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.
This problem came to light recently when a share house developer and operator abruptly informed their 800 investors that they were suffering from financial problems and could no longer pay landlords their guaranteed rents. Many of the investors had borrowed upwards of 100 million Yen to purchase share houses at seminars offered by the developer, with deals sweetened by promises of guaranteed rent and high returns to cover their high borrowing costs. Investors had borrowed from Suruga Bank with interest rates of between 3.5 ~ 4.5% and were highly over-leveraged, some to the point where they were facing almost instant default on their loans. Some had borrowed amounts over 15 times their annual income, resulting in mortgage repayments as high as their gross income.
Investors, now unable to cover their mortgage payments, have started contacting the bank to ask for delayed or restructured repayments. The investors were unaware that their loan application documents were falsified. After inquiring with the bank, one investor was presented with a copy of their bank book that was submitted as part of the loan approval process that showed a balance of 30 million Yen and a payment of 20 million Yen as a deposit to the seller. The numbers had been falsified by someone. In reality, the investor had savings of a few hundred thousand Yen and had not paid any deposit at the time of purchase.
Some of the real estate agencies interviewed by the Asahi Shimbun acknowledged that there were some dodgy loan applications but could not be clear on who was responsible. The share house developer could not comment on the process between the bank and borrowers. Suruga Bank said they could not find any evidence that bank staff were involved in the fraudulent applications. Suruga’s share price has dropped 20% over the past month.
Distressed sellers may have trouble offloading these properties as they may have paid higher than market rates when they purchased them, in some cases as much as 30 ~ 40% above market prices. Without an operator in place and with low occupancy rates, finding another investor to take over a risky asset may require selling at a significant discount. Loans in Japan are typically full recourse, which means the borrower cannot simply leave the keys and walk away from the property debt-free.
Investors are currently in the process of filing a class-action against the share house developer and are also looking into potential allegations of coordinated efforts of excess lending.
Expat investors also a target
Expat and overseas investors are not immune from these types of dodgy real estate spruikers and should exercise caution when offered deals promising high returns and easy finance. The real estate industry and market may often be difficult to navigate or understand, even to Japanese consumers, making foreigners an easy mark.
These operators may rely on cold calling, get-rich-quick seminars, ‘guaranteed’ rental returns and heavy-handed sales tactics. Some of the companies that have recently been accused of fraud by investors also have websites in English and Chinese and have been targeting foreign investors.
The Tokyo Shimbun, February 16, 2018.
The Asahi Shimbun, February 13, 2018.
AERA, February 12, 2018.
Zentoku Chintai Jutaku Shimbun, February 12, 2018.
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