How many times have you seen an enticing advertisement offering a free vacation if you’ll just spend thirty minutes listening to a ‘no-obligation’ presentation about the resort property? They are extremely tempting, but have you ever wondered why they would offer a free vacation just to sell a timeshare or apartment if it really was such a great deal?

Beware the overpriced investment scam

What happens if you take them up on their offer for the free vacation? Let’s go inside one of those meetings and see what happens. They present the property as an investment with no downside, it’s a lovely resort that many others just like you will want to invest in, and they may even tell you that the property has only a few units left for sale. You usually are not given the opportunity to investigate the offer, talk to your accountant or trusted adviser or check the market price and you are pressured to buy quickly “in case you miss out”.  You end up buying a property for tens of thousands of dollars over the market price.  Buying something that includes thousands of dollars of commissions is money that is straight out of your pocket, and off the value of your asset.  This makes it difficult to achieve a profitable return on your investment.

Sometimes unrealistic rental returns are promised for these properties, and they may even be guaranteed.  What happens is that some of the extra money that you paid is filtered back to you to subsidize the rental return.  You are simply getting back part of your capital (as taxable income).

This scam relies on your lack of knowledge of the local markets and hard-sell pressure, which stops you from using your rational skills to analyze the ‘opportunity’.  The packaged investment scheme relies on unrealistic returns and hidden fees, with huge commissions disguised in the fine print.

How can you identify a scam?

First, an honest salesperson will encourage you to take your time and verify the claims.  You will be able to independently assess any promised returns.  Whereas a scam artist will put pressure on you to quickly close a deal, hoping that you don’t change your mind.

The sales person is unlikely to have any formal skills, other than the minimum to be certified as a saleman.  Their primary skills will be in sales, not law or accounting.  Their last job may have been selling something completely different.  A good sales person has a lot of experience in the industry, is professional (not flashy) and has a detailed understanding of the market.

A scam will have returns that are too good to be true.  In some cases, the only way that it will work is through taxation, and taxation is given a strong emphasis in the marketing materials.  It will be presented as something completely novel and fleeting, so you feel compelled to act quickly before the opportunity disappears.

It may have a guaranteed high income for a few years.  A good investment generally won’t need that – it is presented on its own merits with a realistic income.  Any return over about 6-7% for a property is quite high.  Any investment return (capital and income) over 20% over a long term is very unlikely to be achieved. So don’t let greed lead you into a bad investment.

How can you protect yourself against these scams?

• Remember that there are a huge number of investments available to you at any time.  There will always be another opportunity.  There is no need to think that you are missing out.
• Do your homework.  Don’t purchase impulsively.  Gain knowledge of the market and the investment.  Check current prices and learn to identify the difference between a good investment and a bad investment.  Use conservative returns and use your own figures rather than those given to you by a sales person.  Understand the potential risks.
• Don’t be pressured.  Anyone who doesn’t want to give you the time to consider the investment has a good reason for the high-pressure sale – perhaps it is not actually a good deal.

The deal that seems too good to be true, generally is.  Be conservative rather than try to become wealthy in a hurry by taking silly risks and relying on sales people for your advice.   Take control of your own future – carefully consider before acting, develop your own analysis, and don’t believe everything you are told.

Tags: Investment, scam

This entry was posted on Monday, April 26th, 2010 at 10:25 am and is filed under Investment. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.