How to spot a property investment scam

How do you tell you if a property deal you’re planning to invest in is a scam? It’s the sort of concern every investor encounters once in a while, and it’s always discomforting.

While it can be hard to tell the difference between what’s real and what isn’t, it always helps to be prudent.

If you’re worried you may be waking into a scam, here’s what you need to do.

Verify credentials

Don’t fall for fancy titles and other fake signs of success. Fraudsters make themselves appear successful in the hope that you won’t bother verifying their credentials.

You should check to verify that they are who they claim to be. If you’ve received the offer from a broker, you may verify their credentials by checking them against a reliable regulator like the FCA.

Don’t fall for false promises.

Be careful about investment pitches that promise absurd profit or specific returns. Like all other investments, real estate carries a certain amount of risk, so it’s unlikely that a salesperson would make such promises.

Note: It’s essential to be careful, but this shouldn’t keep you from taking on a good deal, especially if everything checks out. Sometimes you will find incredible investment opportunities before anyone else knows about them.

There’s a more in-depth analysis of this issue in the video below

Please don’t do it because everyone else is

Don’t take the claims that “everyone is doing it” at face value. Be cautious about sales pitches that focus on the number of people making a specific investment without actually telling you why it works.

Don’t rush

If a salesperson tells you an offer is available for a limited time or that you have a narrow investment window, take it as a red flag, legitimate investments should not have such limitations.

Common property investment scams you may encounter

Joint ventures

You may encounter this kind of scam if you’re into joint ventures. Obviously, not all are bad. They often work out excellently. Several investors participate in these investment schemes and enjoy remarkable success. However, some are structured the wrong way, and some may be designed to rob you of your money.

First, you need to understand how the property deal has been arranged. You should also consult your accountant and solicitor. You need to ensure they both agree on the venture and that all parties involved have a clear general understanding of the deal.

Some joint investment opportunities require you (the client) to send money to an intermediary. This can be dangerous as you then lose control over your investment. While it is true that your funds will go to a secure bank account, you won’t have much say over their use if you are not part of the account’s managers.

For this reason, you must ensure that joint ventures arrangements leave you in control of your money.

Exaggerated rental yields

Sometimes, the return on a property will be inflated to convince investors to buy it. This is usually an appeal to greed, where someone tries to get you to invest in a venture with the promise of unrealistic returns.

That’s why it is imperative to do due diligence and evaluate all the figures, not just the yield. Do this for all the assets you intend to acquire, whether it’s bricks and mortar, or commercial property. If something appears inflated or is significantly higher than other properties you’ve come across, it could be a signal that you need to be careful.

Unfair reservation charges

You will need to leave a deposit for all properties you intend to purchase. The amount required will vary for each deal. First, you need to know how much you need to reserve the property, how the payment should be structured, and how much of it goes into the real deal.

If you’re reserving a property, you will be required to pay a reservation fee. This might be paid in stages. You may choose to do an “exchange with delayed completion.” This involves paying a higher upfront (but one-off) amount to reserve a property via a solicitor.

Reservation charges average between 500 and 1000 Pounds. If your reservation fee falls within this range, you should be okay. However, if it’s much higher and you should ask questions. This doesn’t automatically mean that you’ve been scammed, but it is sufficient cause for concern.

Exchange with delayed completion, then the process will be different. Some companies will charge a direct fee, which means you will need to pay them directly while adhering to specific terms and conditions. This is okay, provided that you fully understand what the terms and conditions mean and understand when, if, and under what circumstances you will recover your deposit.

You will need to address the following

  • You should find out what happens if you withdraw from the deal. Will you get your deposit back? Do you address these scenarios in your contract?
  • Are you paying the fee directly to the company or into the client’s account? Are you depositing to an escrow or solicitor account? All these options are acceptable, provided that your contract covers the fees and you are comfortable with the terms and conditions.
  • Is the company legitimate?  This may seem obvious, but it doesn’t hurt to check.  Ideally, the company you’re dealing with should have a legitimate online presence and have been around for some time. It will also help to reach out to their former clients and study any previous deals.

Land deals

Land scams tend to occur when people are looking for alternative investment opportunities. The trick here is that you end up buying land without planning permission.

So you may purchase an asset to hold for 10 years or so, then discover its protected land when you try to obtain planning permission.

To mitigate this kind of risk, you should study land deals, so you fully understand the cost per hectare or acre. You should also find out what it will take to get planning permission or whether it’s even possible.

What to do if you’ve been scammed

If you’ve invested in a venture that you believe is a scam, report it to Action Fraud, the UK’s national fraud and cybercrime reporting center.

Preparing for your next investment

Hopefully, the advice we’ve shared has strengthened your resolve, not scared you into backing away from property investment.

Sometimes it might be legitimate even if it seems too good to be true, and if that’s the case, you won’t want to miss out on the opportunity.