Property fraud: 12 warning signs it’s a scam – part 2

PROPERTY FRAUD #7: The One-Close Sale

I hate pushy salespeople and companies. The promises are heavy and the delivery is light. They concentrate on short-term gain instead of the value of long-term relationships. There is no follow through, no commitment, and no care for the customer (saved for getting their hands on the commission from the sale to the customer). Pushy salespeople are bad news.

One-close sales enable the seller to take the money and run. Instead of allowing this to happen, deal with companies that take time to talk you through the investment opportunity and answer every one of your questions satisfactorily.

PROPERTY FRAUD #8: Off-Plan Property In Underdeveloped Areas

This is one mistake I saw happening everyday in Spain, falling into the trap of buying ‘the dream’ by investing in off-plan villas being developed in up-and-coming areas. The problem was that the area was so up-and-coming that there was next to nothing in terms of fundamentals there.

There was barely any infrastructure (the basic property investment fundamentals) that makes an area liveable − limited schools, shops, restaurants, bars, or other leisure facilities. Consequently, the rentals many of them hoped for were adversely affected. Especially in areas of Spain where so many places relied on Expats who upped and left when the jobs disappeared.

Plenty of other investors have made the same mistake; don’t become another one. Always make sure that the area in which you are investing has strong, existing fundamentals, and never rely on the developer’s promises that ‘they are on their way’.

PROPERTY FRAUD #9: Be certain that the security is real

You might find that sales literature insists that all steps have been taken to ensure security to investors. When it comes to it, though, the investor finds that no such security was ever in place, or that it wasn’t really what was sold.

Don’t ever rely on the developer or promoter to tell the truth, the whole truth, and nothing but the truth. There are some that are ethical, of course, but always be a little sceptical. Paying your own solicitor a couple of hundred pounds to give documents and legal agreements associated with your investment property a once-over is a worthwhile investment in itself.

One other thing: never rely on the developer or promoter’s own solicitor to provide impartial advice – he or she acts for the provider, not you.

PROPERTY FRAUD #10: Never Invest In An Opportunity Without An Exit Strategy

Getting into an investment is one thing, but getting out of it is another thing altogether – especially when it comes to property. Whatever your investment, always buy with an exit strategy in place.

I once took a sales call from a company selling student accommodation. I let the sales agent discuss the opportunity for nearly twenty minutes. Everything he said was positive, as you would probably expect. Then I asked him, “What happens when I want to sell?” He said, “Oh don’t worry about that; the yield is so high that lots of people will be interested in buying it.”

It sounded like a blatant lie to me, so I spent the next hour or two phoning around letting agents in the area and asking about rental and resale values. Not a single one said that they would be able to let the accommodation out or sell it for me; at least, not at the numbers the agent was quoting. Eventually I found one that gave me the number of a company in the area that might be interested in buying the property.

I called this company, and they made me an offer there and then… of £39,000. I pressed him about the valuation discrepancy, and he simply said that £39,000 was the going rate for resales, and that I’d find it difficult to get an offer from anywhere else.

They wouldn’t pay a penny more. I was being offered the property at £79,000. I think I heard the person I was speaking to fall off his chair when I told him.

The moral is always ensure you have an exit strategy, both for a fast exit (if you need cash quickly) and in the longer term (which may be more in line with your investment strategy).

Remember also that having an exit strategy is different to using it. Between 2002 and 2014, I only sold one property, yet had a viable and workable exit strategy on every single investment I made.

PROPERTY FRAUD #11: Small Schemes That Deliver And Then Promote Larger Investment

When I was younger, in my late teens and early twenties, I was in the military with a salary of around $2,000 Aussie dollars per month. Even back then, I was always looking for ways to boost my income, and I came across an idea that was called The Aeroplane Game. It was simple, and a guaranteed money-spinner.

The aeroplane had nine seats from front to back, the first of which belonged to the pilot. For a payment of $250, you could book a seat on the aeroplane – the back seat. It was then your turn to sell the back seat to another for $250, and when you did so everyone on the plane moved forward one row. All the money collected ($2,000) would be given to the pilot, with the pilot then getting off the plane and being replaced by the player behind. The pilot can cut and run, or re-join at the back of the plane (having paid another $250 to do so, of course).

