The world of real estate is a lucrative one that attracts many people around the world. The idea of establishing multiple streams of income, investing to increase your wealth, and even establishing passive income for future generations in your family, can all be extremely tempting. This is why there are so many people who are open to the idea of real estate investment. It seems like the right choice for a lot of people, and the promise that they can earn a passive income will feel like a good investment for when they retire.
Unfortunately, the real estate world is one that is full of jargon, complex agreements, and contractual obligations. Trying to break into the world of real estate investment can seem easy at first, especially given how many companies and services there are that can guide you, but the reality is that you’re walking into the lion’s den when you try to break into this lucrative industry. If you don’t do your research and find reputable businesses to work with, then it’s not uncommon to get scammed almost immediately because of a deal that just sounded too good to be true.
So without further ado, let’s talk about the importance of understanding property arrangements to help you avoid scams and malicious businesses.
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What are property arrangements?
Property arrangements refer to a number of different strategies in which an individual or group of people can structure their ownership or investment in real estate properties. These arrangements give you access to a number of benefits such as:
- Access to more capital because you can pool your resources with others, enabling you to invest in more lucrative properties.
- Mitigates risk because you’ll be sharing investment responsibilities with others. Risks such as vacancy, property damage, or even changing market conditions won’t be as impactful because you can share the risk with partners.
- Arrangements allow investors to diversify their investment portfolio, making it a great way to break into the real estate market by investing in residential, commercial, and even industrial properties.
In short, property arrangements can help you invest in something much more expensive than what you’d normally be able to afford. It’s one of the most common ways for people to break into the real estate industry, and it gives them a taste of what to expect should they decide to go their own way in the future.
Some common examples of property arrangements include:
- Joint ventures, an arrangement that involves pooling funds from multiple investors to purchase real estate properties. It’s a great way to invest in larger properties that might otherwise be too expensive for individuals. Due to the economies of scale in the real estate market, this usually provides larger returns than what would be possible with smaller properties.
- Real Estate Investment Trusts (REITS) are companies that own, operate, or even finance real estate projects that produce income. A REIT allows basically anyone to invest in the real estate market. They can purchase individual company stocks and reap the benefits without having to go out and buy, manage, or finance individual properties.
- House hacking is an option open to people who already own property. It usually involves purchasing a multi-unit property and living in a unit while renting out others. It’s a great way to generate additional rental income while also reducing your own housing expenses. One of the most common forms of house hacking is listing your property on Airbnb. This is a great way to rent out single rooms for short-term guests, but it can also be done without a middleman service.
- Timeshares can also be seen as a form of property arrangement, though not for the purposes of investing in a property for the sake of generating profit. Instead, timeshares are like sharing the financial burden of owning a vacation property. It can give you access to luxurious properties in popular holiday destinations, and you pay less because it’s split between a group of people.
While many of these property arrangements aren’t outright scams and can benefit people who are either looking to invest in real estate for profit or just to have another home, they can sometimes lead to undesirable outcomes that make them feel like scams.
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How property arrangements can turn into scams
To many people, a property arrangement can seem like something that is too good to be true–and that’s one of the main reasons why people are drawn to them in the first place. There’s usually a promise of a high or quick return on investments because you’re investing in property. The promise of risk mitigation is also enticing because the financial burden of investment is split between multiple people.
Scams can also capitalize on the fear of missing out. Many scams create a sense of urgency to pressure people into making quick yet rash decisions without first conducting proper due diligence or research. This leads people to make hasty decisions which can lock them into poor contracts and schemes without realizing it.
Some people are also fooled by trusted referrals. They can exploit trust within social circles, communities, or even families. It’s normal for people to place their trust in professionals or those whom they’ve personally interacted with in the past, but this trust can be exploited if you’re not careful. Manipulation is one of the most common strategies when it comes to property arrangement scams, and it’s something you should definitely watch out for.
And finally, a lack of financial literacy is another problem that frequently causes people to sign up for poor contracts and scams. Not everyone understands the complexities of investments and their associated risks. It’s easy to be fooled by complex jargon and reports that may or may not be falsified. Add to this the desire to achieve passive income and grow wealth, and it’s easy to see why people would be followed into property arrangement scams in the first place.
To help illustrate these points better, here are some of the common scams associated with property arrangements:
- Joint Ventures: Parties may often overstate the value of their contribution to a joint venture, or they may begin to siphon funds and assets from the joint venture for their personal gain. They may also act in their own interests, instead of the best interests of the entire venture and everyone involved.
- REITs: Fraudulent companies may set up fake REITs that promise high returns with low investments. They may overvalue the properties held by the trust, and they may not fully disclose the risks associated with REITs which leads investors to have a false sense of security.
- House Hacking: Tenants may illegally sublet parts of their property, keeping profits to themselves without the owner’s knowledge. They may also cause intentional property damage and make false claims to avoid responsibility for repairing it. Overall, house hacking is something that can avoid most scams since it’s often done by the owner of a property, but issues may arise in the case of a tenant using house hacking when they aren’t the owner of a property.
- Timeshares: Salespeople can often use deceptive or aggressive tactics to pressure buyers into purchasing timeshares. They may misrepresent the properties and mislead people about what they’re getting. Some owners also find it difficult to resell their timeshare due to restrictive contracts or oversaturated markets.
Overall, there’s a combination of financial vulnerabilities, manipulation, and the promise of easy passive income which can lead people to sign up for these property arrangement scams. Some of them are legitimate and are run by fairly large companies, but while they aren’t exactly scams, they have a low return on investment and won’t deliver on their lofty promises.
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Tips for avoiding property arrangement scams
Avoiding property arrangement scams requires you to be vigilant and informed. Thankfully, there are a number of ways you can do this.
First, start by performing research on any of the companies and groups that you’re thinking of working with. For example, before you decide to invest in a timeshare, make sure you look at reviews of the company to ensure that they’re not forcing their customers into restrictive contracts. If you find yourself in these types of situations, then you may want to look at Wesley Financial Group reviews or similar information about companies that can help you cancel a timeshare. If it’s a common issue that occurs in your state or country, then it’s worth looking for reputable companies that have good reviews.
It’s also a good idea to always request documentation to prove ownership and authorization. This is particularly important when it comes to REITs and joint ventures where it’s common for people to overstate what their properties are worth or their potential income. It’s also a good idea to visually inspect these properties. You should absolutely be wary of anyone who doesn’t allow visual inspections of properties, as it usually signifies that something is off.
Lately, be aware of any unrealistic offers. If a deal seems too good to be true, then there’s a good chance that it’s just a scam. This is one of the easiest ways for bad actors to lure people into property arrangement scams. If it raises any red flags, then consult a legal expert if necessary or just look for better options.
