Social Housing Investment Scam: How Operation Lily Exposed a ÂŁMillion Ponzi Scheme
One of my property colleagues reposted a warning on social media highlighting that a number of companies specialising in – apparently – supporting social housing and charity accommodation are the subject of a fraud investigation.
The City of London Police have launched Operation Lily, to investigate fraud and money laundering, initially in the Social Housing Group, CityGate Housing and Social Housing Holdings Ltd., but there are likely to be other companies under investigation, such as the Unique Property Group, who have mysteriously vanished from the internet.
These companies were pitching an investment opportunity with relatively small investments of blocks of £13-15,000, for just three years and with monthly interest payments at a rate of 20% per annum, PLUS your capital back at the end of the 3 years – amazing, right? No, I said at the time that they way this was structured would end it tears – and, sadly, that turns out to be exactly what has happened!
I wrote an article about this about a year ago, warning people of the potential scam, but it was advertised as a government-backed scheme, so appeared to be as safe as houses – except in this instance, the houses in question weren’t quite as safe as they seemed.
When is property investment NOT property investment
Social housing and supported living are popular investments. You rent your property to a charity, housing association, or other entity that can be in receipt of genuine Government funds to house certain kinds of vulnerable people, which is undoubtedly a good thing. These organisations sign a commercial lease, typically 3-5 years with the owner of the property, meaning they take care of everything – maintenance, finding tenants, insurance, utilities and deal with voids, and any other hassle. Done in this way this is all very legitimate.
For the owner, it’s quite a compelling proposition, get paid without any of the usual tenant hassles. As a landlord you’re letting on an FRI lease (full repair and insure) and even if you are getting a below market rate rental, you have no headaches. In reality, if you’re finding your own tenants and you’ve taking care of the costs of all the things on that list above, it will probably cost at least 30% of your rent, so even if you’re getting a fixed rental at 70% of full market rate on a 3-5 year contract with nothing to do, you’re on a winner.
These companies that are now under investigation were offering to become the middleman between landlord and charity/association. In essence, a rent-to-rent scheme, but you weren’t the landlord, just an ‘investor’. So, your ‘investment’ wasn’t to purchase property, it was, I would guess, to cover their marketing costs to find properties and organisations who wanted properties., to give them the benefit of the doubt. You may think they used it for less genuine reasons? Effectively, you were lending money to a limited company to do with whatever they wanted, with no protection of your investment and none of the ‘Government backed’ fluff it was purported to have.
Their marketing was powerful:
Help solve the country’s housing problem
Do good with your investment – and still get a great return
Like all Ponzi schemes, investors, having received a monthly interest payment or two, are encouraged to recruit their friends and family into the ‘investment’. While those who had invested were getting their monthly payouts and also being enticed to become recruiters, pulling more investors in and getting paid commission, it looks as though they were on a winner, both as an investor and a recruiter. It’s the classic Ponzi tactic.
But as I forecasted, this is not a bona-fide investment and the payments fizzle out after a while, investors don’t get their money back and the whole house of cards comes tumbling down.
Now these companies have crashed losing their investors tens of millions of pounds.
As you can imagine, if someone else you know introduced you to this kind of scam, your view of them will have changed. Goodbye to their hard-won reputation.
Lessons to learn
Here’s the big thing, no-one - but no-one, guards your money as well as you do. Other people will play fast and loose with your money – if you let them.
When someone asks you to invest in a project or investment scheme, you should work on the basis of ‘guilty, until proven innocent’. If you approach the opportunity as a potential rip off, you need to look for evidence of that. In other words, do due diligence with knobs on, until you have incontrovertible evidence that it’s genuine.
How do you gather that information? Firstly, get very good at asking the right questions and keep asking until you get satisfactory answers, with evidence. Listen to valued commentators, those people with experience.
Along with some of my property colleagues, I warned people about this particular scam, but nobody was listening. I even privately messaged the admins of some FB property groups where these companies were permitted to advertise. Most of them couldn’t care less.
In the groups that I run, I banned anyone posting about it. Not only taking the post down, but ‘excommunicating’ the person who posted it, too.
Ponzi schemes show a great return – but they trigger greed, the idea of getting something for nothing, or at least for not very much. This results in irrational judgement and poor decision making. The rule of thumb is that, if it looks to good to be true, it probably is.
Should you avoid social housing?
Absolutely not. It’s an excellent strategy, but you don’t need a middleman. You can work directly with social housing associations and charities – get that nice warm glow of doing something good for society – AND make a good income.
Here’s a couple of caveats if you are a landlord and thinking of switching to a social housing or supported living organisation to rent your property to -
First, no Buy To Let mortgage lender permits you to sign a commercial lease with any organisation of this type. It is a fundamental breach of your lender’s T&Cs that gives them the right to call in their mortgage. Letting on this basis ‘on the sly’ is a huge risk to take. You need to refinance to a commercial mortgage lender that are fine with this type of commercial contract.
Second, if you do want to contract with a rent-to-rent provider and you are confident enough that they are genuine and not a pot-less ‘blagger’, you have the right kind of mortgage for rent-to-rent – sub-letting is also a big T&C breach, it falls outside the buy-to-let rules, and none of these lenders permit it. Once again, you’ll need a commercial mortgage for this kind of sub-letting – and it’s not worth risking it, you’ll just end up not being able to get any kind of mortgage ever again, which won’t do your career as a property investor any good at all!
