How to Avoid Property Fraud, a Ponzi Scheme, Scam or Bad Business Model

In this 3 post series, I want to give you an insight into what makes up a property scam, Ponzi or bad business model. First, after giving you a little insight into my experience, I'll run through 7 Scams For Seven Suckers. In my next post, I'll run through "The Dirty Dozen" signs of a property scam and finally, show you "How To Pull Off The Perfect Scam." So you can avoid them in the future. I'd love to hear your comments and for you to share your experiences so others can learn from those mistakes.

I’ve spent my whole career working in industries that revolve around high value sales. From personal coaching, seminars, marketing consultancy, mortgages and property investment, I’ve seen just about every get rich quick, money making scheme on the planet (of course I know that's not entirely true) but being in industries that are prone to corruption and working with thousands of clients across the world, it’s given me a unique perspective.

Through all this I have been able to largely navigate through and avoid almost every scam, Ponzi, and bad business model around. Not because I have some gift for spotting them (although I now have a good grasp of what goes into one) but more because I have been very conservative in my approach, measured some may say, others may call me ‘tight’ but regardless having been in the business of investment with other people's money has given me a great insight into what works, what doesn’t and what clearly should be avoided.

Research helps.... but will it be enough?

I believe with enough research you can largely avoid them. Some you will get caught in, as a good business model turns bad and then potentially turns into a Ponzi. I think these are the ones that are hard to avoid. I’d like to say that I have never lost money in any of these but I, like millions of others, have lost money through the good business turned bad. As I travel the globe meeting residential property investors and strategising their portfolios, it is amazing the scope of scams and the number of people impacted by them. For most it's frustrating but not fatal, but I have seen plenty of fatalities where they invested their entire capital (or a large portion) into a sure thing, with insider knowledge that couldn't lose, only to find out it wasn’t.

No-one can guarantee you won’t be exposed to a scam, Ponzi or bad business model, but after meeting 100's of people and them telling me about the investment that went sour, I see three things emerge:

1. It was an ethical investment that just didn’t work out…this does happen.
2. The clients knew it was too good to be true but really hoped this was the one… it never is.
3. It was a masterful scam, intentionally fraudulent and they got duped, even with a great deal of due diligence and research, they probably would still have been duped.

So what can we do?
1. We cannot do much about 
2. We definitely can and this is 80-90% of the scams I think
3. We have to learn from and move on

The problem with frauds is that they are hard to prosecute and even harder, if not impossible to get your money back. Importantly, this book is not about the negative and I don’t want to scare you off investing, the majority (over 99%) of investments don't fit into the category of a scam, Ponzi or bad business model. It’s just the scams that make the headlines.

The majority (over 99%) of investments doesn’t fit into the category of a scam, Ponzi or bad business model. It’s just that the scams make the headlines. So read this post series on property scams and Ponzi schemes with the thought of adding in the little checks and balances into your process.

I believe the key is to research upfront, before you invest, it seldom works afterwards. Part of becoming a great investor is creating a systematic process for investment that covers the possibility of scams, Ponzi's and bad business models in property or any investment. And I still feel the best advice is: if it seems to good to be true, it probably is, no matter who is promoting, celebrities or sportsmen, no matter how many guarantees they are offering.

If You’re A Typical Investor, You’re A Typical Target For Scammers.

There are plenty of different types of scams, some of which you will have come across in markets and on street corners: the ‘three-card monte’, flipping cups, and finding the coin under one of three cups are all examples of how con artists steal your money. If you’ve ever been the victim of one of these games, you’ll have walked away with lighter pockets and feeling a little dumber. That’s bad enough, of course, but small change when compared with how much the big scams can cost you. Property investment scams can quite literally cost you your home. The thing about scammers and the scams they perpetrate is that both are believable.

Anyone who has ever been caught out by a scammer is a person who never knew the scam existed, or could be said to have acted ‘naively’ by placing all their trust – and often all their money – in the hands of the scammer. They were attracted by the promise of huge returns, and the ‘evidence’ of massive profits being made by investors. If you know what the different types of scam are and the signs that should set the warning bells ringing, then you’ll avoid becoming another scam statistic.

There’s A Scam Around Every Corner!

I’ve been involved in property markets and property investment for more than 20 years, and it constantly surprises me not only how scams start and then develop, but also how investors are sucked into giving their money away. Based on the research done by Office of Fair Trading in December 2006, almost half the UK adult population (48 per cent) – some 23.5 million people – is likely to have been targeted by a scam. Some eight per cent of the adult population – 3.9 million people – would admit to having been a victim of a scam at some time. Consistently, it was reported in 2014 by the Citizens Advice Bureau that 4 million people in the UK become scam victims with increasing number every year. In 2013, ￡168 million was lost to investment fraud in the UK. In 2014, the number hit ￡212 million in 2014, up by 25%. These aren’t all victims of property scams, of course, but property scams tend to be the ones that cost the most money. Investors were the largest victims of fraud in 2014.

