Poland’s hot market and the real estate “kawalerka” scam—and what to do about it…

The world of scams, cons, grifts and swindles never stops morphing, but when a specific sector gets “hot,” the incidence and severity of said cons seem to immediately increase.

Unfortunately, this is now the case with residential real estate in Poland.

True, real estate has always been a prime target, and no, Poland is not and has never been the most targeted country in the region, but of late this detective has come across new twists on old scams, which have ramped up in the wake of a wild increase in residential (primarily small apartment) prices in Warsaw and other major cities.

Just why this sector is now so incredibly hot is another story. But for laymen sellers (and buyers) here is the breakdown of how the current scams work, as well as the twist that while not completely groundbreaking, is catching endless citizens off guard.

Breakdown of a grift…

The current real estate apartment scam has two sides—and in fact there is a third aspect that has impacted commercial retail and office, but we will get to that shortly. First, let’s talk about vulnerabilities faced by the seller.

Warsaw and other major cities have seen somewhat shocking price increases that are perhaps best seen on the “kawalerka” level—these being small apartments in the 15- to 35-square meter range. In fact, a shoddy one- or two-person apartment that may have gone for as low as PLN 150,000 only a few years ago can now easily command PLN 550,00 if at least somewhat located in the center. A remodeled, centrally-located apartment near a metro? Think PLN 850,000 to PLN 1 mln or more (obviously depending on size, actual quality and location).

Real estate barons aside, for many families the potential of such a windfall can be all but life changing. An apartment handed down by a grandparent now has the potential to enable investment or a real estate purchase elsewhere, or perhaps it might fund a university education abroad. Yet any time such windfalls become “almost the norm” the sharks come out, and yes they are now out in abundance.

Here is the set up and the standard play:

First, apartment owners eager to avoid paying real estate agents commissions (which, honestly, are sometimes questionable with regard to services provided) post ads on local internet services. At that point—even if the list price is too high—the phone typically buzzes until the battery dies. Some calls are obviously legitimate, but many are made essentially by grifters who more or less operate by the following modus operandi:

·        Likely, such a “buyer” will pose as interested individual, unaffiliated with a company or agency, and claim to be ready to make a cash buy.

·        If not, said buyer will pose as an agent or representative of a company that is buying up real estate at higher-than-normal prices in order to entice a gullible seller to sign a deal.

Yet neither of the above are 100 percent true—and here a dead give-away is when “buyers” want to rush a notarized preliminary agreement with a less-than-standard down payment.

This is the first true catch—and the most dangerous. Read this again: the red flag is the less-than-standard down payment. In short, if a “buyer” wants to pay less than 10 percent down while also rushing the notarial meeting, this spells trouble.

Why is it a red flag? For the simple reason that once the preliminary notary deed is signed—even though only 10 percent down—the seller potentially has a problem. He or she is blocked from a future sale of the property even if the buyer misses the remaining payment, as the preliminary agreement does go to the Polish land registry… and here the bog starts.

True, the seller does have the guarantee that the down payment is paid and thus forfeit, but the games will begin when it comes time for the seller to actually pay up and complete the deal. There will be delays (supposedly made in good faith). There will then be bogus claims that the apartment actually is not worth what was originally agreed, based on pretty much any reason that can be dreamed up by the “buyer.” The seller meanwhile faces delays and potentially lengthy litigation to abort the deal and free up the apartment for a sale to a real buyer.

And about those delays: if the buyer fails to pay on the agreed upon date (often six months out), according to Polish law he still has 12 months to force the sale through. This means that the seller must wait 12 months to file to have preliminary sale information removed from the land registry and thus once again have a "clean and clear" property to sell. And still (and unfortunately for the seller) litigation may await (based on the previously mentioned “complaints). In short, the seller could be faced a two-year period in which he cannot move his apartment based on only a six or eight percent down payment. And considering the current massive delays in getting paperwork registered with the Polish land registry, this could be a conservative estimate.

True, this scenario is not quite a nuclear bomb (although close enough for many). In truth, the apartment to be sold has not been technically stolen, but it has been blocked and often the seller is not financially equipped to deal with organized legal… “resistance.” Our unethical “buyer” will know this, and he will then make offers that are lower than agreed to “simply end the impasse.” The offer may or may not be dramatically lower (often it is), but the seller is now at a disadvantage. Recently, Yours Truly saw a PLN 600,000 “sale” essentially halved. In another, a PLN 500,000 apartment was agreed to finally be sold for PLN 400,000, but still the buyer failed to come up with the money.

In fact, the same games are currently being played with commercial real estate, but I digress.

The false portfolio…

Make no mistake, this kind of legal “buyer blackmail” is constant threat. But now you may ask just why would the  second type of “buyer” not come up with PLN 400,000 for the second apartment? In other words, the buyer now has a PLN 100,000 discount, and the seller has fully agreed.

The reason the sale does not go through is simple: the buyer does not have the money.

Ignoring the fact that he may well push down further or try to put a deal in place that ensures payment in tranches, but this second shark’s goal is more far reaching. Typically, he or his company has put together a “portfolio” of “acquired apartments” with the goal of selling said fictitious portfolio to an investor (usually foreign) at a price based on the currently high-flying market with yes, a bit more on top.

Now here there may be some in the real estate market who will claim the above portfolio building is fair and square. May answer to that? Don’t embarrass yourself. Such a real estate portfolio is not bona-fide, but instead it is based on holding hostage scores of apartments based on the aforementioned preliminary agreement trick (and remember, much of the time the down payment on said apartments was below the norm to begin with).

In short, the sellers are not made aware that their sale hinges on a buyer from beyond, and their sale price will not be respected anyway. Again, they will be driven to agree to a lower final price based on delays and the threat of litigation expenses.

