Lies and false promises weaken industry foundations

Exaggerated market prospects, false rental guarantees and risky mortgage options are creating the 'scandals' and 'exposés' of the future, but the practices of some developers will have the most devastating results for the industry, reports Alex Evans.

The Sunday Times' recent exposé of UK agents promoting spurious rental guarantees in Bulgaria has worried many professionals in the overseas property industry. With an unprecedented amount of interest in overseas property, and a growing profile in the media, agents fear that stories about buyers being ripped off will severely limit the industry's prospects.

"This unprofessional attitude towards aspects of contact with the public will only prolong any distrust and poor regard the profession is held in," said Alex Charles of Creme de Languedoc. "There is no room for shady practices and the sooner this message is understood and pressure brought to bear, the sooner the tarnished reputation of property developers and agents will disappear."

The short term attitude of the few could ruin things for the majority said Mary Dunne, sales director at Panorama Properties: "It's the get rich quick brigade who move on to other markets, and leave the bona fide agents to clean up after them. They have cleaned out the Costa del Sol and moved on. Our industry does not need them, and these companies should be blacklisted."

Based around the 'promise' of rental guarantees, The Sunday Times asked whether agents were exaggerating prospects in local rental markets or simply lying about bogus offers made by developers.

Colin Barrett-Treen, managing director of finance provider Blue Horizons, highlighted a number of situations where agent partners in the Bulgarian market were marketing 'anticipated rental' based on the management company's expectations as a 'guaranteed rental'.

However, terminology aside, Barrett-Treen also encountered a far more serious situation. A case in point was a 'Spanish company' that had offered a two year guaranteed rental income of 6% on two products in Bansko, guaranteed by a Bulgarian bank. "A bank guaranteed rental sounded, on the face of it, a sure thing and we marketed it accordingly," said Barrett-Treen. "It was not until we ceased using this company for new business that we discovered exactly how this 'guarantee' was being provided. Quite simply, the company was adding a total of 12% to the purchase price of each property where a guaranteed rental was being provided then lodging these funds in a bank account with the 'guaranteeing' bank, to be paid back to the purchaser over the two years following completion of the property.

"In other words, the company was taking the guaranteed rental income out of the purchaser's pocket as a part of the purchase price (so the client was obligated to pay VAT on the amount taken from them), then promising to pay the purchaser back (with their own money) over the following years to provide the guaranteed income. This income is of course also taxable."

The agent, in a position of trust with the buyer, was seen to completely abuse that trust, as Barrett-Treen concludes: "On approaching the underlying promoter of the properties we discovered that they were quite willing to sell the properties at the original price (before the 12% had been added, but without the 'guaranteed rental income' option). I believe very strongly that this practice is both unethical and unprofessional, and should be eradicated from the market, not only in Bulgaria but anywhere else it is found."

Bulgaria may suffer from bad press, but Peter Stanhope, President of the Florida Brits Group, has seen it all before in the US. Beyond the promises of guaranteed rentals and off-plan capital appreciation projections, Stanhope is more concerned about delivery of projects more than two years after initial promises.

"Thousands of 'investors' (read 'suckers') have their millions of dollars of deposits tied up in escrow accounts that nobody knows where they are, or who has control of them, and on-site construction has been standing still for months with not a single home yet built. Every excuse in the book is being trolled out - from protected turtles to gophers - to keep the investors' concerns at bay."

Observing that many of these developers have moved on to other markets around the world, Stanhope is "carefully watching five Central Florida projects, maybe even seven, which were being fiercely promoted on the UK market two years ago" where homes still do not exist.

As this time bomb ticks away in Florida, a number of agents have expressed concern about the practices of several other 'global' developers who are not only marketing projects without planning permission, but reneging on payment. One agent told The OPP that a developer currently owed more than £500,000 in commission to several agents. He further alleges that the developer has failed to produce evidence of the requisite planning consent for residential development for one of its major projects.

The industry is often well aware of such practices. Another agent recently highlighted the case of a developer in Spain who tried to steal water from a neighbouring development by building a pipeline during the night - after being denied a water pipeline or a water licence. "It had already sold all its properties and is already well under construction," she said.

Until the overseas property industry is fully regulated, the only means for raising professional standards are through individual accountability and a refusal to tolerate illegal or unethical practice. While the associations promoting self regulation continue to promote a code of practice, they are yet to prove a real change in attitudes and standards - with many in the industry observing that some members of these organizations are still behaving unethically and irresponsibly.

With proposals for the US regulatory model to be adopted by Dubai, intensifying demand for the formal regulation of Spanish agents, and the British government about to impose a more strict and mandatory code of practice on all 12,000 property companies working in the UK, how long will it be until the world's property markets force some accountability on the professionals working within them?

What do you think? Should the industry associations be focusing on ways to expose illegal or unethical behaviour, rather than merely promoting a code of practice? Should they pursue non-members for poor practice, and investigate industry abuses as part of their overall remit to raise standards in overseas property sales?

According to The Overseas Property Professional, Essential reading for the international property industry