Scams come in a variety of disguises, and are increasingly conducted without the victim and scammer ever meeting! In fact, nearly three quarters of scammed people don’t know the scammer. That makes it even more difficult to recover any money, which has usually disappeared out of sight long before the victim even reports being scammed.

Not All Scams Start As Scams, Some Are Just Businesses Gone Wrong

Some scams start out as scams, with the perpetrator having criminal intent from the off. Others start out as a bona fide business built on a bad business model. Some scams even evolve from a good business model that has turned bad because of bad business decisions or complacency. The origins of the scam don’t really matter. What matters is the result: a lot of people losing a lot of money. However, let’s take a few moments to discover how these scams do differ. The classic scam is when the perpetrator deliberately sets out to steal investors’ money. You may have heard the term ‘Ponzi scheme’. This type of scam starts with absolutely no more than a promise. Investors’ money is used to feed previous investors their promised return, with the scammer skimming the remainder. The majority of investors in this type of scheme lose everything.

7 Scams for Seven Suckers

How easily do UK investors become scam victims? Very easily, according to those figures produced by the Citizens Advice Bureau. Scams and fraud cost British citizens billions of pounds every year. To those who understand the types of schemes and the telltale signs of a scam, victims might be called ‘suckers’. However, what I see is a social system that fails to educate people in how scams work and how to avoid them. Here are seven examples of possible property investment scams from around the world that have collectively cost investors at least ￡600 million ? many of these investors from the UK. Were they a Ponzi scheme, scam or bad business model? I'll let you decide.

Colourful and personable, and a sponsor to football teams in Brazil and Italy, Anthony Armstrong Emery set up EcoHouse to raise international investment for low-cost housing in Brazil. He touted his development company as one of those with exclusive contracts to build 1.7 million units of subsidised housing under Brazil’s Minha Vida programme. Investors were promised a return of 20% per year. In October 2014, Brazilian authorities announced they were investigating EcoHouse for crimes including fraud, money laundering, tax evasion, and conspiracy. Armstrong Emery’s company wasn’t even listed as a participant in the Minha Vida scheme. EcoHouse had managed to sell investments in properties they didn’t own, and would never be able to build. The company was liquidated, along with every penny of investors’ money. In a January 2015 meeting of investors in the West Midlands, Armstrong Emery addressed the crowd – from an unknown location in the Middle East. He blamed everyone but himself for the problems, but couldn’t (or wouldn’t) give any clues as to when investors might see the return of any of their investment.

In comparison to the EcoHouse scam, the Profitable Plots scam is small change. But try telling that to the investors who were duped with the promise of a 12.5% profit in only six months. Investors were tempted to buy bonds in a scheme called Boron Investment; but instead of being invested, the near ￡2 million raised was spent on repaying debts and six-month remuneration of ￡900,000 to the directors. These directors, British-born Timothy Goldring and John Nordmann, were convicted on 18 charges of fraud.

North Dakota Developments was a subsidiary of Property Horizons, a UK-based property investment firm. Its website and associated marketing materials stated that its “focus is on producing superior housing solutions at an affordable price, thereby offering excellent returns for our investors.” Investors from around the world were offered the chance to invest in commercial and residential real estate projects in the Bakken Formation region. Investors would effectively buy a unit (share) in the development that had a guaranteed lease to oil workers in the area, and North Dakota Developments would then manage the property on behalf of the investor. The company never registered these shares with the appropriate authorities, but that wasn’t the worst part. The investors, who had predominantly invested through website offerings, were offered a return of 59.4% over three years, guaranteed rental income, and a guaranteed buyback value of 110% of investment. Investors placed their funds into an escrow account as they waited for the development to complete and the investment to be made. These funds were continually drawn down, despite the development not proceeding to plan. In the UK, Property Horizons was shut down by the Financial Conduct Authority.

