The scandal surrounding dubious lending practices and falsified loan documents on investment properties widened last week with the Asahi Shimbun newspaper obtaining over 1,000 records of correspondence that allegedly implicates real estate agents and several Suruga Bank employees. The correspondence, which took place via email and LINE messages, is alleged to show the bank staff receiving numerous falsified documents including faked rent rolls for investment buildings.
In the wake of a widening investment loan fraud scandal, a second share house company in Tokyo has filed for bankruptcy.
The company operated by developing and selling share houses to individual investors and then managing the properties on behalf of the buyers, offering high yields and guaranteed rents. However, as was the case with the other defunct share house operator that filed for bankruptcy last month, the vacancy rates of the share houses was higher than forecast and the company was not able to make the guaranteed rent payments to investors.
A report by the Asahi Shimbun newspaper on May 5, has alleged that that mortgage fraud scandal now extends to 11 Suruga Bank branches across Japan. The newspaper alleges that five companies are involved in obtaining loans from various Suruga branches that were based on falsified income statements, resulting in over-loans to borrowers. The Suruga branches that have discovered faked documents include Tokyo, Shibuya, Shinjuku, Midtown, Futako-Tamagawa, Kawasaki, Omiya, Tama Plaza, Sendai and Kyoto.
On May 7 the newspaper dropped another bombshell, reporting that the lawyers representing a group of investors had received an audio recording of a phone call that took place in April 2016 between a real estate agent and an alleged bank employee. In the recording, which was released to the public, the broker asked the bank staffer for advice on what to do if a sales agency was unable to tamper with the loan application documents. The bank staffer mentioned a company that takes on a lot of those requests. The broker then called the company in question and they confirmed that they could falsify documents. Suruga’s share price briefly dropped by as much as 11% the following morning before recovering.
The scandal surrounding a failed share house developer continues to grow this month as more information about dodgy spruiking tactics and falsified documents comes to light. As many as 700 investors from a single share house developer are facing potential bankruptcy, but the number of victims could easily rise as other investment-spruiking companies are put under the spotlight.
A lawyer representing a class action by investors against the Tokyo-based share house company alleges that the inflated price of the share houses sold to investors was determined by the maximum amount that the bank was willing to lend a buyer, rather than the true market price. A gross return was 8 ~ 9% was then applied to the sale price, even if it was higher than the market rent. The buyer would buy under the assumption that they could rely on stable, guaranteed rents that would provide them with a cash surplus each month. The high yield was only possible because the share house operator was providing a rental guarantee that far exceeded the rent they were receiving – causing the operator to lose money each month.
The Asahi Shimbun newspaper has reported on potential mortgage fraud occurring with companies that tout share houses to real estate investors.
When buying an investment property from one of these companies, buyers typically entrust the entire loan application process to one of the many real estate agencies connected to the seller. The seller’s side will take copies of the buyer’s bank book showing their savings. At some point, and by whom remains unclear, the documents submitted to the bank are forged in order to improve the chance of obtaining finance or obtaining a loan much larger than would normally be approved. There are apparently cases where a buyer’s savings have been falsely inflated by as much as 10 times the true amount, along with false records showing a large deposit made to the seller.
Investors in share houses have been left struggling to make loan repayments after their subleasing companies failed to make rental payments to landlords. A non-profit support center for landlords reported over 100 calls from distressed property owners over the past month.
Two different share house operators have recently reneged on their sublease agreements with landlords.
On January 17th, a Tokyo-based share house operator held a meeting with investors informing them that they would no longer be able to pay rent to the landlords due to financial difficulties.
According to an article in ZAi Online, some of Japan’s major real estate agencies are collecting double-end commissions on over half of their sales. Collecting brokerage fees from both the buyer and seller may be illegal in some countries, but is a legal and common practice in Japan. Many times the buyer or seller will be unaware as there are no duties to disclose this to the customer.
In some companies, the agency has represented both the buyer and seller for as many as two-thirds of all transactions. Agencies are heavily dependent on this practice as it makes up a significant portion of their annual sales, and it is not likely that heavy regulation will be introduced to curb this behavior.
In early 2016, the Ministry of Land, Infrastructure, Transport and Tourism (MLIT) introduced reporting requirements for agencies that use the REINS online listing database. Agencies with exclusive-listing agreements are obligated to update the status of the property on the database if an offer has been received. This is an attempt to boost transparency in the real estate market, but appears to have had a limited effect.
Major property developer Sekisui House has reported to have lost as much as 6.3 billion Yen (approx. 58 million USD) to scammers in a fraudulent land sale in central Tokyo.
According to a public announcement made by Sekisui earlier this month, they had agreed to purchase the property from a company that claimed to have already signed a tentative sales agreement with the alleged property owner. On the day of settlement, the property title was to be transferred from the original owner to the middle company and then to Sekisui. After the money had changed hands, the registry office (the government agency responsible for recording official changes in property titles) rejected the deed-change application because the title and identification documents from the alleged seller were falsified. By this point the ‘seller’ and associated parties had fled with the money and could not be contacted.
Three men and women have been arrested for the alleged fraudulent sale of a 300 square meter block of land in Tokyo’s upscale Minamiazabu neighbourhood.
According to the police department, the suspects forged the identity of the landowner and collected a 240 million Yen (approx. 2.15 million USD) payment from a buyer in early 2014. Depending on the location, a block of land of that size in Minamiazabu could have had a potential market value of 350 million Yen and upwards, and certainly a higher value today.
First-time property investors across Japan are starting to find themselves with poor performing investments that don’t meet what they were promised by salespersons. Despite cashflow-positive claims made at investor seminars, some buyers are finding out that their rental property is running in the red, which means they pay cash out of their own pocket each month just to keep up with loan repayments. Some are then convinced by salespersons to buy additional properties to help offset their current losses. The newly suggested properties may appear to be cashflow positive on paper, but in reality they also turn out to run at a loss, only worsening the investor’s situation.
A common tactic is for a salesperson to provide a scenario of the potential return assuming the longest mortgage possible (resulting in lower monthly payments), and not warning the buyer about the possibility of interest rate hikes, monthly building fees increasing in the future, or large-scale building repairs and maintenance that need to be carried out at the owners’ expense. The simulations may also incorrectly assume that rents will remain unchanged and not factor into account future vacancy or a decrease in rents.
Some sales pitches include promises to buy back the the property for the same amount after a fixed period of time, or promising a guaranteed rent, only for the promises to be broken after the sale. Salespersons might also fail to inform the buyer that by taking out investment loans now, they may find it more difficult to get a home loan for their personal residence in the future, especially when they have borrowed at their maximum capacity.