Investment Club Scams
Many clubs charge over S$1k to attend, promising to share with you methods of picking good properties and letting you into their "good deals". The seminars are often sponsored by property agencies, solicitors, bankers and anyone who wants to sell anything to the poor members.
The good deals are often nothing more than expensive properties that the so-called "wealth coaches" sourced from overseas. The wealth coaches will negotiate a bulk discount from the developer, mark up the properties by 10% to sometimes 20% higher and sell them to the members. Many of the properties marketed do not have a land registry to track the transacted prices. Hence there is no way the members can find out if the properties are below market value. Often, the properties marketed are condominiums in Manila, Bangkok, cities in Australia, to exotic assets like student accommodation and hotel rooms.
The poor members are being ripped off twice, once by paying good money to attend often useless courses and again by paying exorbitant fees for dubious projects.
Overseas Property Exhibitions
Many property agencies are selling Tokyo, London, Houston, Florida, Sydney and Iskandar condominiums. They are often at a 20 - 30% premium to resale properties. Sometimes, they are even 20% higher than units in the same projects.
The so-called free seminars are extremely dangerous. They will have an extremely enigmatic speaker to give you the macro picture, the city outlook, often both are true. But when it comes to the project, the analysis is wrong or skewed. Often very little time is given for Q&A because embarrassing questions could deter others from buying.
Given that Singaporeans are not known to be sceptical or questioning, relying on trust due to the strict political culture, I would urge the relevant authorities to look into the above two to make it mandatory to disclose the fees and commissions earned.
Exotic Assets Con Job
In the last three years, many exotic assets like student accommodation and hotel rooms were sold. Almost all of them were off plan. There are many risks involved, unknown to many. Here they are:
1. Non completion by developers. They often have a very long stop date, e.g. you exchange contracts today but the deal is terminated only if the developer fails to complete by 2017 Dec.
2. In UK, many of the deposits are guaranteed by an insurance bond. But if you look at some of the insurance companies that provide the bonds, e.g. Northern and Western Insurance Company, they have patchy financial records, a history of refusing to pay claimants, pouncing on small technicalities to not pay back the deposits.
3. Solicitors overseas are sometimes cahoots with the developers. They collect fees from the purchasers and promise to due diligence to ensure that the developers have title to the land, the construction has met standards etc. But often they are paid off by the developers, linked closely with the agents, with an agenda to push the deal through.
4. You cannot exit individual hotel rooms and student accommodation. As an entire block, both assets are readily sought after, with capitalisation rates as low as 4 - 5%. But for individual rooms, I've never seen them being transacted. Hence you can buy but you cannot exit.
5. Why can't you exit? One reason is banks are unwilling to finance such asset classes due to a lack of control. Think of it this way: if you own a house, or a retail shop, you are in full control. If you don't like your managing agent, you can change her. you can also change tenants once the lease is up. But you have no control over the operator of a student accommodation or hotel. It takes a drastic action, e.g. a majority vote to do so. The operator can increase charges on you arbitrarily, e.g. charge you for repairs of your room. In the end, what you thought was an 8% net yield investment will become only 3% in yield.
Simple Due Diligence Before You Buy Overseas Properties
1. Always try to obtain a bank loan. Ignore what agents or wealth coaches tell you, that the asset is profitable without leverage.
a. A bank will only appoint its own solicitors to conduct due diligence. Any scam will immediately be identified. If a developer or an insurance provider have spotty histories, it will be stopped even before you can transact. The solicitor tends to fear the bank more than individual clients because of the clout. A bank can give millions worth of legal work to a firm whereas how much fees do you think you will pay over a year?
b. The level of LTV will determine how over-valued the property is. If a bank is willing to offer you 65% LTV, obviously they need a buffer of 35% for their loan to be impacted. If it offers only 50%, you can be quite sure that the price that you bought for is not attractive.
c. Leverage increases your internal rate of return as long as your rental income is able to cover your mortgage. Banks seldom margin call on your property if you have been servicing the monthly mortgage.
2. Always go to the web and look at comparables around the area. You may find cheaper properties in the resale market. If so, you should then look for a buyer's agent to help you source for resale / completed properties.
3. Completed properties tend to have much lower risks than off plan properties. I don't understand why we should pay a premium for off plan. There are risks such as developers going bankrupt, late completion, lack of rental income, scams, inability to see the finished product. It's like buying a car off a brochure. Look for a trusted agent to source resale properties for you.
4. Always always try to walk the area before you buy. Even if you're buying in New York or Houston, you need to know if the area is right for you. You can check the crime rate, income levels and the type of tenants you potentially can get by checking online. but this only applies for developed markets like UK and the US. But for developing countries, you really won't know. You need to visit the place on a week day afternoon and at night, because it could be a noisy motorway in the day and an eerily quiet ghost town at night with gangs of kids roaming. You also need to visit the place on a weekend because there could be strange happenings such as a weekend bazaar right next to your place every weekend, or a make shift mass prayer site in the park next to your house, making it impossible to rest over the weekend!
The luxury condo that you bought could actually be a wooden shack!
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