How Can an Investor Distinguish Between Legitimate and Fraudulent Land Schemes?

The growth of the population in the UK naturally creates a need for new housing and commercial structures. But investors need to distinguish fraud from opportunity.

Between 2006 and 2012, The Insolvency Service closed down 82 land investment companies on the basis of fraud that took £60 million of would-be investors’ money with nary a sixpence in returns. But that may be just the tip of the iceberg of losses, as some authorities believe land investment fraud may cumulatively total as much as £1 billion.

How so much and how does this happen? It is hardly a new phenomenon, as investments in worthless land stretches back into history. Land fraud was present enough in the ancient times that it receives several mentions in the Old Testament, specifically Deuteronomy, Leviticus and Psalms. The very first mention addresses the fraudulent movement of a landmark that defines a boundary (Deuteronomy 22:17).

Modern land fraud takes advantage of individuals who are typically contacted by telephone. The pitch plays to a get-rich-quick scheme, hinging on the well-established growth of population, both at home in the UK and abroad, where world trade is opening up land in remote regions for agriculture and resource extraction. Some pitches are for contracts and property that are altogether invalid; in others, an actual tract of land might be sold to the hapless victim, however that land is usually inaccessible or forbidden from development due to proximity to historical or environmentally sensitive property.

To be clear, there are wholly legitimate opportunities to profit from land asset growth. But these are investments that require a significant minimal purchase — £10,000 or more – and which are managed by professional land investment managers. It is extremely unlikely that such programs would use telemarketing to find their joint venture participants.

That is not to say that individuals pulled into fraudulent schemes are rural rubes. The Serious Organised Crime Agency (SOCA) did a survey in 2005 to identify how scams operate and proliferate. It found the following:

• “Suckers lists” are developed based on past responses to questionable offers; The Financial Services Authority uncovered one such list that contained contact information for 38,000 people.

• A much larger group of people, about 3.2 million adults in the UK, together lose about £3.5 billion in scams of all types each year.

• The profile of the victim may not be what you think. Often, some knowledge of the subject of the scam offer may make the scam victim over-confident in their decisions to participate in the investment. Many have had successful business or professional careers, even if they allow emotion to override good sense in an investment decision. And, their decisions are rarely off-the-cuff; instead, they spend time considering the decision.

• Oddly, these scammed investors often do not discuss the investment with family or friends. They seem to know they will be challenged but are determined to proceed anyway, without validation from others.

Legitimate land investment offerings should be made with a thorough prospectus that accompanies ample information on the professionals managing the investment and the strategies they are following. The population increase in the UK provides many opportunities for land asset growth, as housing is in very tight supply and needs to be replenished with new building. One type of land investment looks at the areas in the most critical need of building, where the investors can work with local planning authorities to seek a land use designation change. Under the right conditions, asset growth can be considerable – but a period of two to five years is typically required to go through planning and infrastructure development.

Investors should always engage an independent financial counselor to determine where land, other real assets and traditional market-traded securities are prudent choices.