© The Financial Times Ltd 2015 FT and 'Financial Times' are trademarks of The Financial Times Ltd.
April 20, 2012 6:45 pm
Private investors are being warned about the dangers of buying repossessed homes at knock-down prices, after a US scheme left dozens of UK and European backers with derelict and untenanted properties – and thousands of dollars of additional costs.
Three years ago, property investment firms were enthusiastically promoting schemes to buy repossessed homes in the US cities of Detroit, Atlanta and Florida – with prospective net yields as high as 16 per cent.
Their message was simple: repossessed homes in the US, known as “foreclosures” could be picked up for a fraction of their value, due to the financial crisis and high levels of unemployment, but would offer high returns if they were refurbished and rented out. Buyers also stood to achieve significant capital gains as the US housing market recovered.
One scheme marketed by Assetz International, a well-known property company in the UK, was promoted as a “ground-breaking opportunity”. Its brochure stated that investors would see a “superb” return for a minimal cash investment, adding: “you will not find such an investment opportunity anywhere in Europe at the moment”.
The Assetz scheme offered buyers an all-inclusive investment: pay a lump-sum of typically $45,000-50,000 to secure a property, have it fully refurbished, and cover all legal fees and property transaction costs. Investors were told that the properties would be rented by tenants through a government-backed scheme within 90 days.
But dozens of investors who bought repossessed property in Detroit – through Assetz and other UK firms such as Experience International and Axis Property Investment – have found themselves stuck with properties that have neither been refurbished or tenanted, and which are now incurring ongoing costs. Their properties have also fallen further in value – prices in Detroit were down another 4.2 per cent between January 2010 to January 2012, according to the S&P/Case Shiller House Price Index.
Adrienne Cullen and her partner Peter Cluskey, a UK couple who live in the Netherlands, bought three Detroit houses for $140,000 through Assetz International in July 2010. “It was being sold to us as a hands-off investment,” explains Cullen. “We knew there were properties available for less, as we did our research, but we thought we were buying security.”
She says she started to become concerned when, five months later, none of the three properties had been tenanted. One property was later tenanted, but the couple have incurred costs of $4,000 to refurbish another property and their third property is estimated to cost $9,000 to fix. They have $8,000 worth of backdated property tax bills due across all of their properties.
A similar story is told by Patricia Busaidy and her husband Paul – a retired UK couple living in France, who bought a property in Detroit through Assetz International for $46,000 in December 2010, using the proceeds of an inheritance. Their property was not fully refurbished, or tenanted.
“Paul had this small inheritance and if we lose it, that’s tough – but now we’re having to put in money that we can’t afford to lose with no prospect at the moment of getting any money back,” Patricia explains.
However, Assetz and the other UK firms did not operate the scheme. All of the property transactions in question were carried out by the US firm NSUK LLC, run by a Detroit-based businessman called Tom Smith, and promoted to the UK property firms by Nuevo Skye UK Limited, run by Mark Demby.
Assetz therefore lays the blame on those companies who it says were in charge of sourcing, refurbishing and letting the properties in Detroit.
Some European investors also allege problems in dealing with the US firm and Nuevo Skye. Diederik Ising, who works for Unilever in Switzerland, had learned of the investment opportunity through Assetz initially, and spent $220,000 on five properties from NSUK in December 2009.
Investors considering purchasing a repossessed, or “distressed”, property abroad should proceed with caution – and seek independent advice to avoid potential pitfalls, experts warn.
Research published this week by HiFX, the currency broker, found that the sovereign debt crisis has done little to deter ambitious buyers from purchasing in France, Spain and the US, where some property values have plummeted by 50 per cent or more.
However, brokers point out that market and legal risks remain, no matter how “cheap” a property may seem. They stress the importance of taking advice from a lawyer unconnected to the seller, estate agent or property developer.
Buyers need to be certain that proper legal title exists, that the property is registered in the buyer’s name and that an independent valuation of the property takes place, says Clare Nessling of Conti, the overseas mortgage broker. In a recent scandal, hundreds of thousands of buyers were sold Spanish homes by developers – only to discover they had no legal right to them.
Other points to check include the tax status of the property, and any unpaid debts secured against it – for which a new buyer could be liable. “In Spain, the mortgage is attached to the property, not the buyer, and there have been cases where buyers, without the right representation have bought property with a debt still attached that they knew nothing about,” says Miranda John, international manager at SPF Private Clients.
With repossessed properties, sellers seek quicker deals, notes Charles Weston Baker, head of international sales at Savills – but this makes it “essential that all of the paperwork is in order and no shortcuts have been taken”.
Nessling warns against buying a property overseas without visiting it first. But she says purchasing with a mortgage can make the process safer, and the lender will carry out its own legal checks. A Spanish government guide to the purchase process can be found at www.fomento. gob.es/spanishrealestate.
A few months later, Ising visited Detroit and saw all of his five properties. “We were a bit shocked by the fact that things weren’t being done and everything was messy and disorganised,” he says.
Ising says NSUK kept promising to fix things, and feels he gave them too much leeway. “I thought I was working with a legitimate party who were selling their properties via a respected real estate agent in the UK. Looking back, I should have been much more careful.”
Demby’s firm Nuevo Skye went into liquidation on September 20 2011, according to Harris Lipman, the appointed liquidator, and inquiries remain ongoing.
In an email to the Financial Times, Demby says he was part of a separate company dealing with sales. He says money was paid to Smith’s company, NSUK, to purchase, renovate and rent the homes. He could not comment further for legal reasons.
Smith says his company paid contractors to carry out the refurbishment, and also paid to have some properties refurbished several times. He admits there were problems with the initial management company hired for the lettings, but says he subsequently appointed a new one. “Legally, I did everything I was supposed to do,” he says. “I did everything I could do to try and make it right.”
NSUK is being investigated by Wayne County’s mortgage and deed fraud unit.
Meanwhile, investors have questioned how much due diligence was carried out by sales agents promoting the scheme in the UK.
Stuart Law, chief executive of Assetz International, says members of his team visited Detroit to see the work being done by NSUK before they offered the scheme. “Our team were seeing properties being refurbished, they were seeing tenanted ones, we could see the lettings being done correctly and we could see happy buyers,” he says.
Rod Thomas, of Axis Property Investment, another agent that worked with NSUK, says he visits every location and every partner that the firm collaborates with.
Steve Worboys, managing director of Experience International, says: “As a company, we do do our due diligence, but ultimately it comes down to the individual. We will hold our hands up and say we made a mistake working with NSUK. We’ve been let down by NSUK.” Worboys says his firm sold a total of 31 properties and only a handful of investors were affected by NSUK’s problems.
Agents say they have been helping affected investors by helping investors get their houses refurbished and rented. Most investors are being advised to stick with their properties as the best way to recoup their losses.
According to Law, Assetz International has provided “huge assistance” to buyers, assigning a team of three people to help investors. It has also been offering advice to buyers on tax and title issues with their properties.
Many now concede that the risks of buying into Detroit property were far too great for UK investors.
“It is probably one of the worst places on the planet to invest at this time,” says Nigel Gough of Belgrave Group, which stopped doing business in Detroit in 2011. He says houses are regularly vandalised, and boilers, kitchen appliances and copper piping are stolen.
Howard Jennings, chief executive of Stateside Property Company, says investors should only consider buying properties that have already been renovated, and have paying tenants. “Investors who are thinking of investing in Detroit shouldn’t buy a property that’s not already got cash flow,” he says.
Please don't cut articles from FT.com and redistribute by email or post to the web.