Don't Get Stung | 7 UK Property Scams and How you can Avoid Them
Avoid getting stung on your next property deal by understanding exactly how property scams work and fraudsters operate in the industry. Today we look at seven different ways that unsuspecting investors can be conned out of their hard-won capital and at what it will take to make sure it doesn't happen to you.
Property Scam # 1 - Inflated Rental Yield
The first one we'll look at is all about risk and reward.
If the return on a property is too good to be true, then that's a sign that the deal is not all that it seems.
To give you some idea... When we're looking at potential property deals we follow some general rules of thumb regarding the returns that we would expect.
We try and target buy to lets that are around 8% rental yields where we can. Now, some city-centre locations might offer lower yields than that. These types of property might be more expensive than other types and yields can be as low as 6%. That isn't to say you should avoid city centres - if you like the area and the tenant profile you can attract then you should go for it.
For more information see our article on how to calculate the rental yield of a buy-to-let.
Houses In Multiple Occupation (HMO)
Development projects for a house in multiple occupation, typically, you expect around 12%+ gross rental yield. This is a number we generally look for across the board. Now, you'll get lower value areas that will give you much higher yields than that. But, our focus has always been to try and invest in quality locations. That's why we target that 12% range.
Typically, for development projects, we try and target about a 20% return on investment. That's a 20% return after all the refurbishment costs and the costs involved in buying.
Be Suspicious Of High Yields
We've included these numbers as a rough guide as to what you can expect from property investment.
There are scams out there in the property industry and some of them involve the promise of wildly inflated returns. Most often this is an appeal to greed, where someone is trying to get someone to invest based on the promise of unrealistic, and therefore very attractive returns.
Don't fall for it...
That's why we say examine the fundamentals, do your due diligence and look at everything. This includes looking at ALL the numbers involved - and not just the yield.
You will need to ask yourself: Is this legitimate? Do I have an exit strategy? Does this property make sense when compared to the local area?
Whether it's bricks and mortar, yield value, a ready-to-go HMO or commercial property make sure you look carefully at the figures. If something looks there like it's been inflated or is much higher than other similar properties you've looked at, then it could be a sign that something isn't quite right.
Property Scam # 2 - Joint Ventures
Number two is the scams that can come into play when your working with joint ventures.
Certainly, not all joint ventures are bad, far from it. We do joint ventures with our properties; with clients, partners, friends, family. Often joint ventures can work really well. We also know customers, clients and have colleagues that work and joint ventures and been very successful at doing so.
But, some joint ventures aren't structured correctly from the beginning. Others might be structured to scam you.
What's important is that first off you understand exactly how the property deal is coming together. You must also make sure that you don't skip speaking to your accountant and your solicitor. You need to make sure they are both onboard and that everyone involved has a clear, overall picture of the deal.
When we enter into joint ventures with our clients very often it is the client that owns the property and the property is in their name. This is because our clients are putting all the funds into the property and therefore need 100% security over that investment.
However, some companies structure their joint ventures with their clients slightly differently.
Some will typically ask the client to send them the money. Now, this can be a dangerous thing for the client to do as then they lose a lot of control over the investment. Obviously, the funds will go into a bank account and will be secure in that regard, but not being a shareholder of the company that owns the account, to an extent the client loses control of that cash.
So, if you are doing joint ventures - and they can be very lucrative - it's important that they are structured right and such a way as to retain control over your money.
Again, speak to your solicitor and speak to your accountant. Make sure the structure of that joint venture is going to work for you. Ultimately you want to structure it so that you have control. And you want it in your own name or owned by a company that you own in turn.
Property Scam # 3 - Avoid Large Reservation Charges
Number three is all about deposits. When you reserve a property you want to buy, whether it's with an investment company or some other source, there will be some process requiring a deposit.
For every deal, this can be different and for every deal, you need to know how it is going to work.
Firstly, of course, you need to know what amount is expected of you for you to reserve the property. But, you also need to know how the deposit is to be paid; how the payment is to structured and secured; and most importantly how much of it goes towards the deal itself (if any).
But, there's more. It's not just about making sure you know how the deposit is structure but making sure you know why it is structured this way.
In the property industry, you sometimes see companies (fly-by-nights) that are set up only to disappear six months later. What they are doing is a scam.
