Property Investment Scams
This week I received news that yet another company which attracted private investor funds to help fund property developments has been put into liquidation and according to the statement of affairs on the Companies House website, several private investors stand to lose considerable sums of money. Is this another example of property investment scams?
This is the fourth or fifth such liquidation of firms of this nature that I am aware of in the last 18 months and it is simply staggering the sums of private investor money which are disappearing without trace whilst the organisers of the schemes seem to be able to hang on to their Aston Martins or Ferraris!
Accordingly, this month I urge readers to undertake significant and thorough due diligence before investing with any such firms and would imagine that such checks would include the following:
- What particular development would your money be used to fund? Is it a strategy and area which should result in good growth or return or is it of a far more speculative nature? By this, as an example, I would say that three bedroom family homes in established residential areas should be less risk than investing in student rental hubs where there is a far more limited resale market and lack of comparable sales data.
- How much of their own money are the firm who want you to invest putting in themselves? I think it is of paramount importance that they have an appropriate level of ‘skin in the game’. If they have risked little of their own money, ask yourself why not.
- Why are they wanting private investor finance rather than funding the project through more traditional means such as a bank or existing cash reserves?
- Is the site and any buildings on the site owned by the same company that you are being asked to invest with? Assuming it is, will your financial contribution result in a charge being registered over the site? If not why not?
- What level of experience has the development company in delivering projects on time and on budget or even delivering projects at all? It is not sufficient just to ask them whether they are any good but to drill down and get some solid proof that they have delivered in the past. It is not for you to pay for their training!
- Independently verify any financial data that they provide you. Check that the sale prices are realistic, that the build costs are realistic and that the project timescales are achievable. A project that overruns will inevitably start to eat up any profit that has accrued. Find out who the principal contractor and professional team are and do some due diligence on them too.
What frustrates me, with some of these firms that have failed recently, is that they appear to be run by people who simply do not have the requisite skills and experience to undertake property development. If they are aware of these shortcomings and that is why they wish to use your money rather than their own then this makes the problem even worse. Regardless, it appears that a common thread with these schemes is that they are financially overgeared and rely on potentially unachievable end results. Another commonality appears to be that they are led by effective salespeople able to upsell investment opportunities at their training days and the like.
Personally I would back myself more than I would back someone I don’t know. If you have the required skills then why not undertake the development yourself and if you do not have the necessary skills then some further personal development would be my preferred option for you as even if you are lacking in the skills and experience department, it may well be that the developer that wants you to invest is even less able to deliver a scheme.
This scenario is happening all too frequently for my liking. I hope that bona fide developers will take heed of this worrying trend and arrange for proper protections for investors’ money and provide comprehensive and independently validated details of the scheme for which they want investment. It is simply not acceptable for private individuals to lose sizeable chunks of money in this way.
For me, I would not invest with one of these firms. I stand or fall by my own success or failure. I believe the risk investing with my own money is lower as I am motivated to work and to succeed. I doubt the same could be said if none of my money were on the line.
For those who want to participate in a collective investment then I wish you well but urge you to undertake significant homework on the whole operation before parting with your hard earned money.
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