A place in the sun or an investment nightmare?

High quality homes abroad, discount on the developers standard prices, promises of high capital return, guaranteed rental income 40 weeks a year, favourable mortgage rates negotiated with leading lenders, a reputable company to manage your property. Sounds too good to be true? Sometimes it is.

Foreign property investments and investment club arrangements have been popular for many years but it is very easy for property marketing companies, operating under the guise of investment groups or clubs, selling properties on behalf of developers to stretch the truth in order to induce people to part with their hard earned cash and invest off plan.

How Property Investment Schemes Work

Investment property schemes are usually spread by word of mouth or investment seminars and require individuals to invest large sums of money in one or more investment properties, often purchased ‘off plan’. Many schemes promise a discount on the developer’s prices coupled with a large increase in the value of the property which will result in a guaranteed return on investment. A property 'investment club' arrangement is a group of individuals pooling funds in order to make property investments that individual club members would otherwise not be able to afford. Whichever the type of investment, potential investors are often assured verbally that full due diligence has been carried out by the marketing company and that they will be guided through the process of buying abroad, often by foreign lawyers referred by the marketing company. These promised, when scrutinised, are not often repeated in writing.

For some, the reality of their investment property differs significantly from that which they were promised. This can lead to financial problems for investors, particularly if it transpires that the property value was substantially inflated and the level of rental income expected cannot be achieved. This can lead to investors being lumbered with loss making assets and being unable to maintain their mortgage payments. Whilst the investors are pursued by foreign banks for defaulting on their mortgages, the marketing company that sold them the promise of riches in the sun has pocketed substantial commissions and moved on to the next development, or worse, disappeared.


A marketing company making pre-contractual representations to potential investors must be honest. If investors relied upon those representations when acquiring their properties and they subsequently turn out to be false, investors may be able to recover their losses if they can establish that the representations were made negligently or fraudulently. Whilst negligent misrepresentation may be easier to establish, where the marketing company in question is no longer trading or has no assets, then it will be necessary to pursue its directors or those directly responsible for causing the marketing company to issue those misrepresentations. This will involve establishing that the individual(s) in question knew that the representations were false, or they were reckless as to whether they were true or false. They may also be able to pursue the developer itself if the marketing company was acting as its agent.

If a claim is viable, investors will need to consider the cost of pursuing the claim, versus what they can recover from the marketing company or its individual directors or the developer. Acting quickly and investigating their assets is key. This may enable investors to obtain litigation funding to assist with the cost of pursuing their claim. Worldwide freezing orders can also be obtained before proceedings are issued to ensure that if the claim is successful, there are sufficient assets available to pay damages to the investors and to recover costs. There are often many individual investors who have been stung by the same scam. If that is the case, forming a group and obtaining a group litigation order can be a good way to spread the cost and administration of litigation.

Avoiding the Pitfalls

The unfortunate reality is that being stung by a property investment scam can lead to investors losing their life savings and the knowledge that there are steps that can be taken to recover losses is little comfort at that stage. So what can potential investors do to avoid being scammed?

  1. Be mindful that real estate fraud exists. It is a common and growing problem around the world and can catch out anyone, from sophisticated professionals to those investing in their retirement.
  2. Be mindful of cold calls, promises of getting rich quick and aggressive or high pressure sales tactics. Do not commit to investing at a seminar; take the time to go away and consider things fully and obtain independent professional advice, if appropriate.
  3. Always do your own due diligence. Do not rely solely upon the promises made by sales people. Investors should research the market that they are looking to buy in and satisfy themselves that the price is not overvalued and that if they intend to rent the property out, that there is a buoyant rental market and no local laws or regulations preventing them from doing so. If possible, travel to the country in question to view the property and the area before committing to purchase.
  4. Use an independent local lawyer or broker to guide you through the process. Property laws vary vastly from country to country and not checking how they may affect you can have financial consequences. For example, in Cyprus, renting your holiday home to tourists is illegal unless you obtain a licence from the Cyprus Tourism Organisation. Investors may not be made aware of this when they are sold properties on the basis that they are suitable “buy to let” investments.
  5. Factor in the risk of currency valuations and local law changing. Particularly if you bought off plan, what seemed like a good deal when you invested, may not be such a good deal by the time the property is built. The value of currency changes and your mortgage may be susceptible to this. Equally, a country’s laws can change at any time and you may find that those changes, in particular tax and licencing changes, may make the investment less financially rewarding.
  6. Carry out research into the marketing company, not just via their website. How long has the company traded? Who are its directors? Are they the owners of the company? Check the marketing company and its directors’ legitimacy; it is amazing what an online search can uncover. If in doubt, make enquiries.
  7. Remember that no investment is risk free. There can be unexpected costs involved and the market can change overnight. If it sounds too good to be true, it probably is.
This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.