Q&A: Dodgy Deals

Hi Olly,
I am a new property investor and have been actively reading as much material as I can. I’ve recently attended a course where they were promoting techniques such as lease options, sandwich leash options, cash back stop, double settlement, etc.

They were singing virtues of these deals and how realtively simple it is to find a good deal. What are your personal thoughts on this? I realise you have wrote an article titled ‘Dodgy dealers – what to look out for’ in 18 June 2009 about this.

I would very much appreciate your thoughts on this as I am still contemplating whether or not to join their programme.
Thanks for your time. Alex

Dear Alex

If it was that easy why any everyone doing it?
All these “deals” need the other side of the deal agreeing with it and in 99% of the cases they don’t.
Lawyers will never let these deals through especially in this market.
They sound good on paper but in reality they hardly ever succeed- unless the property is a dog and no one wants it.
I don’t know who you are talking about (and I don’t want to know) but any “get-rich-quick” programme is suspect.
I attach my programme which has been tested for over 30 years and based on my real life experiences and reality.
Up to you whether you want dreams or facts?

PS article below:


Property, by its very nature, is a big ticket item. It’s no wonder then that the property game attracts a variety of scam artists and fraudsters, as well as those who just push the envelope whenever they think they can get away with it.

We have all read or seen the suffering of those who have already been caught up in dodgy deals. The likes of BueChip, Merlot and the real estate agents from the highly respected firm of Barfoot & Thompson who abused their position in a multimillion dollar mortgage scam.

In this column and in subsequent articles over the coming weeks, I will set out to describe some of the ‘dirty tricks’ of the property game — to help you remain fully informed and vigilant — lest one of these type of deals is ever presented to you.

Property finders and Sandwich deals

Traditionally property finders — sometimes also known as buyer’s advocates — are licensed real estate agents who specialise in seeking suitable properties for their clients who may not have the time or inclination to look for themselves. This is a respectable and very useful service and is widely practiced both here and overseas.

Unfortunately scam artists have climbed aboard and, trumpeting themselves as property finders (although NOT actually licensed agents), many are effectively playing a game called ‘sandwiching’. Their objective is to simply ‘sandwich’ themselves between a legitimate seller and a legitimate buyer with the aim picking up a quick profit.

Some even hold themselves as property or wealth ‘coaches’, but they are not the least bit concerned about the welfare of either party, nor any stress and suffering they may cause. Most importantly, their scheme is designed to carry no risk to themselves. To the disadvantage of the vendor, these ‘traders’ don’t have the slightest intention of ever buying the property themselves.

How it works

The system is an abuse of the traditional methods used in the majority of property transactions. These self styled ‘finders’ use the standard Agreements for Sale and Purchase obtainable everywhere.

Typically targeting the cheaper end of the market the ‘finder’ puts in multiple offers, often through the internet, on anything listed for sale and always offering a very sharp price. Rarely do they ever set foot on the property let alone inspect it. You can recognise their ‘offers’ as they are inevitably conditional for several weeks and are in the name of the purchaser ‘or nominee’, and the deposit is invariably very small and not payable until the offer is unconditional.

During the period the property is under contract (with what is, in reality, only an option) the finder re-markets the property and hopes to on–sell it or ‘trade’ it by finding a legitimate buyer at a higher price.

If they succeed, they simply nominate the legitimate buyer and step aside — picking up the difference. If they fail to on-sell, they declare the contract void and move on to another sucker.

By the law of averages if they put in enough offers they will succeed often enough to make it a worthwhile exercise — for them.

Auctions and tenders are the only exceptions where the system will not work.

The hurt and inconvenience consequently falls on the honest seller who has been effectively taken out of the market during the ‘option’ period. He or she can only hope for back–up offers, which can be a highly stressful and frustrating situation for all parties — except of course the ‘finder’.

Guarding yourself

To protect yourself against this practice :

1. Warn your real estate agent to be on guard against these offers.
2. Ask for a substantial deposit to be paid up front. (The Americans call it ‘earnest’ or ‘hurt’ money for good reason.)
3. Accept any conditional clauses only for a short duration.
4. Always have a ‘cash out clause’ which allows you to sell to someone else during the conditional period if you receive another satisfactory offer.
5. Do your best to check out the buyer before signing.

Jacking up prices

Another way dodgy dealers manage to borrow more than a property is worth is by jacking up the price through a system called ‘hydraulicking’.

The usual method of valuing a property is by comparing recent sale prices of nearby similar properties and the last sale price of the property in question. What the dodgy dealer does is re-sell his target property to a colleague/partner who is a part of the scheme, often within days or weeks of buying it — but for a considerably higher price than was originally paid. Then his colleague sells it back to him for a yet a higher price. This money-go-round may be repeated a few more times with one sole objective: to have the property appear to be more valuable when the records are searched for sales evidence.

This trick has been used many times and was one of the causes of the massive strain (and sometimes collapse) of lenders who took the apparent sales evidence at face value instead of checking it out properly. The unfortunate result is that a lender can end up advancing too much money against the property, with the mortgage ending upside down and exceeding the real value by a wide margin.

Most competent registered valuers are well aware of this practice but unfortunately these deals (and more sophisticated variations of them) do slip through from time to time.

I have seen for myself a blatant example where a South Auckland home, with a real value of $250,000 at the time, was sold and resold within a few months with the last recorded sale being $550,000. Yet the house was exactly the same as before and prices in the street had hardly moved at all.

The owner had jacked up the value with the sole objective of fooling the bank into lending 80% of the last sale price (i.e.$550,000 x 80% = $440,000) thereby giving him a tidy $190,000 surplus in the hand. This is a totally crooked racket which has fooled many a lender or buyer to their horrendous cost.

Fortunately lending rules are much tighter now. The current generation of lenders is much more careful as a result of the recent carnage the lending market.

Nevertheless, if you’re a buyer, I urge you to stay alert to this practice and always use a registered valuer and their common sense before putting in an offer.

Olly Newland
June 2009

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