The Harlequin Property Company was founded with one purpose: to build 6,000 luxury properties in the Caribbean. For 3,000 UK investors, the opportunity was too good to turn down. Harlequin Properties’ promotional material was convincing. Sports stars such as Australian tennis legend Pat Cash and Republic of Ireland footballer Andy Townsend were used as advocates for the scheme, as was Liverpool Football Club. Fantastic returns were promised, and previous experiences in other successful developments were used as evidence of investment potential. Some investors paid good money to own their new luxury holiday homes or investment properties with the potential to produce mind-boggling holiday rental income. The Essex-based company’s chairman, David Ames, has put the company HQ up for sale, and failed to turn up to court in St. Vincent to give evidence in a case that has so far taken up five years of court time ? and this isn’t a case brought by investors, this is a claim for work-related damages. The company has completed only 300 of the planned 6,000 properties, with Ames blaming the 2008 economic downturn for delays. Harlequin filed for administration in April 2013, and the court proceedings, with investors desperately trying to recoup some of their money, drags on.

Far East students love coming to the UK to study. We have some of the world’s best universities, and the country’s diverse and eclectic population is welcoming to many cultures. So when Singaporean investors were offered the chance to invest in student accommodation, with guaranteed rental income of between 5% and 8% per year, 200 jumped at the chance. UK-based Key Home offered investment opportunities in a number of hotels and student hostel projects in various cities including London, Leicester, Birmingham, and Hull. Investors paid deposits of up to ￡40,000, believing the company would deliver on its promises and develop the student accommodation. The developer has only completed two of the nine projects it started (refurbishments from old buildings), and investors who have ploughed their life savings into the scheme since 2011 are now left with nothing to show for their confidence in the ability of Key Home to deliver. Investors thought their deposits were safe; after all, they were insured. What investors weren’t told was that the deposit insurance meant nothing, as the insurer was unregulated and unrated Northern & Western Insurance. Northern & Western has now gone into liquidation, so there’s no insurance money to make good on investors’ lost deposits.

When it comes to investing, you’d think you could trust a former Eton contemporary of Prince William. Especially one with the aim of renovating old properties and renting them out as affordable homes. And, when the CEO of the company claims it is “one of the only safe investments available”, your ears might prick up a little further. And the 9% annual return and phenomenal growth promised is also likely to push you to make an investment. The paragraph above describes Fresh Start and Empirical Property Group, a company run by Charles Cunningham and Andrew Camilleri. In 2013, Fresh Start was served a winding-up petition in Nottingham over a scheme that then had five unpaid county court judgements against it, totalling ￡31,400. Across the country, Fresh Start and its parent, Empirical Property Group, left a trail of half-baked and half-finished developments. Those that were completed were plagued by breaches of safety standards and poor finishes. Investors had been lured into student accommodation schemes, and paid millions in deposits to secure a foothold. Many schemes never even got off the ground, and at least one was sold to investors without Fresh Start owning a single brick of the property to be refurbished! At other buildings, work was completed and rooms rented out to students – then Fresh Start kept all the rental income. Fresh Start was finally wound up in December 2013. I indirectly lost ￡200k to Fresh Start by having to pay back investors and court costs. In the end, we won the case but the company had no assets!

Except, magically, about ￡18 million appeared in the accounts of the parent company, Empirical Property Group. Where did it come from??? We will probably never know. Fraudsters are able to use the Companies Act to siphon off money from one company to another. Of course, without detailed accounts and access to their bank it very hard to prove anything and it seems the authorities have bought their story and excuses.

The story of Dylan Harvey, a company owned and run by Toby Whittaker is a story of lies, deceit, and malpractice of the highest order. Pensioners who trusted independent valuations were hoodwinked. Dylan Harvey specialised in selling the buy-to-let dream to investors. Many of these were pensioners who wanted to increase their income through their retirement years. What they were left with were properties in immediate negative equity and unable to meet even the mortgage payments from rental income. Among Dylan Harvey's many shady practices was appointing a mortgage company shortly before its developments were complete. Surveyors were employed to provide valuations and rental prices. According to one investor, Mr Malcolm Roscow, not once did the rental valuation differ from that given to investors months earlier. The rental prices also mysteriously matched the 130% rental cover that the mortgage companies required at the time. On many of its apartments, Dylan Harvey had told surveyors that a parking space was included. No such spaces existed. Consequently, apartments were valued at tens of thousands more than their real value, and rents fell hundreds short of their promise. Dylan Harvey’s activities were conducted through a web of companies, including Dylan Harvey Land Investments and Dylan Harvey Residential (DHR). Its collapse in 2009 cost investors millions.

Interestingly, Toby Whittaker, is now the man behind First Group - First Storage, First Parking, which already has complaints against it. First Parking made the front page of The Times newspaper again, due to the returns it was offering targeting pension money. Could this be the next Ponzi, scam, or bad business model?

To learn more, you can download my Free How to Avoid Property Fraud, a Ponzi Scheme, Scam or Bad Business Model Book 

In the meantime, have you ever been scammed?
What property scams have you seen that you'd like to share?