Scams, Surprises, and Hidden Costs of Investing on Your Own

Scams, Surprises, and Hidden Costs of Investing on Your Own

The market for US investment properties is hot right now. Property suppliers and foreign investors alike are making huge amounts of good, honest money. Unfortunately anytime large amounts of money is involved in a new investment opportunity, there are always unscrupulous characters looking to take advantage of people through scams and hidden costs. American Properties is here to prevent this, but if you decide to go it alone, here are a few tips on the house (pun intended).

While the US is one of the safest foreign markets to invest in, it goes without saying that any time you invest outside your own backyard the risk of being scammed increases. It’s important to educate yourself on common scams, surprises, and hidden costs which foreign investors are prone to encounter. Always exercise good judgment, always work with reputable companies, and always conduct thorough due diligence before making any investment decision.

The following items are a few things we would advise you look out for if you decide to invest in the US Property market on your own. When you decide to invest with American Properties, these are just a few of the things we take care of in order to make your life easier and your investments more profitable.

Overpriced Property

This is a very common scam that preys on foreign investors who are unfamiliar with fair local property prices. The property in question may still cash flow and appear good on paper even though it is overpriced compared to similar properties, however just because an investment is profitable does not mean you aren’t paying too much for it.

Example – A supplier buys a house for $35,000 and immediately resells it for $50,000. At an investment basis of $50,000, the investment still cash flows at an attractive rate and is marketed based on that fact. The supplier knows you are looking for cash flow and that you lack the local knowledge to determine that you could buy the same investment property for $35,000, and the supplier takes advantage of this.  American Properties avoids this through the utilisation of verified, qualified, and reputable service providers; in addition to performing thorough due diligence on each individual property.

Low Quality Construction Methods and Material

Whether a new construction or a rehab/renovation, many players in this market will use the cheapest materials and the cheapest contractors to maximize their profits at the expense of whoever buys the property. They know that they will be reselling the property shortly after their work is complete so they neglect quality for the sake of profit.

Example – A dishonest supplier uses roof tiles with a 5-year lifespan rather than 20 years, or their contractors save time and money by cutting corners on electrical work. The result of this poor workmanship is a property that requires an unreasonable amount of costly repairs every year.

Bad Location

In the US neighbourhoods can literally change from block to block. Suppliers can and will sell properties that can be located in areas with gang crime, abandoned homes, or any other manner of undesirable circumstance. These properties may be very difficult to rent out if the existing tenants leave.

Example – Philadelphia locals know not to travel north of Girard Street as the crime rate rapidly rises along with poverty and drug use as you travel north of that street. Foreign buyers rarely possess this detailed local knowledge. Take a $50,000 property that is located 1 block south of Girard in a relatively safe blue-collar neighbourhood. If you were to pick that house up and drop it 1 block north of Girard its value immediately drops to $40,000.

American Properties utilizes its reputable team of experts in each investment area, and leverages their local knowledge to ensure that you don’t end up investing on the wrong part of town.

Artificially Inflated Rents

Dishonest suppliers have a number of tricks up their sleeves to make their properties appear to have a higher yield. By arranging that tenants pay a higher rent than fair market value, an investment property can appear to have a much higher cash flow yield. Some dishonest suppliers will even provide a “rent credit” to a tenant for the first year and not report this when selling the property. When these tenants then move out the buyer is left with a property that commands a much lower rent and lower monthly cash flow.

Example – A supplier may have their friends or family move into a property they are selling and pay an inflated rent of $1000/month when fair market is $750. Each time rent is paid the supplier refunds $250 cash to his friends as an “under the table” rent credit. The unfortunate buyer purchases the property based on the current rental returns only to have these “fake” tenants move out 6 weeks later. The buyer is only able to re-rent the property at fair market value of $750 and now receives $250 less positive cash flow per month than they anticipated drastically reducing their rate of return. Additionally, had the buyer know the true fair market rent, the property would have been valued $5000 lower then what they paid.

American Properties has assembled a team of expert attorneys, property agents, property managers, accountants and financial professionals that know exactly how to spot these scams and keep them from ending up in your investment portfolio.

Exorbitant Service Fees

While American Properties charges NO FEES for purchasing a US investment property, some of our competitors have different business models which include a service fee for each property purchased. The typical service fee charged for purchasing a US investment property has a fair market rate of $2000-$4000 depending on the company’s experience, expertise, service level, and overall results. If you pay anything higher than $4000 you are simply being scammed.

Example – The highest fee we have ever seen was $10,000 for a $150,000 property. The supplier presented a deal that looked good on paper – decent yield, appreciation potential, nice neighbourhood, etc. However this was an open market property, anyone could have purchased it without paying a $10,000 service fee. An investor could have become an American Properties Member for only $1995 and purchased the property saving themselves $9505 in the process.

Pending Repairs and Deferred Maintenance

An investment property may be in a rentable condition now, but have expensive repairs looming. Often a property owner will find out about an expensive issue with their property and immediately move to sell. They avoid paying the repair costs and pass on this problem to whoever buys the property.

Example – A property owner has a problem with a leaky roof. The contractor repairing the leak discovers the roof is severely deteriorating. He can repair the leak for $100 but the roof really needs to be entirely replaced at a cost of $4000. The property owner opts for the $100 repair job and puts the property on the market without ever mentioning the roof. The unfortunate buyer finds out very quickly that their new investment just got $4000 more expensive.

Non-existent properties

Believe it or not, there are individuals who have sold properties to foreign investors that simply did not exist. This is perhaps the ultimate in crooked scams that face unprepared foreign investors. It is by no means common, but it is always a good idea to error on the side of caution by teaming up with a reputable service provider such as American Properties.

Example – A scammer markets a property and finds a buyer. The buyer is advised to wire the funds to a bank account. Once the purchase funds are received the scammer disappears never to be seen again, leaving the “buyer” is left with no money and no property.

American Properties’ team of professionals knows how to spot scams like these from a mile away. Team up with us and let American Properties protect your portfolio.

We take the hard work and risk out of investing in the USA.

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