How to Avoid Being Caught in a Pump and Dump Scam?

Property Management Blog

Many investors have fallen prey to pump and dump scam in the past. They buy properties that are nothing more than a pile of trash thinking they are buying great properties. These properties appear very alluring as they are available for very low prices. But the investor learns the lesson only after buying them as he finds that rehabbing and then managing them needs more money and effort than they can generate. Therefore, it is important to know how to avoid being duped through a pump and dump scam.

Understanding pump and dump scam

Pump and Dump is a phrase that is mostly used to refer to scams in stock markets where the prices of a securities are inflated giving false and misleading propaganda. This cheaply purchased stock is then sold to unsuspecting investors at a high price. Pump and Dump also works in real estate where someone buys a low occupancy apartment building complex and then does bare minimum to get it rented by other people. He will advertise to make it allure for prospective tenants, saying no background checks will be done for screening of tenants. It takes no time to fill up the apartment complex with tenants by using such a flexible policy. The investor then puts the property back on the market claiming 95% occupancy rates.

High occupancy is claimed using bad tenants

Many buyers are attracted to such a property that is claimed to be fully occupied by tenants. The investor asks for a premium for the property because of such high occupancy rates. He often gets it from buyers who are lured by the prospect of owning a property with such great prospects. This investor is careful enough to look for buyers who can pay him in cash rather than those who avail a mortgage form a bank. This is because banks normally like to do an appraisal of the property to safeguard their money. This investor is pretty sure that cash buyers will not carry out any kind of appraisal or background check and they will be satisfied to see the apartment complex full of tenants.

Buyers even pay a premium for such a property

The property is sold at a premium to the victim who takes months to realize that he has been duped by a pump and dump scam. He was hoping for a large amount of rental income from his property but finds that his apartment complex is full of bad tenants who are not willing to pay him any rent. He learns that his property has 20% occupancy as these are the tenants who are paying rent on time. The buyer can do nothing now except to hire services of attorneys to send eviction notices to bad tenants.  Not only does the buyer pay for all the legal expenses but also finds that the property he bought is worth only half of what he paid to the investor.

How to avoid pump and dump scam?

The best way to avoid getting caught in a pump and dump scam to not fall prey to all those advertisements of high occupancy that sound too good to be true. Also, investors would never proceed with a property until they have conducted some sort of background check or gone for an appraisal of the property. It is mostly cash home buyers who fall prey to pump and dump scams. But you can still protect yourself if you are alert and ask for an appraisal of the property to know the truth behind the scam.

If you’d like to talk more about property management, or you need help with Everest Property Management, please contact us at Everest Realty. 

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