Our main feture - Property swindles exposed - showed that the property rip-off industry is alive and well. Preying on the weak-minded may be unethical, but it is not illegal. Sadly, despite the obvious flaws in the following methods, you can't legislate for greed or stupidity.
MYTH NUMBER ONE: Buy property for below market value
"The divorced, the dead and the desperate" is the slick turn of phrase employed by one seminar company describing who its delegates should be targeting. "Buy below market value, and you're in profit from day one," says our host. Known in property circles as 'BMV', this is the linchpin of nearly all the 'get-rich-quick' schemes touted by dubious seminar companies.
Those offering access to BMV deals can be split into two camps. The first group charge extortionate course fees to reveal methods as basic as leafleting ('Need to sell your home fast? Call me!') or taking out ads in the local paper. One firm is slightly more sophisticated, and suggests you pay someone else to deliver the leaflets.
The latter group act as property sourcing agencies and – for a hefty fee – will offer you deals which they claim are heavily discounted for a quick sale. But in a market devoid of residential transactions, how does one define what 'market value' really is?
At one seminar I attended, following an hour's brainwashing, I was offered details of four "BMV Opportunities" to tempt me into parting with £2,000 in membership fees. Back in the office, I looked up the postcodes of all four properties on the website Rightmove. Despite the agent claiming a 20 per cent discount to market value, it came as no surprise that I was able to find similar properties for similar prices online. Deduct the membership fees and commission, and these ones would actually work out cheaper.
What's more, the rental estimates provided by the company were at the top end of similar properties Rightmove advertised for lease.
"Establishing market value is very hard in a falling market," comments independent property investment adviser David Lawrenson. "To find someone who is desperate enough to sell their home for 20 per cent below true market value is very hard indeed. Even if leafleting and advertising produces a 'lead', you will have to work very hard to convert someone into a willing seller."
MYTH NUMBER TWO: Buy a property with no money down
Buying BMV (below market value) is the key to the next scheme. Dressed up by various seminar companies as getting 'paid' to buy a property, or getting 'instant cash back' from a property deal, they all boil down to the same high risk method – using a bridging loan to buy a property, then remortgaging it for a higher value.
One self-styled property millionaire tells his free seminar audience: "You can buy a £100k property for £80k, giving you £20k FREE to invest in property number two." A torrent of PowerPoint slides flashes before us. A shabby-looking property in Lancashire is pictured. Bought for £35,000, it was remortgaged "on day one" for £53,000 thus avoiding the need for a deposit. After £6,000 of refurbishment costs and £750 legal charges, "you get cash back of £3,300. That means you just got paid £3,300 to buy this property," he triumphantly concludes. All that remains is the small matter of finding a tenant to cover the mortgage repayments.
There is an added twist to this scheme – same day remortgaging is no longer possible. The last company to offer this service was the hapless – Bradford & Bingley's buy-to-let arm. Yet our 'millionaire' expects us to pay £2,000 for a course that is now fundamentally flawed. After being quizzed, he accepts it is more difficult to find same-day deals, but stresses that with the right broker, remortgaging is possible. "When you find a good deal, the money finds you," he reassures. Naturally, brokers who can assist will be present at the forthcoming course.
"Buying a property in this way is incredibly risky," says Darren Cook from mortgage comparison website Moneyfacts.co.uk, who believes a gap of "at least three months" would be required before remortgaging were possible.
"Property prices are dropping. The danger is that a buyer will arrange bridging finance, but then find themselves unable to raise a mortgage. There is no guarantee in the current economic climate."
Moneyfacts also tracks the interest rates of bridging loans, which Mr Cook says range from 1 to 3.5 per cent per month – or up to 42 per cent when measured on an annual basis. "A buyer would still need a deposit to purchase a property using bridging finance," he says, adding that the average loan-to-value of products currently on offer is 75 per cent. So much for buying with no money down.
However, our presenter has another worrying solution. "You have one credit card to go to Sainsbury's, and twenty credit cards to use for your properties," he says, adding that his course contains a special section on how to improve your credit rating. And guess what? You can also use your credit card to pay the £2,000 fee.
MYTH NUMBER THREE: profit from rising repossessions
According to a free property seminar I attended in the home counties, are the 'holy grail' of property deals. The Council of Mortgage lenders forecasts there will be 45,000 by the end of this year - but don't wait for them to turn up at an .
