What is Third Party Fraud?
This is a fraud committed by people outside an employee employer relationship. They can be committed against individuals, businesses, companies, the government or any other entity. Third party frauds are not as common as occupational frauds, but on average each fraud is for a larger amount.
Some third party frauds are not meant to remain hidden forever. Some only remain hidden long enough for the fraudster to make their get-away. The fraudster may not care if the fraud is eventually discovered as they do not have a continuing relationship with the victim and they cannot be found.
What is land sale fraud?
This is a fraud related to the purchase or sale of real property – though similar frauds can be committed involving other assets. Purchasing property is not always a safe investment. Some purchasers are disappointed when they realize that the property is not worth the purchase price, legal title cannot be or is not passed, or the development or rental potential expected does not exist.
Some property investment groups or advisors try to sell properties (properties they own) to people at inflated prices based on inaccurate or incomplete information, and without giving people sufficient time to conduct their own investigations. Values will be calculated on an unsustainable basis (usually very high rentals and occupancy rates), and the true value may be well less than advertised. These groups may also arrange the finance to purchase the properties, at higher than standard rates.
Frauds may also occur as people try to sell their own property. Fraudsters try to obtain advance fees for marketing properties and are never seen again – known as Advance Fee frauds – or they commit a fraud whilst buying the property themselves – known as Vendor Finance Frauds. Some ‘marketers’ target older owners and ask for Powers of Attorney to help the sale process. as soon as they have the Power of Attorney they are free to deal with the property as they want, and that is usually not in the best interest of the owner.
What should people do before purchasing a property?
Add these points to your checklist of searches on the property, particularly investment properties:
1. Inspect the property
Always inspect the property. Some people buy properties or land ‘sight unseen’ and some properties will not match the descriptions given or photos shown. Some properties may not even exist. If it is a new development, discuss the development and the associated approvals with the local council. If you are not happy with the answers have a solicitor or an independent valuer conduct more detailed searches on the property. Talk to residents who live in the area, particularly in the same development, to see if they know something that you don’t.
2. Fees and Taxes
Look into the fees and charges, such as real estate taxes, council rates, other development costs, body corporate fees etc, regardless of how small you are told that they will be. If proceeding with the contract, make sure that all fees are capped at an amount acceptable to you. Beware of becoming personally liable for these costs if the developer defaults and owes council fees.
3. Get independent advice
Meet with independent real estate agents in the area to discuss the market and their opinion of the property. If the property appears to be a bargain, ask why no one else has purchased the property. Ask the independent agent how long it would take to sell the property, for what price, and how long that property has been on the market at the time.
This is particularly important if the purchase is being arranged through an ‘investment club’ where the club obtains their own information and packages it up to present to potential purchasers. They will then use the perceived competition between purchasers and short time limits to entice purchasers to make snap decisions.
If it is a rental property, ask independent agents what rentals they would expect the property to get, and what similar properties in the area are getting and how difficult it would be to rent the property.
Beware if you are not offered sufficient time to obtain independent advice.
4. Get details from the local council
Check with the council town planning department for any future development plans for the surrounding area that may affect the value of your property. It would be important to know if an airport, rubbish tip or a major road is scheduled to be built in the future – especially if it is to run through your property. You should also check if there are any restrictions or covenants that cover the land, particularly in relation to protected structures or trees on the property.
5. Who is responsible?
If the property is undeveloped, know who will be responsible for the costs of building roads, utilities or sewers. Do not settle on the contract until the works have been completed and approved by the local council. Also consider an appropriate time period for these works to be completed before the contract may be terminated. Be able to get out of the contract if the development period extends too long.
Research the builder, developer or sales agent
Contact your local and state agencies that regulate real estate agents and property developers to learn if any complaints have been made against these parties. Find out the length of time the developer has been in business as some start a new company for every project, what past developments the builder has done and get details of any restrictions that has been imposed on the developer by the relevant building authority.
Research the public records (Google is great for this purpose) to determine if there have been any civil actions brought against the salesperson, the developer or any associated company by other investors.
Obtain a copy of the property report
Most local councils will have details of the property and plans of any development that is proposed for that land. These are usually available for comment and for objections to be raised against the development. You should ask the developer to provide a copy of any disclosure statements, plans and covenants, and these should be verified before a contract is signed. You should make sure that the objection period has expired and that the development has been fully approved.
Be wary of the hard sell
Fraudsters trying to sell land generally will use the hard sell. Promises of a wonderful investment opportunity that seems “too good to be true” and claims like “it can’t fail to increase in value” should always arouse your suspicions. If the property is such a great investment, why do they need to try so hard to sell it and why has it not already sold, and why is it so cheap?
The promoters of these investments will try to create a sense of urgency, saying that the opportunity “can’t last” and “someone else is interested, don’t miss out”. Fraudsters will try to rush people to make a quick decision as they do not want potential victims to do any research.
Always be wary of “deals” and being rushed into a contract without having sufficient time to think about the deal, inspect the land, conduct searches and seek proper advice. If the land is that great, why are they selling it to you so cheaply, when they could be selling it to someone else?
Every investment has a risk. View slick glossy brochures that portray booming communities and charts showing increases in property values with skepticism, particularly when the development has not yet commenced.
Advance Fee Frauds (see separate Fact Sheet)
Some fraudsters work the other end of the property investment cycle. They target sellers of properties, particularly properties that are difficult to sell, or have been on the market for some time.
If people cannot sell the property quickly using local real estate agents, they may be contacted by someone calling themselves an agent with promises of an quick sale for a relatively high amount to an investor (probably an overseas investor), but a fee for their services will have to be paid in advance to cover costs, part of the commission etc.
The aim of the fraud is to obtain these fees in advance of a sale, then disappear. Be careful about paying advance fees to anyone who promises to sell your property to other investors, particular foreign or interstate investors, that are “just waiting to buy your property”. Advance Fee Frauds are also covered on a separate Fact Sheet.
Vendor Finance Fraud (see separate Fact Sheet)
This is a more sophisticated fraud that involves the fraudster purchasing the property in one of their entities and arranging for most of the money to be ‘financed’ through the vendor. The balance, being the amount of cash paid to the vendor at settlement, is financed through a third party financier and secured by a first registered mortgage.
After settlement, the fraudster draws down on the loan from the financier with the first registered mortgage and disappears. The financier gets their money back when the property is sold, the vendor looses most of their money.
LESSONS TO BE LEARNED
1. Not all real property is a good investment.
2. Fraudsters try to pressure people into quick decisions to limit the time to properly consider and investigate a transaction. Purchasers should be wary of these deals and take their time to examine deals properly.
3. Always get independent advice and valuations – do not rely on information provided by the seller. Be Suspicious. A few dollars spent before the deal may keep people out of a bad deal.