The trick that they are pulling is to charge large deposits to customers who want to reserve a property. The chances are that the property itself does not exist but they convince their clients that, for whatever reason, it's a great deal. They then take the deposit and after a while, disappear completely.
To avoid falling for this you just need to know how much is too much...
Knowing How Much you Should be Paying
If you are reserving a property there will be a reservation charge to pay, an amount to reserve the property. This reservation charge might involve paying in stages. There is another way as well which is something called an exchange with delayed completion. This involves paying a higher amount up-front to reserve the property via a solicitor but let's look at the reservation fee first.
Reservation fees shouldn't be that high...
With reservation charges, there is an industry-standard at play here. Average reservations fees for the industry are typically between £500 to £1,000. If the amount is within that range you should be fine. If the fee is a lot higher than this then you need to start asking questions. It's not that you are definitely being duped but it is very important that you get to understand exactly what it is that is going on.
Exchange with Delayed Completion
If you're doing an exchange with delayed completion it's a different process to paying a simple reservation charge.
Some companies charge a fee directly. This means that you will have to pay them directly - under certain terms and conditions.
That's absolutely fine as long as you understand what the terms and conditions mean and also understand when, if, and under what conditions you are going to get your deposit back.
You need to know what happens if the seller pulls out of the deal. Will you get your deposit back? Is this situation even outlined in the contract? If you don't know the answers you should worry. After all, this is a situation that is completely out of your control so it wouldn't be fair or right if you were penalised if it were to happen.
So it's important to understand how the contractual arrangement around the payment of a deposit is structured and how circumstances are going to impact the arrangement.
You Need To Know Where the Deposit is Going
Are you paying the money directly to the company, into their client account? Are you paying it to a solicitor or into an escrow account?
Any of these options is, of course, fine as long as the amount is contractually covered and you are happy with the terms and conditions surrounding the payment.
Is The Company Legitimate?
Sounds obvious, but make sure that you are dealing with a legitimate company.
Ideally, they should have a good internet presence and have been around for a long time.
I'd also advise that you speak to their previous customers and look at some of their previous developments.
You want to do everything you can to check that they are an established company that isn't going to disappear after a couple of months (with your money).
So, as long as it's an established company, as long as the deposit structure is right, as long as the amount they are asking seems right, as long as your deposit is secure and you are happy with the terms and conditions of the contract, then you should be protected.
Property Scam # 4 - Inflated Property Value
Number four is again looking for inflated figures.
In point number one we looked at inflated ROI (return on investment) and more specifically at rental yield. Here we are going to look at inflated valuations for the property itself and how you can check the authenticity of a valuation by making market comparisons yourself.
Overvalued property is most often a problem for people looking at investing in housing stock overseas. Obviously, it is much harder for investors to understand local valuations when they are not familiar with the area much less the country. Of course, there are going to be unscrupulous people ready to exploit this. But, an overvalued property is a problem for UK based investors, investing in the UK, as well.
To avoid falling for this you need to look carefully at figures for the local area and make your comparisons. If the value of the property is wildly different from others in the area there might be a problem. It's important to compare like with like on the market - and not just the sale values, you want to look at rental values as well.
So, you might see a property for sale with an anticipated rental amount of £600/month but the local market rent is just £500/month. This is certainly a very bad sign for the deal.
If the predicted rental value is a lot higher than those others on the market - and there appears to be no good reason for it - then when you come to rent it out you can expect to make the same on rent as those other properties. In short, your income is going to be a lot less than you anticipated.
Overvaluing the value of a property is a scam that unfortunately some companies do try and pull. Whether it's the property sale price or the anticipated rental return some companies like to massage the numbers either to make more themselves or make the deal seem more attractive.
It's very important to do your own due diligence.
You need to speak to the local agents and local letting agents. Do your own comparisons with other properties on the market; those currently for sale or on to rent and those that have recently sold or been rented out as well.
Property Scam # 5 - Refurbishment 'Package Deals'
Some companies offer refurbishment properties as a 'package' meaning that they are selling both the property and the refurbishment together.
There isn't anything wrong in pursuing this kind of deal, or anything wrong with this as an investment strategy, but there are a few scams in this part of the industry.
