Real Estate

Higher Than Normal Rent Scam

With scams the best defense is often to discuss them and let people who haven’t run into them know how they work. Unfortunately, talking about scams can seem like a “how to” for scam artists, which IS NOT my intention here. I always love reading about scams and cons, in part to protect myself, and in part out of amazement at how devious people can be when they’re trying to part us from our cash. Depending on the level of interest, I may occasionally post more scams I’ve encountered, what the person was trying to pull and what might have happened if someone fell for it.

Some people starting with real estate investing, buy into the guru hype and will run around trying to buy stuff as quickly as possible. One scam that preys on this group is what I call the “Higher Than Normal Rent Scam”.

How it works is you find a piece of property that’s already tenanted, and it seems to be a great price for the rent it commands (say it costs $200K and is earning a rent of $2500 / month). You plug the numbers into your “get-rich-quick fast-calculations (patent pending) calculator” and decide this is exactly what the guru ordered. Talking to the seller, he encourages you, saying he’s selling to buy bigger investments himself and that this one will make you tons of cash. There’s only 1 month left on the tenant’s lease, but “he’s going to stay forever” you’re assured.

Soon after closing, the tenant contacts you and reluctantly informs you that he’s been moved elsewhere and won’t be renewing his lease. You wish him the best of luck (plotting not to return his security deposit depending on which guru low life you’ve been listening to) and decide to raise the rent and make it even more cash-flow positive (“this is how the rich think” you say to yourself, patting your own back).

The next month no one is interested in renting your place for $2700 / month (even though it would help you be cash flow positive, the nerve of these tenants!). You reluctantly drop it down to $2500. Still no takers. Time goes on, and finally you manage to rent it out to a shifty looking guy who has “lost his ID” and promises to get you a first-and-last month deposit “real soon” if you let him move in now.

Depending on who you are you may be thinking:

1) Can’t wait until the new tenant pays me! I’m on the fast track!!! Someone who says this doesn’t know it yet, but they’ve got a long, hard life ahead of them.

2) I guess I’m not a entrepreneur yet, I better hire a mentor for $200 / hour. Maybe I can hire that nice man who sold me the place to show me how he was able to get so much rent!

3) I guess the market has changed, I’m so unlucky. I’d best tell everyone how the world is against me and nothing is my fault.

4) Real estate is for suckers, I’ll never rent a property again and will sell this one as cheap as possible as soon as possible.

5) I’ll look into what comparable units are renting for. Then when I’ve found out they’re renting for $1200 / month, I’ll set my rent according to the market rate and screen tenants carefully. Looking into comparable properties, it seems like I paid 50% more for the property than I should have. Since it seems very suspicious that someone would have happily been paying more than double the going rate (sadly there aren’t a whole lot of dumb, rich people running around), I may begin to wonder if the lease was set up to justify an expensive property value and sucker me into over paying. Perhaps the seller and the former tenants weren’t the perfect strangers they pretended to be.

It’s easy to read a scam over and say “how could anyone be so dumb as to fall for that”. Clearly scams exists because people DO fall for them. I came across this one here in lovely Toronto. New real estate buyers may skip the step of determining FOR THEMSELVES what market rates are for a property they’re considering buying, and trust that nice seller who was so friendly and split a beer with them.

If you’re reading this thinking “good idea, I should try that next time I’m selling!” you’re scum. Sadly, there are bad people in this world and you’re one of them.

What scams have you encountered or, if it’s not too painful to discuss, fallen for?