http://propertysoul.com/2015/06/21/p...vestment-trap/
Lessons learned from a property investment trap
June 21, 2015
I was in Jakarta when I saw an article on the front page of The Jakarta Post with the headline “Property firm deceives thousands of buyers” (May 27, 2015).
Another story of property investment scam
A property consulting firm known as PT Royal Premier Internasional marketed to the public investment opportunities of 12 complexes across Jakarta, Bali, Yogyakarta, Bandung in West Java and Tangerang in Banten.
The company bought condotels from developers with progressive payments but claimed that it owned those properties. By leveraging on a partnership with the reputable property agency Century 21, their investment opportunity gained a lot of credibility. Prospective buyers were also lured with attractive incentives by making one-off payment, including high return on investment and various gifts such as cash back and car prizes.
As in any high profile investment scheme that promises ultra-high returns, we all know what’s going to happen next: The company embezzled all the investment funds and the person-in-charge fled to Seoul. There were as many as 1,157 victims who lost a total of Rp 800 billion (S$80 million).
The police found that the company only paid around Rp 155 million (S$15.5 million) to the developers. The rest of the funds from the investors were spent on buying insurance, houses, land and vehicles.
What are the lessons learned?
This is not the first incident, and there will definitely be more to come. And it is almost impossible for any government to weed out all these property investment scams.
Every day potential property buyers and amateur investors are tempted by different investment offers. How can they tell which ones are real projects and who can be trusted?
Below are four invaluable lessons learned from this property investment trap in Indonesia.
Lesson #1: Look out for what’s underneath, not what they want to show you.
Is PT Royal Premier Internasional a trusted company? No one knows. But for three years it has a nice office at the prestigious Bakrie Tower, a grand 50-storey office tower which is a landmark in the heart of Jakarta’s prime CBD area.
So what? The infamous Brazil public housing project developer EcoHouse also opened its Singapore office at Suntec Tower Two in February 2013. It was closed 1 ½ years’ later when investors started legal proceedings to recover their investment funds. Even then the once high-profile developer still denied all accusations in front of the media. Barely three months later, it suspended all its global operations.
Look beyond what the developers and their marketing agents want you to see. Conduct due diligence before making any purchase decision.
What is the history, background and business profile of the company? Do those numbers in their recent years’ of financial statements look suspicious? Have they just started venturing into real estate? Any track record of building relevant property projects?
Lesson #2: Look into the developer, not the marketing agent.
Is Century 21 a reputable and trusted marketing agency? Definitely. Century 21 is the franchisor of the world’s largest residential real estate sales network, with presence in 74 countries comprising more than 100,000 property agents.
But when things turned sour, with the company director of PT Royal Premier Internasional still at large, the police summoned the management of Century 21 for investigations.
PT Royal Premier Internasional is not even a developer. And they don’t really have full ownership of the properties that they are selling. So why Century 21 didn’t raise the alarm but signed up as the exclusive marketing agent?
The property agency might not be in the know. Or their judgment might be clouded by the lucrative business opportunity, high profit margin or any vested interest.
Message to prospective investors: do the due diligence on the developer or the seller. Whoever marketing the project is irrelevant to the credibility and quality of the deal.
Lesson #3: Look for completed properties, not off-plan projects.
Is it safe to buy off-plan properties with progressive payments? My book No B.S. Guide to Property Investment has touched on the different types of risks involved in buying uncompleted projects.
I don’t like surprises in my investments. I prefer to buy resale properties because what you see is what you get; and what you pay is what you get.
The legal counselor in Bali advised buyers to ensure that the properties they intend to buy should have at least 20 percent constructed. But even projects with over 70 percent completion will still have the chance of being abandoned by the developers.
Prudent investors should make a trip to the actual site to check whether construction has already started. At least a significant portion of the project should be completed.
Singapore buyers are used to buying off-plan projects from local developers even before the latter started any foundation work. However, they must beware that once they buy overseas properties outside Singapore, they are no longer protected by the regulations of the Monetary Authority of Singapore.
With sky-high property prices and property buying restrictions at home, Singaporeans are looking overseas for cheaper alternatives. However, property investment is different from buying your own home. You can’t settle for less just because you can’t afford the better choices.
Lesson #4: Look at the deal itself, not the incentives.
Is high return or buyer incentive critical to attract buyers in a property project? How many of the 1,157 victims were drawn by the promise of high return, cash back and car prizes?
The US property fix-and-flip scheme by CTL Global promised a high return between 14.5 and 22.3 percent. Victims from Singapore claimed that except one month’s rental for a property, they never received the guaranteed return. Instead they received legal letters from the US asking them to pay up the outstanding mortgage or face foreclosure. Rather than getting cheques with high rental returns or flipping profits, they ended up sending cheques to save their properties.
The risk of ultra-high return investment schemes is that, once the company can’t deliver the promised return, they can only go bankrupt or go missing.
And do buyers know that they are actually the ones paying for all the incentives, cash subsidies and rebates they get from the developers?
As I was finishing this blog post, an email arrived at my mailbox. It read “Empty land for sale in Jakarta with the surroundings of offices, mall, apartments and industrial development. For more information, contact us at xxxxxxx”.
Oh no, not another one!
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