As always the crucial thing when looking at a deal of this nature is to understand both how the deal is being presented and how it is structured. Specifically, you will need to know the type of refurbishment that is being done, how much you are paying for it and when you will need to pay.
Some companies charge an up-front fee. So you'll be charged upfront for their sourcing of the property and the refurbishment. Now, I'm sure I don't need to tell you that refurbishment costs can be very high. If could be 20k, or 40, that you are being asked to pay out on day one.
Paying out amounts like this up-front can put you in a very precarious, even dangerous, position.
We say don't do it. You should not be in a position where you are paying for a full refurbishment on day one on any property. You should only take on projects where the payments are in stages and there is no real reason why you should ever have to pay for all refurbishment costs at the start.
With conversions, with smaller refurbishments, with large ones, even with new build developments paying in stages is the norm.
So, if a company says that they require all the money up-front there is some reason to be concerned.
At least this would be reason enough to start asking some serious questions of the company so that you can try and understand why they are structuring their payments in this way.
When we work with our refurbishment company we typically pay for each stage, making payments once a week. So, our refurbishment team will do a week's work. We will assess that work, say twice a week. Then after signing off on that week's work, we will make a payment.
(Of course, by doing things this way we have to make sure that we pay very promptly as we want to keep our team on site.)
But the important thing to remember here that staged payments are the norm in the industry. If you are asked for a lump sum upfront it could be a sign that it is a scam.
It's very important that you pay quickly to make sure you keep the development and refurbishment team on site, but stage payments should be the norm within the industry. Certainly, look at that if you are looking at refurbishment or conversion type projects.
Property Scam # 6 - Land Deals
Number six involves land. Land scams are quite common and more so in times of recession or growth when people are looking for alternative investment possibilities - something a bit different to the norm.
What you find are a few companies that set up to sell land for development; land, where you could build a property or develop at some point in the future.
It's very speculative insofar as the land won't come with planning permission. So you might buy with the intention of holding the land for 5, 10, 15 years at which point you'd look to get planning to develop on it.
Where this turns into a scam is when these companies are actually selling protected greenbelt land on which you probably have no hope of ever being able to build.
And of course, this type of scam can go further with investors being duped into buying land without planning permission at a higher (or a much higher) price than the land should be with planning permission.
This scam is all about the pitch. These companies will present the land they have to sell by trying to sell you on what could be built on it. Say, it's an apartment building, a housing estate, a single house - as if developing the land is a done deal. They will happily sell you the land at the value of land with planning permission in place when if fact no such permissions exist.
It goes without saying that land with planning permission is worth considerably more than land without.
Planning Permission can be Very Hard to Get
If you are looking at land deals you need to really make sure you understand what the cost - per acre or hectare - really is. You need to know what it is worth with planning permission and, you need to know whether getting planning permission is going to even be possible.
You need to have done your homework, your research, your sums. You need to know whether the investment is really worth it.
It will often be easier in the long run to only look at land with planning permission in place. By doing that you cut a lot of the risk from the investment.
But, if you are happy with the risk then at the minimum you need to know the local area. You need to know the value of the land without planning permission. You need to know the value of land with planning permission. And, you need to know what the likelihood is of you getting planning permission should you invest.
Property Scam # 7 - Phishing
Last on this list of property investment scams is phishing. It's a more recent scam to arrive in the property investment industry but it's serious and something that we've been speaking to our solicitor about.
It might seem strange to be talking about phishing in relation to property but it happens. In essence, all it is is when a scammer tries to pinch your personal information, your bank details, or your money... normally by luring you into a conversation by email.
Specifically, in property, what has been happening is that fraudsters hack the email accounts of solicitors and then send out an email from that account.
Transferring Money to Solicitor For House Purchase
If a client is in the process of buying a property then, of course, it would be normal for that client to send the money to their solicitor. In this scenario the fraudsters might send out an email, from the solicitor, saying that their bank details have changed.
The client then sends all the purchase money to the bank account of the fraudsters and their money is lost.
This isn't a wildly prominent scam and you shouldn't worry about it to the extent that it puts you off doing deals. But it is something you should talk to your solicitor about, particularly if you are about to transfer money. And you should certainly speak to your solicitor just before you wire them money rather than relying on email.
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