“It is a huge loss and will impact me for years to come.”
These words are from Gemma (not her real name) who has unwittingly become a victim of an overseas property investment that went wrong.
Even with her 15 years of experience of investing in property around the world, her latest investment in North Dakota Developments (NDD) has left her unable to sleep and the prospect of no retirement savings.
NDD is currently the subject of a court order and its assets worldwide are now frozen. On its website it claimed: “NDD Group is committed to providing expert solutions to the increasing lack of quality housing in the Bakken Formation region of the U.S.A.; currently sourcing, developing, and maintaining high quality residential and commercial properties surrounding the highly attractive areas of North Dakota and Montana.” To date its website is still alive.
As a warning to other overseas investors ‘Gemma ‘ has agreed to share her experiences with PropertyGuru readers to act as a warning for anyone, even experienced investors, that a bad investment could be just around the corner.
She said: “I had been a property investor for 15 years, mainly in Australia and New Zealand where I had lived, so I was confident and comfortable with the concept of property investing.
“I had been an international investor in the U.S. market for the last four years, and in 2011 I travelled with a group of like-minded property investors to Florida, checking out properties, meeting accountants, lawyers, setting up the appropriate bank accounts and getting our LLC’s established.
“It was a great opportunity to research the market and get a feel for what was available and understand the different property terms used in America compared to elsewhere.
“I purchased a Florida condo on that trip as an initial test investment to see if I was comfortable in the market and with the overall experience. I sold it two years later as I did not like paying the condo association fees, and I wasn’t making that much out of it after expenses.
“Overall it served its purpose and I was keen to do more.
“I subsequently purchased a block of units from the Internet in Detroit. It has been a great investment but the most difficult part of overseas investing is getting the right property manager who isn’t going to rip you off. I have been through a few but I have a good one now.
“I was keen to start investing in other states to spread the risk and realise opportunities elsewhere.
“I purchased a single family home in Ohio that is doing really well, and researched other states where I could purchase under US$50,000 to US$60,000 and make good monthly net returns.
When things went wrong
“NDD had been doing a lot of advertising for a couple of years. I had stayed out of the U.S. resources property market, as I had in the booming Australian resources property market, because I thought it was short lived but the more I read, the more I discovered it was long-term and there were good opportunities for a short, 5-10-year investment.
“I researched NDD online and couldn’t find any negative press or issues with their properties. As it happened, a fellow property investor had also started investing in NDD and suggested it may suit my investment strategy.
“I investigated further and decided to go ahead, purchasing two NDD units.”
The trigger moments
“I researched testimonials and the company’s investment strategy. They had been around for a few years and seemed to have a good reputation. For me, the trigger was the excellent returns. I thought even if I only made 50 percent of what they promised it would be a great little investment.
‘Their sales people were very good, advising that a few properties had just come back on the market from a buyer that couldn’t raise the funds. I jumped on the opportunity and purchased two units for US$59,000 plus legal expenses and fees.
“Even though the property was delayed their excuses seemed legitimate, like the terrible winter they had in 2013 that froze the ground so construction was delayed. I also had problems with my other U.S. properties because of bad weather so it seemed legitimate. I purchased another unit for a total debt of $200,000. What was worse was that a friend saw what I was doing and decided to invest. They used their life savings to buy a unit.
Stressed and sleepless
I took out a loan to purchase these properties; it is going to take me four years to pay off. This was supposed to be my retirement savings. “I’m totally devastated.
“The repayments were supposed to come from the rental returns but are now coming out of my monthly salary. I am single and hadn’t counted on this being a long-term expense. It is almost half of my salary each month and it’s hurting me really badly financially.
“This is incredibly stressful; I have had sleepless nights and can’t stop thinking about the deceit. The way it works where I am living is that if you default on your loans they put you in jail, no questions asked until after. It’s very scary and I’m really angry.”
Despite all of this, ‘Gemma’ will invest overseas again.
She said: “It hasn’t put me off investing but next time I’ll only purchase properties like my original investments, already built, rented out and making an income. That will be at least four years away, until I can save again after paying the debt I have because of NDD.
Could more have been done?
“I wish I had done more due diligence, found out more about their management team/owners and conducted more online searches. It was only yesterday that I discovered both owners has been previously fined and asked to stop some business dealings.
“Overall I’m devastated. I was just starting to make headway with my property investments to help me with my retirement.
“We don’t have family money and I’m not married so I don’t have anyone else to rely on, and I’m helping my parents financially in their retirement too.”
What can you learn from this?
Although experiences such as the one ‘Gemma’ is going through are fairly rare, it underlines the importance of doing your own due diligence, as well as the need for independent legal advice. Although rare, they are becoming increasingly common.
Despite doing everything you are able to, even the most experienced property investors, such as ‘Gemma’, are caught in the marketing hype and end up with years of suffering from one bad overseas property investments.
Consider your own holding power for the investment. Do not over-stretch yourself and never invest more than you can afford to lose. ‘Gemma’ will likely agree that taking a loan for an overseas property investment is a risky position, and one that needs complete confidence in your chosen investment.
When rental income is your goal, take into consideration periods where you may not be able to find tenants. Will you still be able to afford the repayments if your properties are not tenanted? This is especially important to consider after any periods of guaranteed rental returns have expired. Be clear on what returns you can really expect considering all expenses.
The importance of due diligence cannot by understated. ‘Gemma’ did almost everything those experts who speak at property shows tell us to do. Visit the place for yourself, and visit at various times of the day, understand the market for sales and rental, and check the finances and management of the developer and management company. The single area that ‘Gemma’ failed to do was that she explored an area she was not familiar with, and invested with a developer she had not worked with.
Be comfortable with your own risk versus the possible returns, and your individual comfort level will depend on your own risk appetite. Before properties are developed prices are typically lower than after they are completed. That is a fact.
Another fact is that properties in less developed or emerging markets tend to be cheaper than those in more developed locations are. The uplift could be higher in the long term but the risks are higher.
Consider what might happen if the developer runs out of money, or if you need urgent access to your investment? What if there is natural disaster that causes delays or even the total abandonment of your project? Some countries have laws that provide for a full refund plus interest, and some do not.
Know your chosen investment country and invest in a field that you are familiar with, whether it be the country, the market, or type of property. Mitigate as many of the potential risks that you can and be comfortable with your investment.
There are many stories which share some or all of what ‘Gemma’ is going through. The number does seem to be increasing, highlighting even more the need to do your own due diligence and gather as much independent information as you can – beyond that provided by the developer and agent.
The North Dakota Developments website as of May 13, 2015.
Andrew Batt, International Group Editor of PropertyGuru Group, wrote this story. To contact him about this or other stories email andrew@propertyguru.com.sg
