock – horrify – and I’m selling investment property!). For several months I thought I was going crazy, I couldn’t understand why I couldn’t get tenants anywhere near the prices I was expecting or renting at all. This was the first reveal as I was promised the properties would be fully let when completed. At least that’s what the brochures and the sales manager said at the presentation I attended. And I had bought a number of these “beauties”, each of which was reportedly fully rented and was making me about £ 500 rental surplus every month.
Then I began to investigate the situation more thoroughly and I soon realized the problem. It is a highly complex investment property scam!
As a seasoned real estate investor and investment property reseller, how am I involved in an investment property fraud?
I’ll tell you how – maybe Criminal Intent?
What I’ve done is record the events that actually happened to my investments, which I’ve now learned to have well over 100 similar incidents.
Before making this investment, or even recommending it to others, which consisted of a series of renovated homes converted into Houses of Multiple Occupation (HMOs), I researched the company thoroughly. (Note that the company and location of these houses are not mentioned in this report for legal reasons). I’ve looked at at least 6 of their property conversions, spoken to their landlords, and spoken to several existing investors. I took my former business partner with me to check my findings. I was also comforted by the fact that these people spent (and are still spending) a lot of money on the major national newspapers (Sunday Times, Telegraph, etc.) and produced a slew of glossy brochures that matched their claims.
Some of their larger off-plan construction projects have also been featured in a two-page spread in one of the UK’s leading real estate magazines. In addition, they had (and still have) very large exhibition stands at a number of the UK’s leading real estate shows.
Everything seemed to stack up, so I bought a number of them and encouraged my friends, close family, and business colleagues to buy a few too. I paid my reservation fees and just settled down to wait for them to complete and generate some excess cash every month.
The first event in the chain of things was that the houses were finished very late, so we ran the risk of losing student numbers in the fall of 2005, but the investment still seemed pretty good and we had up anyway then all contracts exchanged. And of course we all thought we had at least an 11% stake in each property, plus the usual 4-6% year-over-year growth. When asked if we could inspect it before completion we were also told “sorry, as you have tenants you need to give at least 48 hours notice”. Then when we tried to make an appointment, 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 …
These houses were all sold under the premise ‘all contact for services from a single source for the investor – use our services for sales, recommended lawyers, in-house brokers, mortgages, rental management from your own company’ – you know, a really good one Package for the armchair investor. ‘
Problem 1 was that the houses were not fully rented when they were completed and in many cases the tenants “melted away” after the contract was signed. So much for the promises in the builders’ glosses that the tenants are nearing completion, with mutual guarantees, so there are practically no notice periods, no problems with the rent, like one tenant failing to pay, which means cross guarantees that the other tenants would stick.
Also, in some cases (luckily not mine) there was no renovation at all and the developers then had the audacity of charging £ 3,000 per property to fix those that had not been carried out. Then there were big problems with the construction work. Basements would flood, not because of rain (although this has happened on a number of occasions where the basements have not been properly “refueled”), but because of faulty piping. But if of course we had a 12-month guarantee contract – right? Not correct?
Even after constant phone calls and emails, the management company failed to send us proper records, and did not inform us of maintenance issues, tenant departures, tenants who did not pay rent on time – all the usual things one was used to from a “real” management company who charged 10% of the rent as fees.
And the hassle I had about moving the management contracts to another company is a different story for another day to be told.
Okay, this just seemed like a rogue and a total lack of proper administration by the department that manages 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 would have thought they would have solved the problems. Law? Not correct!
Because of all of these issues, I had since started doing very extensive research on this company and the methods used to package the sale of these homes.
It then found that most of these houses had been bought by the developer about three to four months before the sale, some in the morning for about £ 90,000 – in the words of the developer – run-down houses that had been completely gutted; 3 bed properties where basements have been opened up and or loft conversions have been made so that up to 2, 3 or even 4 more bedrooms have been added and supposedly remodeled to the highest standards for HMO purposes, and these have been sent to us for about £. sells 249,950 up to £ 325,000 and above.
Ding Ding Ding – alarm bells …
Why were we so happy to buy them – because they all came with RICS (Royal Institute of Chartered Surveyors) ratings on property value and expected rental income.
All of this corresponded to the requirements of the developer.
But when we noticed several investors from other groups were repossessing some of these similar houses – because they couldn’t get the rent and consequently couldn’t afford the mortgage, and the valuations were all around £ 80,000 to £ 100,000 below THE VALUE THE MORTGAGE!
Our own research then revealed that many of these properties were valued by the same company and properties from the same developer were used on the valuation form to compare.
We have come across cases where the mortgages they were granted: –
· Does not apply to apartment buildings – why was a loan granted?
· Would not have been granted if the banks had known that the properties had already been rented out and had not been sold as vacant. So why was a mortgage granted?
· Would not have been granted if the valuation of the rent had not been realistic. Loans were granted on the basis of false information. If the investor had entered the rental numbers, they would likely have been charged with mortgage fraud.
· Would not have given a loan (especially interest only) if the real value had been known.
· Wouldn’t have granted 85% of the accepted value if they had known a gift deposit was being paid (along with legal and other developer fees). The lawyer and the broker knew why wasn’t the lender informed?
Now that I like to call myself an “accomplished investor”, knowing that free deposits, cashbacks etc. do happen and often set the real estate market in motion, I had told my lawyers what the side business was, the broker told me what the deal was so no problem huh?
Wrong … I then learn that neither the attorney (s) nor the broker informed the lender.
At some point something was wrong here.
The question is – Was it the fault of: –
· The developer?
· The lawyer?
· The agent?
· The investor?
In a society where the regulations for lawyers, brokers, mortgage loans and appraisers seem pretty strict, I have to say that something is wrong here, where the unfortunate individual investor can fall into such an unregulated trap!
If you feel like you’ve been involved in such an investment property scam and want to see if others are in the same boat, please visit my blog for your opinion and even add your name to one structured list if you want so that we can build a database of similar events that can be easily analyzed to identify trends or passed to ‘watchdog’ for example.
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Source by Geoff Morris