Real estate scam artist series (Part One)--"conditions" and the "positive due diligence report scam"

Some weeks ago we covered real estate scams that have plagued the CEE, and especially the Polish residential market—yet that is only the tip of the iceberg, as similar scam artists using a very similar modus operandi (albeit with a few twists) have targeted the market on a still greater scale.

And sometimes they have even hit other grifters as well.

This has become more and more evident to private and public investigators—and (finally) a key crooked developer scam is said to be on the radar of Polish parliamentarians, although coming up with effective legal counters will be a challenge.

But more on that momentarily. For there is much more discuss here, as this will be the first of a series of three different ongoing real estate grifts currently seen by clients and fellow private investigators. And at the end of each we will cover the simplest methods to defeat them.

Scam No. 1—the “warunki” play

Readers who read the March apartment-scam article will recognize some of the same features in this one. (And those who did not may find that post here: Poland’s hot market and the real estate “kawalerka” scam—and what to do about it… https://thecorners.pl/polands-hot-market-and-the-real-estate-kawalerka-scam-and-what-to-do-about-it/). Yet the focus here is not only on the ever-present push to get a seller to sign a preliminary agreement, but on the details within.

Within the first, simpler scam, the play (in simplified form) was to pay a less-than-normal amount as a down payment, get the prelim signed so that the buyer’s information would be documented in the Polish land registry and then delay through premeditated (albeit technically legal means) to force price re-negotiations.

But let’s focus on this for a moment longer: the goal of the scammer is to gum up the works. He or she wants you to commit to a sale that will only happen on the buyer’s terms—which will not be what were originally agreed. And to force re-negotiations the buyer will de facto force the seller into endless limbo where in fact the land registry lists the buyer’s ownership information so that no sale can be completed to anyone until the buyer’s (new and incoming) conditions are satisfied.

Yet today’s przekret, the “warunki” scam, is far more dangerous. This scam targets typically larger property owners (often completely undeveloped property) who would like to sell to a serious residential developer set on building multiple or large numbers of apartments.

Now for those unfamiliar with the word, warunki means conditions, and while even a layman knows to worry about the fine print, even a supposed real estate expert may be fooled by what appears to be exemplary fine print. In short, the preliminary contract will not look trick so much as it will appear professional to the point of being outstanding.

And even more ironic, it actually centers on the phrase "positive due diligence."

Sounds good, right?

You would think so, but it’s not. But enough of the introduction. Imagine the following scenario:

A seller is approached by a very legitimate appearing buyer. This often will appear to be an established company and TAKE CARE because this time around a check of company financials may well reveal solid earnings and impressive asset figures.

This is intentional and meant to throw you off the track.

At this point, the seller will likely be met by the company president or “true owner” behind the company. He will also seem impressive. However, here comes the first red flag: he may well seem only symbolically interested or ramble about bigger investments. At any rate, he will delegate dealings with you, the seller, to a company proxy, who will be a Polish lawyer (although this will likely not be an advocate, but still a lawyer in the form of a radca prawny).

Still, this will be impressive stuff. The price will be enticing, the professionalism will be convincing, and the next step will placate all nerves. This will come in the form as a key condition in the contract that the property up for sale receives a positive due diligence rating from an established due diligence professional.

And here comes the second—and very recognizable red flag. The buyer will provide said due diligence professional. Which makes sense, right? After all, the buyer is the side spending the cash and thus wants to have a due diligence professional he can trust.

And when you, the seller, meets said due diligence professional, he will clearly be experienced, highly professional, knowledgeable and probably he will be quite easy to check.

But he will also be on the take.

Here, a quick bit of advice: it will be near impossible to prove this. In fact, it is a waste of time to bother--just as it is very, very difficult to attack a notary that has also gone south. The final due diligence report will be thorough, objective, will show “starannosc”—in other words that attention to detail and proper legwork has been completed—and it will be incredibly neutral.

Which is the point.

For whether or not the report is fat or thin, whether or not it delves into endless minutiae that always comes up fair and square, nowhere in the report—not in the summary, not in the body, not in the table of contents will you find the word “positive.” Or anything like it.

Instead, it will center on facts. Endless, established facts.

Now also be advised that the due diligence professional involved is a pro. If he or she documents negative findings, well, those are negative findings, and the word “negative” may well appear. But let’s assume that there simply is nothing negative to find. The wording here will reflect that, but it will not say “positive,” “good” or anything of the kind.

Which brings us back to the preliminary contract and the fine print.

The need for “positive” due diligence…

Here it pays to remember that within the fine print of said preliminary agreement a key to the end-sale was a “positive” due diligence report. Here it also pays to remember that words like “positive,” “good,” “outstanding,” “mind-blowingly great,” etc. are actually fairly impossible to define. Even more important is the fact that the absence of the negative does not by law mean… anything.

Or at least in this case the reality is that if the actual word "positive" does not appear... well, it actually does not mean positive.

In the literal sense. Or any sense at all.

It just means that you are still on the hook for the eventual sale.

