Room For Fraud
Recently we have come across a large number of different types of fraud going on in the property market. This no doubt comes in part because of the current economic climate; therefore the number of cases is likely to increase further with time.
Recently a client came to see me very wary about investing; when I enquired what the reason was he mentioned he had just spent two years trying to recover £300,000 from a property he had ‘purchased’. The property was sold by someone who did not own it. The supposed vendors pretended to be tenants in a property where there lived an elderly gentleman who was the actual owner. They had befriended the owner and made sure he was taken out when the property was to be shown to the prospective buyer.
The solicitors who had been acting for the supposed vendors had been supplied with forged documents which were not checked properly, normally they require a passport and a utility bill to act for a client. The property was duly sold and the money sent across to the purchaser’s solicitor and then to the seller’s solicitor and then on to the pretend vendor.
When the scam came to light the perpetrators where caught but the money had disappeared. The seller got a sentence but this was of no benefit to the purchaser as the money had disappeared and could not be traced.
The only recourse was the solicitor who had acted for the ‘seller’ and who had failed to check the documents carefully; which on closer inspection had shown clear signs of forgery.
Extracting money from them took two years.
Another story which came to light was when a landlord had tenants move out of his flat but before they did so they had ‘rented’ the flat to a number of different parties and had taken deposits from them all. When the property was officially rented by the actual landlord a number of different parties had come to the property to move in only to discover they had given their deposits to somebody who did not own the property.
Auctions also attract fraudsters. Many properties have been put on to the market which did not belong to the sellers. The auction is a faster paced environment where things are more likely to be missed more so than the average sale; also the sale is guaranteed to occur within one month of the auction.
The above instances of fraud were based on somebody who pretended to be the owner of a property. It is very important to do some basic checks prior to handing over deposits for rentals and even when purchasing, nowadays you may find a lot of information on social websites and the internet.
There is also a type of mortgage fraud going around where someone checks out all unencumbered property in highly valued locations such as Central London and then proceeds to take a bridging loan on the property. The loan is paid for a period of around 6 months to allow some time between the event and when the crime is discovered and then the property is left to get repossessed.
At the point of repossession the fraud is uncovered and then the lenders or more likely their insurers are forced to swallow the loss caused. It also causes the owner a lot of hassle and distress in discovering this and in rectifying this issue.
It is surprising this still happens in the UK property market , but it goes on and it pays to be astute; although in fairness it’s a rarity in the UK and certainly not the norm.
We have come across a building on 115 Shirland Rd which we purchased for £1.15m from an auction, where you would think the auctioneer would have done some basic due diligence. We had the legals and our lawyer had done some basic due diligence.
We had exchanged on the property at the auction only to discover the property was not owned by the seller. The freeholders were the Council of Westminster and the lessees through various reasons had forfeited the lease and they were in the process of being evicted themselves; so they had this bright idea of trying to sell a building they did not own through the auctions.
When it came to completion they couldn’t provide a clean title and therefore they couldn’t complete the transaction. All that happened was the money was left with the auctioneer at the point of exchange and when the ‘seller’ couldn’t complete the deposit was returned back to us, the purchasers.
We actually had suspected there may be issues with this purchase but we went ahead on the basis that if a clean title was not delivered we would get our deposit back and only be left with a legal bill. We were prepared to take this small downside risk considering the massive potential upside on the building if we could somehow manage to sort the title out. Knowing the auctioneer would be holding on to the deposit was a reassurance for us.
It is difficult to ensure fraud never takes place completely as there are many forms in which it might occur, from a simple mis-description of a property to the refinancing of one which doesn’t even belong to the person remortgaging.
There is another type of fraud which occurs time to time in auctions; this is whereby the actual seller ‘converts’ a large house into several flats overnight. This has been done without planning permission, without building regulations and without any of the amenities connected. For instance if you were to turn on the tap there would be no water coming through, if you were to switch on electrics there would be no electricity flowing. It would be done purely for prima facie appearances.
This type of sale is made for those who purchase at auctions without full and proper due diligence. One particular auction house was receiving many properties from a vendor who had done a quick conversion job and put them straight into the auction. After receiving many complaints from purchasers they decided to stop taking instructions from this vendor. It is amazing how little due diligence many auction houses do. Some do not even visit the properties they sell instead they cover themselves with legal jargon to protect themselves in case someone ends up with a dud property. It’s basic common sense if someone is selling a product, whatever it is, they should know at least a little about what they are selling. This is unfortunately not always the case when purchasing at auction.
Lenders are also concerned about being stung. One concern is when properties are being subsold. This means someone has exchanged on a property and is reselling it straight away.
There was a time a few years ago when you could purchase a property without putting any money into the deal based on the valuation of the property; now unsurprisingly lenders do not like this type of situation.
They try to curtail this by having a six month rule before you can remortgage a property at the market valuation rather than the purchase price from the date of purchase.
For example if you purchase a property for £700,000 and it’s worth £1m, a bridging company could in theory loan you 70% on the valuation. This would mean you put very little into the deal. They understandably will not do this anymore and will instead lend to you based on the purchase price and not the market valuation of £1m.
The way some people get around this is to resell it to someone else at £1m, this would then make the purchase price the same as the valuation, then they would be able to get a loan on the £1m which would give £700,000 which covers the full purchase price.
The two parties would need to appear unrelated for this to occur. This is however a concern for lenders, though from one angle it doesn’t make any difference as the value of the security is the same. But the angle is more psychological where the borrower is less likely to default if they have their own funds in the deal.
Remember property is still the safest investment you can make. The important lesson here is to ensure you use good solicitors when carrying out transactions, London is still perceived to be one of the safest places in the world to invest and of course a lucrative one too.
Sow & Reap
A Property Investment Company
!Tips of the Week
Normally a high return means a high risk investment, however property is the exception. Property can deliver high returns with low risk if done in the right way, this happens partly because you can gear your investment up using borrowing.
Know the type of return you would like from property; for example there is no point going for a high income property when you will be paying 50% tax on the income. It may be better to aim for capital gains instead.