If you love a good bargain, it can be difficult to resist the siren call of an investment scheme that “guarantees” high returns with low risks. When buying property, though, it pays to be extra prudent lest you fall prey to a scam.
Words by Sebastian Haq & Winnie Tan
According to a recent survey by property consultancy firm CBRE, Singaporean investors are the most confident in Asia when it comes to property investments.
[Free Ebook] How should you invest your first $20,000?
We asked 14 Singapore finance bloggers to share what they would do if they could go back in time and invest their first $20,000. They can no longer rewind time, but you can learn from their experience and hopefully start with a better footing.
More than 70% of those surveyed said that they had intentions to invest in property abroad, citing reasons of low interest rates here and a desire to expand their portfolios beyond home ground.
Adding real estate to your portfolio can indeed be an attractive option, due to the likelihood of capital appreciation (i.e., your property increases in value) and you gaining a passive source of income from rent paid by tenants.
Like all other investments, though, property investments do come with risks.
For instance, a rise in interest rates could mean that you effectively receive less from your income streams. Or if the property turns out to be a bad investment, you might end up having to let it go at an unfavourable price, as was the case with the St Regis penthouse that was bought for $28m in 2007 and sold recently for $12.2m. (That’s an eye-popping loss of $15.8 million. Ouch.)
Property investments can also turn sour much faster than other investments such as deposits, shares and bonds. Unlike stocks listed on a stock exchange, properties are not standardised products, which means that property investment companies are subject to less stringent regulations.
This is why you need to practise due diligence before investing to avoid falling prey to property investment scams.
Property investment scam? What’s that?
Property investment scams come in a myriad of forms.
You may be approached by companies who offer to source, renovate and manage properties that will give you good returns from rental income. In reality, the properties are near-derelict and the tenants non-existent.
Or you may be offered the opportunity to buy properties that aren’t built yet at a discount. What you don’t know is that the land is agricultural, abandoned or plain unsuitable for development.
What many of these dodgy scams offer is an alluring premise: to help you “get rich quick”.
As a matter of fact, any unusually attractive offer should make you doubly cautious and prompt you to think twice about whether it’s a genuine deal or a fraudulent scam.
What should I look out for?
Before committing to any property investment, look out for these 3 red flags that should tip you off to the possibility of a scam at work.
1. The investment is risk-free. Or so the company claims.
You should be wary of any terms like “risk-free” in the context of investments. There are no free lunches when investing; there is always a level of risk involved.
If the property investment company promises extraordinarily high returns on your investment within a short period of time, you should definitely smell a rat. Just think about it: if the company were actually expecting high returns, you can bet that they are taking on some high risks as well.
Take EcoHouse for instance – the Brazilian social housing developer promised investors a 20% fixed rate of return within one year if they invested a minimum of S$49,000 per housing unit. However, its investors are now left fearing the worst, as the company suddenly suspended global operations late last year and is facing investigation in the UK and Brazil on charges of money laundering and criminal conspiracy.
2. The company’s business model seems vague, or too complex.
Watch out if your investment “manager” has trouble explaining the company’s business operations. Generally speaking, the more complex a business model is, the more scrutinising it requires on your part. If you find that the projected numbers don’t add up, or if the company doesn’t seem to have sufficient financial clout, it might be better to err on the side of caution and pass on the investment.
In 2013, as many as 600 British investors hoping to profit from the “World Cup effect” ended up losing millions of pounds investing in a land bank scam. The company in question, Pantheon Realty Consultants, sold plots in areas supposedly close to Brazilian World Cup stadiums and made vague claims that the properties would soar in value after being developed as hotels and resorts. Unfortunately, the land turned out to be almost worthless.
3. The company is a convenient one-stop shop.
One of the reasons why many investors fall prey to property scams is because they find it cumbersome having to research on their investment. But there’s no denying that thorough research is oftentimes the best way to keep yourself informed and thereby keep yourself protected against any potential scams.
If a company claims it can take care of all the facets of your investment, including mortgage broking, valuations, legal representation and financing, it is likely to be a scam. It is also likely to make you sign up on the spot and give you no time to reassess the investment.
For example, just last month, The New Paper carried a report about a group of 12 local investors who were allegedly hoodwinked by the founder of CTL Global into investing in old homes in Memphis and Indianapolis, United States. The plan seemed simple: repair the homes, rent them out, and wait for the value to go up before “flipping” them. Everything from the loans to legal letters would be taken care of, they were reassured.
Unfortunately, what seemed like convenient money has now turned into a nightmare – not only did the investors fail to receive any rent, they are now receiving letters from US lawyers threatening property foreclosure. Meanwhile, the person responsible for it all has gone AWOL.
Okay, I’ve been warned. So what exactly should I do?
Investing in property can be very fruitful and rewarding. But before you can reap the fruits of your labour, you’ll need to put in the necessary legwork.
As mentioned, be thorough when doing your research. Assess the projected retail price of your property investment by looking at comparable real estate in the area. You should also verify the broker and the company’s licenses, as well as cross-check the information against different listing sites. (Google is your best friend here.)
Don’t forget to also visit the Monetary Authority of Singapore (MAS) investor alert list to see if the company is legitimate, and only deal with companies regulated by MAS.
Secondly, make sure you get an independent valuation of the property you are about to purchase. Never be satisfied with the property marketer’s valuation only, as it is made up to sound as good as possible. Sure, an independent valuation may cost you a few hundred dollars, but it’s still relatively cheap considering the much larger sum you’re investing into the property. At least this way, you know you’re going in with your eyes open.
Additionally, you should also opt for independent legal advice. The property marketer will be able to provide you with a lawyer, but remember that that lawyer is on their payroll and will be getting a slice of the profits. There’s no guarantee they will have your best interests at heart.
What if I think I’ve been scammed?
If you think you’ve been scammed, there is unfortunately little you can do to get your money back, short of pursuing legal action.
One thing you could do is to contact the Commercial Affairs Department of the Singapore Police Force, which is in charge of investing commercial and financial crimes. This is if you have reasonable grounds to suspect the property investment company of any wrongdoing.
On a less serious note, if you receive an unsolicited sales call from an unknown person, you should report the matter to MAS immediately. From there, MAS will take regulatory or other enforcement action if warranted.
By doing so, you can play a part in alerting the public and hopefully prevent others from falling into the same trap.