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Being Savvy About

REAL ESTATE SCAMS

BY YITZCHOK KORNBLUH

THOSE WHO WISH TO


INVEST IN REAL ESTATE
DO SO EXPECTING A
SIZABLE RETURN: Who

could lose in such a


lucrative market? The
sobering scenarios
detailed here highlight
unscrupulous schemes
that exploiters
particularly based
in the U.K. use to
separate the unwary
and ill-informed from
their money. Similar
scams operate in Israel
and the United States;
however, U.K. operators
specifically target
Israeli and American
investors, who are seen
as easy game.

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17 Iyar 5776

n a volatile global economy, with low interest rates


and falling returns from cash or bonds, investing
in real estate is an increasingly popular choice.
Whether the investment is in commercial property
or a residential home, perhaps divided into apartments or studios, for those prepared to take a long-term
view on returns, the rising property market is a very desirable area for investment. However, those who think they
can outwit the market to get rich quick may nd themselves facing an unfortunate surprise.
Typically, property investments promising rapid
returns are operated by consortium, or syndicate, groups.
This is totally unlike investing independently, which
means that you retain exibility and control over your
money and your investment. Investing in a syndicate has
the downside of not being in control of the asset or expenses; as the rental market has boomed, so too have the scams.
One of the most widespread and least detected ploys of
this sort is the unregulated multi-partnership collective
real estate syndicate scheme. The funding structure related to these projects can easily allow devious operators to
prey on vulnerable investors to part with their cash for
promises of instant wealth.

How Does It Work?


High-yielding and high-risk properties are purchased
by the syndicate operator. The initial capital outlay is
quite modest, and there is the capacity for intense management, without much scope for asset growth. This is an
ideal situation for their companys office environment to
keep administrative operations owing. Every property
acquired triggers stacks of paperwork and administrative
activity, turning the office hub into a nucleus of high-octane activity. Unfortunately for the investor, this is also
an ideal strategy to show how busy the employees are and
to use the investors money to pay for all this activity, by
deducting it from the rental income stream.
The raising of hefty repair bills and insurance premium invoices swells the companys income on top of the
rental income. However, it does little for the woes of the
investors. They have all those expenses deducted from
their monthly rental statement, most of which ends up in
the companys own bank accounts. In many cases, there is
not even a designated clients bank account to enable the
investor to track net accurate gures regarding income
and expenses. The investment module is typically set up
without taking into account the interests of syndicate
members. There are no valid share certicates issued
which can be used as collateral or as legal proof of ownership. In almost all cases, the investors capital will diminish through a variety of circumstances and any request for
information will be met with cynical responses from the
operators.

Why Does This Happen?


In order to understand how the scam works in favor of
the syndicate operator, you only need to look at the techniques by which the investor is ripped off.
In the rst quarter you will not see any return, as all the
set-up expenses, legal fees, acquisition costs, hefty manFEATURES May 25, 2016

$
agement fees and a variety of sundry costs are deducted
from the rental income.
In the second quarter there are additional expenses
such as repairs, etc., which once again are deducted from
the rental income.
The third quarters income may be stalled with explanations that the tenant did not pay his rent, and in the
fourth quarter the principals request extra equity or
they deduct the sum from either your income or from the
invested capital, with the excuse that as the market value
has fallen, the banks wish to reduce their borrowing and
insist on additional cash.
And so the story continues throughout the life of the
investment, quarter after quarter, until either the mortgagees repossess the property or the company goes into
receivership. In short, you will never, ever, see your capital
back, nor will you receive much in the way of income as a
return.

Another Scam?
Another scam involves private investors lining up to
nance the purchase of a property with the promise that
once the property has been purchased, a mortgage will
redeem the investors cash. This, of course, never materializes. The question to ask as a potential investor is: If
the deal is potentially so lucrative, why would an operator
require funds from private individuals?
The answer lies in a rather cynical plan in which private
investors are prospected with promises of high returns
when nancial institutions have rejected the funding due
to high risk factors. One has to ask oneself: If a bank does
not feel comfortable to secure a loan on such project, why
should I?
Some schemes operate by luring unsuspecting investors into their trap through total misrepresentation. The
list of their devious behaviors is endless, and it is up to the
shrewd investor to seek and pick a genuine opportunity
and not be foiled by the scammers. What is most puzzling
is that when you ask an investor why he has put his money
into these schemes, the answer will often be, I only have a
small sum and I cant do anything with it on my own. One
has to question this theory as to why a person might want
to throw away good money for this reason. This is effectively what someone is doing by investing in highly volatile unsecured multi-partnered property deals.
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True Stories

When you are


looking to dabble
in property
investments, but you
do not have enough
funds to invest on
your own, a fairly
safe and feasible
formula to follow
is to initially carry
out due diligence
and a full risk
assessment in every
case, which will flag
the undisclosed
negatives.

