International Property Scams to Avoid

The biggest overseas property cons right now involve many of these 'guaranteed rent' offers. I receive dozens of these offers each week from Spain, Bulgaria, Turkey; you name a market, and I'll name developers who are using this marketing tool right now.

The offer is a simple one. You buy into an offplan deal on the basis that the developer guarantees the rent for the first year or so. The yield will often be 10%, although that figure seems to be moving up rapidly in some places!

Sounds marvellous, doesn't it? But guess what, nine out of 10 of these deals are rotten to the core. Typically, these rents are way above what's really happening in the marketplace. After that first year, investors are left high and dry. They cannot rent these properties out at those levels. They then try to sell up at the same time as lots of other similar investors.   

How It Works

Most times, these guaranteed rents are marketing tools, no more and no less. They are just another way of hooking in investors. They are all costed into the deals. The valuations are high so that so-called discounts can be made although the selling prices will still be high enough to allow for these guarantees.           

Developers make money in all sorts of other ways of course. They have deals lined up with banks, mortgage lenders, insurers and even local letting agents. They are taking commission on all of these deals. More money in the kitty to fund those guaranteed rents! 

Of course, not every single guaranteed rent deal is a con. But many of them are! The best rule of thumb is very simple. You do a little research and find out what the rents are locally for these types of properties. You then compare them to what's on offer with a guaranteed rent deal. If the average yield is 6 per cent and this deal is offering 15 per cent, well it's not rocket science is it?

Be A Worry-Guts

My wife calls me Mr Misery-Guts. She should know as we've been together since school days more than 25 years ago! She calls me that because I am a dour and dogged property investor. I worry at a deal and give it a good shaking. Fact is, I tear it to shreds. I thought that's what everybody did.

Not so! I am stunned at the number of investors who come and ask me about a property they've just bought in Bulgaria, Dubai or even Mongolia. Have I bought a dead loss? Have I been ripped off? I ask them some simple questions. What valuation did your valuer put on the property? What did the local letting agents have to say? What was in the contract? What did your solicitor say about the contract?                           

Know what? They stare blankly at me as though I were stark staring mad! These investors buy into deals at face value. If the developer says the property is worth 200k, well, it must be mustn't it? Same with guaranteed rents. 15 per cent? Thank you very much. And contracts? Contracts? Who wants to read a contract!

Doing the Due

What you need to do to separate a cracker from a con is very simple. You do your due diligence. We can fancy that phrase up in all sorts of ways but it boils down to applying common sense. You get as much information as you can from the developer. You then turn around and obtain independent views on the property by doing some research of your own. You get out and view the area, look at other properties and walk the streets. How much is a two bed apartment going to cost overlooking the sea?  You need to have that ballpark figure at your fingertips.   

Check who owns the land and property being sold. In Spain, for example, the equivalent of the UK Land Registry is an escutura or land certificate. All European countries have something similar. If the person or business owning and selling the land and property are not the same, you want to know why. It's especially important to do the equivalent overseas checks via a local solicitor.

The best advice is to use an experienced, English-speaking local solicitor over there. As an alternative, you can use one over here who has all sorts of contacts over there. You need to have the nitty gritty of the small print read by a solicitor before signing anything.

That's Not All!

Of course, there is more to doing the due than this. Use a local surveyor to get an independent valuation. You can source one via your solicitor. You need to be sure that, ignoring all the hyped-up discounts, freebies, no-deposit deals and guaranteed rents, you are buying in at below the market value. If you are buying offplan, you probably want 10 to 15 per cent of inbuilt equity. 

Check supply and demand. View the area. Visit comparable properties. Talk to estate agents and letting agents locally. See what other developments are being built. Go through the local plan at the town hall. A deal that stacks up now may not do so in 18 months once a further 1,000 identical properties have been built.

Most investors want to flip an offplan property so check the contract is assignable. Others prefer to hold and profit from capital appreciation and monthly rentals to cover borrowings. Again, do the due diligence. Talk to letting agents locally. My IPA colleague Dixie Walker has a canny question he always asks. "My daughter (family or whoever) is moving here and needs to find such-and-such to live in urgently. How soon could we expect to find that such-and-such property?" The reply you want is "No chance, we have a waiting list" rather than "Today, we have 100s!"