"People who buy properties at auction are the people who pay the most," says the enigmatic speaker. Far better to execute what's known as a 'sale and rent back' deal.
For a fee of nearly £2,000 I can become a 'retained client' of his firm, and thus receive introductions to purchase properties from 'motivated sellers' on the verge of repossession. The firm will also take 2.5 per cent of the purchase price – which is guaranteed to be more than 20 per cent below 'market value' (see above).
"With repossessions, the profit is in the purchase and not in the re-sale," our presenter continues, adding that investors should aim to rent such properties out for 3 to 5 years to ‘maximise profits' before selling on. But who to rent them out to is a more pertinent question.
"Buy these properties with the tenant in. But don't keep them for more than six months – remember, they nearly went under due to financial problems," is his frank assessment. "Far better to let it to someone else."
A course offered by a separate seminar company advocates leafleting and placing advertisements in local papers to find 'sellers in distress'.
"The best time to reach them is before they are repossessed," says the presenter, adding that this is the perfect opportunity to hammer down the price, and then rent the property back to the unfortunate former owner. "They make great tenants - it's their home!"
What's more, he says, you could sell them an 'option' to buy back their property for a fixed price in three years time, adding £100 a month to their rent. If they fail to pay, they lose the right. Other seminar companies advocate same-day remortgaging on such properties for instant profits (see above).
"These seminars are basically groups of unprincipled people working together to discuss how they can profit from other people’s misery and distress," says Adam Sampson, chief executive of homelessness charity Shelter. "People who are on the verge of losing their homes are extremely vulnerable and are being preyed upon by these people. Encouraging people to entrust their homes to a company that may then throw them out, whilst legal, is as good as theft, unethical, and utterly immoral."
The government is urging the Office of Fair Trading and Financial Services Authority to regulate the practice of sale-and-rent-back to clamp down on unscrupulous activity.
"The trouble is that the owner-turned-tenant will usually have no security of tenure beyond the fixed term of the tenancy agreement of 6-12 months," says independent property investment adviser David Lawrenson. "There are some landlords who claim to do this ethically, and I am sure it can be to the good of the investor and the seller in some cases. However, I caution would-be investors about how they'd feel about evicting a family which defaulted on a tenancy."
He also raises another worrying reality. "As it typically takes five months to evict a tenant through the courts, I wonder if green investors who bought using this technique have got into financial trouble themselves as a result of tenants defaulting."
MYTH NUMBER FOUR: Save money with a foreign currency mortgage
For a whopping fee of £5,000 another 'property education company' will introduce delegates to mortgage brokers who can access below base-rate mortgage deals.
"There are financial products we have access to that probably no-one else in the country has access to," boasts the presenter, alluding to a team of "financial engineers". Though not directly employed by the seminar company, "they can access products you can't get on the high street that are only available to our delegates."
He tells delegates that commercial funding is available for interest rates of 3.5 per cent. I question how this is possible.
"Who says you have to borrow money in the UK?" is his smug answer. "We access finance from 57 different countries. The answer is come on our course, and we'll show you how."
Let me save you the £5,000 cost, and potential risk of financial ruin, by explaining the pitfalls of foreign currency mortgages, which are described as "extremely risky" by mortgage expert Ray Boulger of John Charcol. The chief problem is the mismatch between the asset (a UK buy-to-let) and the capital (from a foreign bank) which creates huge currency risk.
"Interest rates in the US and Japan may be much lower than the UK, but in the last few weeks, sterling has fallen nearly 25 per cent against the dollar," Mr Boulger explains. "This movement would hugely increase the value of your debt, and even blow the loan-to-value covenant of your mortgage."
The maximum LTV on commercial loans is typically 70 per cent. "If it gets up to 80 per cent, you've either got to repay part of the loan - which people on a course like this presumably couldn't afford to do - or the lender will covert the loan back into Sterling," he says. "This crystallises losses, plus you end up paying Sterling interest rates."
Most foreign currency loans are pegged at a fixed margin above 3-month Libor (usually above 2 per cent for a commercial loan) and carry a 1 per cent arrangement fee, which adds to the cost. "Now UK rates are on their way down, these deals won't be hugely lower than UK bank rates," Mr Boulger says.
