Hucksters…schemers…rip-off artists. Unfortunately, those terms apply to some of the folks masquerading as developers you’ll meet in the world of real estate. So, how do you protect yourself from falling victim to them?
First, you need to know what to look for. Here are some red flags that signal you might be about to get ripped off…
- They Send You Photos but Don’t Want You to Visit. Fraudsters and rip-off artists are very clever at making their non-existent projects look legit. They set up call centers, so you think they’re calling from Florida…when they’re on the other side of the world. They hire North Americans to pitch for them, so you feel comfortable dealing with them. They create websites they’ll encourage you to look at. They’ll even post fake reviews and comments online telling you just how marvelous they are.
They often send you brochures…and photos of construction vehicles, land clearing and even model homes. Many buyers fall for this. But there’s no way to verify that those back hoes are where the fraudster says they are or that the model home exists—short of a personal visit. And the fraudster doesn’t want you to do that because then you’ll know he’s lying.
- They’re Selling Shangri-La. Experienced, established real estate developers know their limits. They’re realistic about construction costs. They know that upgrading finishes means a higher sticker price. They strike a balance with amenities owners will enjoy, but that don’t burden them with excessive overhead.
But wannabe developers and fraudsters skip all of that. I’ve come across developers that promise restaurants in aquariums…four golf courses…a racetrack…7,000 homes. They had no track record of creating projects, no funding, no clue. What they did have was a very slick presentation—and an equally slick salesman ready to take your money. Only a very experienced developer with very deep pockets can pull off mega-projects like this. So, if a project sounds over-ambitious, it should trigger all kinds of alarm bells.
- They Ask you to Pay in Full Upfront on Pre-Construction. This is a huge red flag. It’s telling you that the developer is likely cash strapped, if they are a developer—or they’re an outright fraudster who wants to take the money and run. Even legit developers may offer you a “discount” for paying upfront. But, think this through. If the project isn’t built, or there’s a lengthy over-run, your only option is to try and sue the developer. You’ve got no leverage, because you’ve already paid.
- They Want You to Use Their Attorney. An outright fraudster or a developer with something to hide doesn’t want you to hire your own attorney. Your independent attorney will point out all their problems and shortcomings and advise you to run a mile. Instead, they’ll offer an “in-house” attorney, a family friend who practices law, or a “trusted” lawyer they’ve worked with before. It’s tempting because it’s the easiest route. But do a little homework, find your own attorney and ask them to verify that everything is in apple-pie order before you commit.
- They’ve Got a Loophole. My heart sinks when a developer tells me they’ve found a grey area that lets them get around planning or ownership restrictions. From weird offshore holding vehicles to obscure interpretations of the law, there’s always someone who thinks they can game the system and win. Sadly, they usually lose. But by then, they’ve pocketed your money and disappeared into the sunset, leaving you to deal with the mess.
Wishing you good real estate investing,
Ronan McMahon, Real Estate Trend Alert