I was young and naive back then, and only realised years later that what I was actually taking part in was a mini-pyramid scheme. Sure, it felt great to receive a month’s salary when I was in the pilot’s seat, especially as I had only put in $250. The problem comes, of course, when the game collapses: everyone behind the pilot loses their money. A pyramid like this is simply a Ponzi in disguise.

Ponzi schemes always appear successful at the start. The promised profits are forthcoming, and the players get paid out. But eventually, when the merry-go-round stops spinning, the whole thing collapses and everyone left in the pyramid loses their investment.

Often, it’s hard to spot these schemes. They are accompanied by glossy brochures, investor testimonials, motivational speakers promoting the product – even celebrities are persuaded to become involved in the marketing process.

There are, however, one or two classic clues that a scheme is a fledgling Ponzi. For example, a common tactic used to pull investors on board is to entice them to start small and see for themselves the big ‘guaranteed’ profits. When the investor has been paid out this small win, his or her confidence grows and it becomes easy for the Ponzi scheme controller to sell the investor a bigger slice of the pie. Eventually the investor is fully invested, usually just before the whole thing implodes and the investor’s life savings disappear.

Ponzi schemes pray on property investor emotions, especially greed, and the majority of people find it hard not to invest. Proof that the scheme works serves to remove fear and scepticism. Yet it is this scepticism that is the logical strategy that will ensure you do what you should: question everything. Sales people will try to make you feel foolish if you question the guaranteed profitability of the scheme – after all, they have all the evidence to show it works, and works well. You may even have made a great return on that initial test investment. Question it again, do some more research, and remain ruled by logic, not emotion. And remember – if it looks too good to be true, it probably is.

PROPERTY FRAUD #12: Super Slick Marketing And ‘No-Risk’ Offers

With more than 20 years of experience in the industry, as you can imagine I’ve seen a huge range of packaged deals marketed. Glossy brochures and slick, scripted sales routines that have been rehearsed hundreds of times, promote claims that I cannot work out. Neither can I work out how the returns can be made (never mind guaranteed) and nor can I understand how the business model can be funded.

These no-risk offers are hard enough to maintain on a smaller basis, but as the business gets bigger and moves toward a long-term model, impossibility sets in. These types of scams are the ones that start out as a bona fide business, but the fragility of the business model literally forces the owner to evolve the business into a scam.

If you understand that businesses that set the bar too high with expectations that will be difficult to maintain are simply bad business models, then you’ll learn to avoid these.

Now, I’m not saying that super slick marketing per se is a red light in itself; but you must separate the marketing of an investment from the fundamentals of that investment. The business plan needs to make sense in the long term, and not just as a single investment opportunity.

You get sold the idea of investing with all the fancy marketing materials and smooth sales patter; but once the investment is made, all that marketing schmooze disappears and the fact is that the business model has to make money for you to make money. Don’t look at the marketing brochures without looking deeper. You want to find a solid business plan and an ethical team behind those glossy pages.

Read the full book…

Having read the above, you might be forgiven if you now think that all property developers and investment schemes are bogus. They’re not, but the fact that you now have a level of scepticism flowing within your investment thinking is a good thing. With a little cynical thinking, you’ll help to keep your emotional side in check and examine each investment opportunity in the right way. This is a healthy investment attitude.

Every opportunity that has the potential to make a profit carries risk. Mitigating that risk is a skill that the provider should have and you will need to learn. These dirty dozen signs of property scams will help you to sidestep the opportunities that will end badly for all their investors. By taking a healthily sceptical approach to property investing, you’ll soon be asking the right questions and doing the right research to make sure that the investment and underlying business is not a scam in disguise. You’ll make solid investments that provide above-average returns as you build a substantial property portfolio.

Bona fide investment companies have ethical business values. They employ and train salespeople to work with clients over the long term. They don’t look for a one-close sale, but instead build relationships, get to know investors, and work together to build a long-term market-beating investment.

Finally, remember those scam-beating two rules that this report opened with:

  • If something appears too good to be true, then it probably is
  • Become cynical, and investigate every opportunity before investing

Live with passion and fun,
Brett Alegre-Wood

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Brett Alegre-Wood
June 7, 2016

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