FRAUD IN REAL ESTATE

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A real estate fraud that is unraveling itself in India is expected to hit at least a million investors. Many unregistered firms have sold plots that have no legal sanction from any authority. Con artists are finding new and ingenious ways to fleece unsuspecting property investors. We have heard of so called, ‘leading builders’ being involved in land encroachment to real estate agents cheatings buyers.
Over all the grievances fall in five categories. Housing committees having gone defunct or fled the city; same plot being sold to multiple customers; societies refusing to hand over the registry of the plot to the owners; no development at all or generating investment in the name of fake property development by fictitious firms. Moreover, illegal construction beyond municipal limits is mushrooming even as the authorities feign ignorance. 
Many MLM company have mushroomed up and promise to pay 10%-15% per month on the investment in real estate. The company do not have credible source of cash flow also the initial payment are made by funds extracted from other investors down the pyramid. These companies are fly by night operators, they make huge money and after few months they simply dissolve the firm only to set another in another name.
Another investment in this sector is a real-estate scheme cobbled together under a portfolio management scheme (PMS) by an asset management company (AMC). Here money is invested in residential projects under construction with builders, presumably at some agreed price and then the builder sells out the project and the profits are shared between the builder and the financier (the PMS scheme). The interesting thing is that the PMS merely acts as a financier and hence there is negligible chance of making big money on this. The sales force promises fancy numbers which actually is far from reality. Another concern is the integrity of these AMC companies is questionable as the real estate industry is opaque and they can strike a side deal with the developer which bypasses the investors.
Moreover these scheme typically have a life of five to six years, with a loophole to extend it further. The exit policy in these schemes depends on the structure of investment, the more complex structure, the lower chance of easy exit. Most of the structures are developer friendly and the interest of the investor is ignored.
Initiatives taken up to protect consumer interest:
RBI has take step to curb the pyramid or ponzi schemes of MLM promising return of 120% plus, per year. In its initiative a circular by the Reserve Bank of India has alerted banks that in cases where accounts have already been opened in the names of the marketing agencies, retail traders and investment firms, the banks should undertake quick reviews. “Wherever large number of cheque books has been issued to such firms, the relative decision may be reviewed,” it said. 
With many MLM companies recently using the banking technology to dupe investors, the RBI said, “banks should be careful in opening accounts of the marketing/trading agencies etc. Especially, strict compliance with KYC (know your customer) and AML (anti-money laundering) guidelines issued by the RBI should be ensured in the matter.” 
Government and the builders association itself are stepping up to provide some protection to the consumers and thus protect their business. Various customer education programs by NGOs and Government have been launched where the buyer is made to understand that, a legal check is the non-negotiable part of purchase.

The above are some of the scam mushrooming in the Indian realty industry, where the regulator has no clue about the industry as well as the dynamics. To monitor such schemes it is important that real-estate investments get a separate regulator and the interest of the investor is taken care.

 

Nasheed

Write to Me at

nasheed@realestatewale.com

http://www.realestatewale.com

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