Sure, such a portfolio can be de facto “legalized” in the sense that if an investor comes through (often by being fooled, but we’ll get to that momentarily), and if the sellers all sell and the “buyer” manages to sell his portfolio to his somewhat (although not completely) gullible real estate investor. If the above happens, sure, there is the no harm, no foul argument—and it is unlikely that a prosecutor will take the case, as the sellers will have a clause barring them from further claims once their particular deal is done.

Yet there is harm—to sellers “legally” strong armed into selling below market value—and even a pyramid scheme (which is in a sense exactly what this is) can be legalized is the guys at the top get out soon enough and pay off enough of the lowest level bricks to simply be resigned to the rip off and go away.

But there is a flip side to the false portfolio scam—and here is exactly where such speculators trip over their own feet. Remember the need to pay less than the standard down payment? At least here they are often telling the truth: they simply do not have the money to put down 10 percent on each apartment they plan to block. Meanwhile, they are searching for investors, and even the least savvy investors in search of a portfolio want to see not only a holding of apartments, but a holding of SOLD apartments.

So why not hit both sides at once? Which means that our unethical buyers (we’ll call them grifters) also become sellers, but they sell in equally unethical fashion in that through marketing and even using the very pics provided by the blocked sellers, our grifters actually “sell” apartments they have not even bought to unknowing individuals who are required to pay the full 10 percent down payment… or more. Thus, they actually generate income on the sale of portfolios they do not yet own while buying up portfolios that they never actually buy until they find an investor who  in the end may not manage to acquire all of the apartments actually presented.

The above may seem far-fetched, but if you hit a layman with enough marketing and small print—and have just one apartment to show prospective individuals—it’s pretty incredible what a create mind can achieve.

Sometimes. Within the last three weeks Yours Truly has twice been contacted by individuals on the edge of paying such a cash down payment, and twice a five-minute check revealed exactly the above. In both cases a simple scoping revealed social media groups formed by ripped off individuals who had fallen for the false portfolio scam, and said social media groups noted that district prosecutors were on the case. Will they get their money back? It’s doubtful. And what if foreign investor comes in behind the grifter mid- preliminary investigation (i.e. prior to any form of publicity or charges filed)? Even in 100 percent good faith?

Well, his life will get complicated. And good faith or not, he will have a lot of explaining to do.

Protect yourself…

Thankfully, this scam is fairly easy to defeat. And here are my suggestions:

1)     If you are selling a “kawalerka” for PLN 600,000 or less, demand a one-notary meeting sale and payment. Do not agree to down payments. After all, if they have the cash, they have the cash.

2)     If you are still worried (if the buyer is pressing for an immediate meeting—within a few days), try this: although the Polish tradition is that the buyer pays for the notary and PCC real estate tax (and this is a real cost), argue over the notary. Demand that you as the seller both selects and pays for the notary (but the buyer should still pay the PCC).

3)     Be warned that if the buyer wants to set up a notary meeting within a few days, this is already a red flag. He will likely give you a runaround story when you show up that he understood this as a prelim agreement, and that he only wants to pay 6 or 8 percent as a down payment. Sadly, face to face, many laymen (although laywomen seem to be tougher and refuse to fall for this) buckle under pressure and wind up in a bog. The truth is that nothing goes that fast in Poland—not even the sale of a kawalerka for cash. Any reasonable notary will demand statements of no debt, no tax left to pay on the apartment, the latest land registry statement, etc. It’s just not likely or reasonable, and if the seller has such a notary in place, run the hell away.

4)     Beware of agencies or companies claiming that they will sign an agreement, take favorable pics and then actually buy your apartment from you themselves (ostensibly to resell to the end buyer). This is just another game in the scam.

5)     If you are selling a larger apartment, true, you cannot reasonably expect someone to pay PLN 1 mln in cash in a same day sale, but if they claim to have the cash, then go back to the same-day, 100-percent cash sale (with your notary instead of theirs). After all, if they claim they have the money, they have the money. And don’t worry about it if such a buyer does disappear, as when it comes time to fork up, this is exactly what a grifter does.

6)     If, and this is reasonable, the buyer wants to make a down payment on a larger deal, get 10 percent minimum—and use a lawyer (and again your own notary). In short, too much money is at stake to play games.

7)     If you are enticed by a company (and let me be clear that here I am not saying that all real estate resi speculators are grifters), try this: first, check to see if the company (buyer or seller) has set up a limited liability company (spolka Z o.o.). If not, cross them off the lisk. No sole proprietor in his right mind is going to buy up a horde of apartments and bear sole liability. Second, if you find that such a limited liability company does exist, check its most recent financial declarations, including revenue, profit and assets. If you see little revenue, no profit or a loss and only symbolic assets, run away. The company has no assets because it does not actually own its portfolio. It has little revenue because this is mostly coming in the form of said “down payments” on the false portfolio, which is likely just enough to barely cover cash flow (if that), which means low to no profit or a loss. And if you do not know how to do this, call me or someone who does.

Finally, be assertive. I constantly deal with very nice people who have been very wronged, mostly because they believed that being polite and passive is tantamount to being an honest and decent person. It’s not. You may not be an experienced real estate professional, but facts are facts. Stick to facts and cash, a solid notary and (if the deal is large) a good lawyer, and you will be all right.

Preston Smith is a licensed detective and well-established risk consultant in Poland who offers due diligence, litigation support and political analysis. Please see www.cddi.pl for more information.

Still from the American drama film Sherlock Holmes (1922) with John Barrymore, on page 41 of the May 13, 1922 Exhibitors Herald.Goldwyn Pictures, Public domain, via Wikimedia Commons.