Through my professional career, I have


come across many individual incidents in
which family fortunes have been obliterated and people have lost all their hard-earned
savings or their inheritance through deceitful
investment operators.
Id like to expose some of the trickery which
they employ.
There was one case I dealt with where
the syndicate took money from a person and
invested it in a property which had varied
angles for increasing its value. After many
months, during which the syndicate deducted set-up expenses and management fees, the
property was sold for a loss with an apparent
justication that it was not producing the
expected income. In an enigmatic twist, one
of the directors had thought of an idea of how
to increase the value of the investment and
enhance the income yield; however, rather
than share those added value angles with the
members, the property was sold for less than
the purchase price, thus showing a capital loss
and then bought back through a company which did not identify the
buyer.
In another scenario, a syndicate member invested in a xed-term
investment plan. Upon the end of the term, the refund of his capital
was not released, on the pretext that they would reinvest it in another scheme. Following a protracted marathon of correspondence, we
eventually obtained an exit statement, which showed a mammoth list
of expenses not listed earlier. The expenses had been conjured and
over-inated to such an extent so that there would be major indents
into the invested capital, thus reducing the shareholding, merely to
stack up gures so as not to be obligated to return the capital investment.
Another story sums up the way these scams typically operate. A client for whom I had acted some time ago lost his capital through a combination of bizarre circumstances. The administration department
had listed major repair costs and therefore showed a net loss in that
particular quarterly statement, with deductions from capital, as well
as from the quarterly rental income, which was not sufficient to cover
those major repairs. Upon scrutiny, we discovered that although the
major repairs were truly necessary to the building, these were insured
perils, where a pending insurance claim had indeed covered all those
deducted costs.
The classic example I have used on many occasions to show how
investors are short-changed and deceived is just mind-boggling. An
ad was placed in an Israeli publication with an obvious intention of
entrapment and to deceive unfortunate, nave readers to invest in U.K.
properties. The ad stated: Invest in high-growth discounted properties in Hendon. The properties being marketed were not located in
upmarket Hendon, North West London but in Hendon, Sunderland
North East England, where property prices are a fraction of the London values. This is just one typical example of how some of the scams
operate. Secondary shopping malls are illustrated in marketing brochures touched up and edited with computer programs to look like
they are located in busy Main Street areas.

schemes which never materialized in the


way they were presented. Almost all the
deals were planned so that the principals of
the investment company did not put in their
own cash and if, on the odd occasion, they
did initially lay out some of the nance, they
then redeemed the outlay with equity from
outside investors, so in effect it was always
your money at risk and not theirs.
Most of the syndicates utter empty promises and assurances, and their record is so
dismal that they have eeced individuals
of their hard-earned cash through manipulative marketing and in-house scandalous
management procedures.
Only recently, I was made aware of a case
where the husband sold his wifes jewelry
in order to raise funds for one such scheme
and ended up destitute when the scheme
collapsed. The heartbreak and experience
of such an occurrence is very severe. Its a
phenomenon which cannot adequately be
described with pen and paper, but taking
serious note of such poignant stories may
one day save you from becoming a victim.

How to Invest Safely


When you are looking to dabble in property investments, but you do
not have enough funds to invest on your own, a fairly safe and feasible
formula to follow is to initially carry out due diligence and a full risk
assessment in every case, which will ag the undisclosed negatives.
Invest with a group of partners where everyone, including the operators and principals, pool their own funds too, in addition to funding
from a bank, so they too have an interest in protecting the projected yield. When this is added to a rising asset value, the investment
becomes benecial equally in the longer term. More importantly, the
property management segment ought to be outsourced to a third-party
company unconnected to the group.
In this way there are no favored income stream advantages to the
operator/principal. If it remains in-house, then all the investors ought
to have an equal share of the prots generated by the management
department. This is the typical structure when you purchase a long
leasehold condo or an apartment in a multi-unit building. The tenants
become partners in the management company, so are any prots at the
end of the year are shared. If they truly have the investors interest at
heart, that is the level of transparency at which syndicates ought to
operate.

No Get-Rich-Quick Shortcuts
There are no shortcuts in creating wealth; anything that sounds too
good to be true ought to be avoided. You cannot change your destination overnight, but you can change your direction. Therefore, you need
to design your own plan; otherwise, you will be falling into someone
elses plan. That is a recipe for nancial disaster, as their plans dont
take into account your nancial interests. Economic disaster begins
with a philosophy of doing less and wanting more.
I once heard from a great motivational intellectual at a seminar that
To be successful, you dont need to do extraordinary things; you just
need to do ordinary things extraordinarily well. What a powerful piece
of advice!

Victim Feedback
Since bringing these scams into the public eye, I have been
approached by many victims who fell prey to promised get-rich-quick
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Yitzchok Kornbluh is an advocate and paralegal consultant based in Stamford Hill, London. He can be contacted by email on imagintern@gmail.com
17 Iyar 5776