A professional investor may be able to understand and justify this level of risk. But amazingly, to push these products on people with little or no financial experience is not illegal. "I would be very surprised if the risks were properly explained on the course, or even by the mortgage broker, unless the investor steers clear of whichever broker they will be pressurised to use by the seminar organiser," he continues.
"Because the FSA doesn't regulate buy-to-let or commercial mortgages, if the risks of borrowing in a foreign currency are not explained clearly and it all goes horribly wrong the investor will not have recourse to the Financial Ombudsman Service."
The debate surrounding FSA regulation continues to rage. Meanwhile, a young woman at the seminar asks; "Can we pay the course fee after we do our first property deal? You see, we came here because we need the money now."
MYTH NUMBER FIVE: Bargain property deals in the USA
A growing number of seminar companies would like you to believe that plummeting US house prices mean there are bargains to be had across the pond. It isn't hard to believe: there are bus tours of foreclosed properties in Florida, and the sad tale of a Detroit house placed on the market for just $1 seems to have captured the British public's imagination.
Before one dreams of owning whole streets of suburban America, this price was subject to the buyer taking on thousands of dollars of utility charges, and spending thousands more on renovating the property, which had had been looted of all fixtures and fittings – including the boards on its windows and doors.
This hasn't stopped one outfit from encouraging its members to build up portfolios of US houses, claiming they will be "worth a fortune" in a few years. I attended a free seminar at a top central London hotel to find out what the deal was.
Following nibbles and drinks in the plush seminar room, faces fall when presented with images of the properties on offer - they ain't pretty. The presenter claims to have sold 200 of these dilapidated looking flat board houses in New York State. They can be purchased outright for as little as $30,000 cash, and come pre-leased to tenants on welfare. "You don't see voids," the presenter reassures, playing down the risks. "The tenancies are month to month, but these people stay put for ten, fifteen years."
The sales pitch continues. "These properties offer extraordinary rental yields, of four times or more what you'd get in the UK," he says. He is offering a $30,000 property, split and leased to two families, with a combined rental income of $850 a month. "That's a rental yield of 31 per cent!" he tells the captivated audience.
Some would question the logic of a shabby buy-to-let on the wrong side of the Atlantic. Conveniently, the presenter says his company will handle property management – for 10 per cent of the rent. Future refurbishment costs are skipped over. Property taxes are briefly mentioned; after some probing, a figure of £1,000 a year is estimated. And then there's his 'sourcing fee' of nearly £3,000 to add on.
As the brochures are passed around, questions start to be asked. "Why aren't US investors taking advantage of these great rental yields?" asks an elderly Asian gentleman. "A lot of Americans are lazy and don't want to be landlords," says the presenter. "But if it's such a great investment, why is your company selling them?"
"Our job is to find great deals for people," is his schmaltzy reply.
There are more questions about problem neighbourhoods, and problem tenants. One woman – who I strongly suspect is a plant – stands up and explains that she owns 20 such properties, has had no problems, and is raking it in. She sits down to a round of applause.
Time for me to ask a question: "Why do we have to buy in cash?" I am fobbed off with "it's the quickest way to do the deal". But crucially, buying without a mortgage means I don't need to take out buildings insurance (the brochure's smallprint says this is up to buyers to arrange). It transpires that homes like these, where the replacement cost is greater than the market value, are effectively uninsurable.
Back in the Investors Chronicle office, I make a few calls to estate agents in the same area of New York State. Is a $30,000 property with $850 monthly income really such a great deal? Linda Kazu, property broker at Realty USA, doesn't think so.
"That is quite high!" she says. "We just sold a property in the same area for $16,000 to an investor, which was bringing in close to $1,000 a month in rent. I recently sold another house split into two apartments for $19,500 with combined rental of $1,125. These houses are not in the greatest of neighbourhoods, but the rent is paid by state housing assistance which attracts investors."
Ms Kazu says she is increasingly aware of investors targeting low-priced properties like these, and stipulating in the purchase contract that they have the right to sell on to another buyer for a higher price within 30 days of closing. "It definitely is happening more," she says, bemused that British buyers are falling for it.
Another estate agent I speak to doubts the investment credentials of such properties. "We do have income properties in that price range, but anything you get for that price would probably need a lot of work and be in a bad area," she adds.