This is when the heart of the scam typically becomes evident, but this happens ever so slowly. The goal of the scammer is multi-fold: first, he wants the property only when he wants it. This means that he may be creating essentially a false portfolio to sell to a willing investor without having to actually buy up said property (or even have true deadlines to get a final deal done). Thus, the scammer wants to control the seller’s property and to be able to show that control in the land registry as long as is necessary without spending a whole lot of cash.

Second, the seller wants to show that the property is not only free-and-clear of negative issues, but also to pump as much value into said property for the purpose of a sale to an eventual investor.

Third, the seller wants to eventually angle the final sale so that his (eventual) investor pays for the property directly or that he pays the least amount possible—and certainly not the amount that was originally negotiated.

So let’s address point two—in the context of that due-diligence report: again, nothing in the report still state that the report actually does represent a positive evaluation. It probably will not be negative, but gradually—as the buyer will want to force the seller to increase the property’s value for the end-investor-to-come, the buyer will begin demanding further effort and investment in said property, which may include completing the environmental permissions process, attaining permissions associated with nearby road access or even gaining the possibility to include retail in a coming development.

In short, he will push this as far as he can.

Those familiar with land development will understand that this is time-consuming and expensive. Yet often the seller will go through with this process first because 1) after all he is upping the value of said property and 2) by moving forward on said paperwork, albeit on his own tab, he  will “complete” the due diligence process—with the assumption that it will then turn “positive.”

While point one makes a bit of sense, with regard to point two, nothing could be further from the truth. First, it is highly likely that the buyer/developer in question does not yet have an investor (or even yet want an investor, as they he will be put under deadlines) and second, his goal is not to sign off on satisfied due diligence.

Still, at least expect relations to remain somewhat amenable. That is also the goal.

Until it isn’t. As there will indeed be a point where the seller has enough and finally says “put up or shut up” with the cash.

This is where the true goal of the scam artist becomes evident. And it is also where the lack of a “positive” due diligence report will hurt. For, as unbelievable as it may sound, this aspect can be played for months. Even years.

Or until the seller begins to break.

Here comes the pain…

This is when things get interest—or when push starts to turn to shove. But the first question again will be (especially if you skipped the previous post): how can the buyer delay if the deadline is stated clearly in the preliminary agreement?

But don’t just believe me. Let me put it in the words of yet another private investigator, who just happens to be dealing with exactly this type of case at this very moment.

“The problem is that the deadline to buy hinges on the 'positive’ due diligence report,’ said a Mazowieckie-based detective who has also encountered this scam in other regions of Poland. “The buyer will typically word the preliminary agreement to be vague and open-ended, and negative or non-positive due diligence report does not negate the deal or cause the buyer to be obliged to pay back the down payment.

“No, that is not the catch at all," he added. "Instead, the deadline to pay the rest of the money and complete the sale continues to depend on 'positive' due diligence, but we have consulted with various lawyers—and without that word there just is no legal definition that applies.”

Indeed, this is my own experience. The necessary "positive" due diligence can actually never be achieved because—unless the due diligence pro (who is on the take) loses his mind and issues a new report—he will make sure the report never actually have anything "positive" in the literal sense to say. There will just be facts.

Which means: so what if you have achieved permissions demands? So what if you have petitioned the local gmina to achieve not only residential zoning, but mixed use? Is that a positive?

Well, it may be to you, but in court—and in the overall schematic of said report—even though this may seem paradoxical, whether a report is truly positive or negative will likely remain impossible to define.

But this is just the beginning, for the “buyer” will continue to prod and poke, which in the eyes of their lawyers (when pushing their arguments to a court) will be portrayed continued—and very diligent—show of interest to complete the deal.

This results in endless delays. And we do mean endless, as at present this writer is aware of two such deals worth tens of millions of zlotys, which have already been delayed for more than two years. For even if somehow the deadline is viewed as final, once again we are into the game that the de facto fact will be that the buyer will still have one year to complete the deal before the seller can forcibly remove his information from the Polish land registry.

Which means the seller is caught in a very legal (and frustratingly costly) limbo.

But, again, this gets worse than that, as two things are quite likely to happen next.

Turning the knife…

“We have a client now that is dealing with this,” said the previously cited detective. “And he has been facing these delays for two years. And two years is nothing. We’ve heard of landowners delayed three or four years, which puts them under tremendous pressure.”

Owners with a mind to sell land to a developer will understand such pressure. Owners may well have their own loans to pay. There may be debt due to land preparation, and that debt may well have increased, due to further preparations/permissions achieved at the behest of the buyer.

Which means: here comes the sting.

First, as expected, the buyer may well move to negotiate the price lower than what was originally agreed. And since delays can indeed seemingly be delayed further and further, the temptation to buckle will be difficult to bear.

Yet the buyer will not make a direct approach for he does now run the risk of being accused of having never had the true intention to buy at the agreed-upon price to begin with—which could be constituted (and even prosecuted) as fraud. Thus, expect a friend-of-a-friend to make an approach. Someone with "everyone's best interests in mind."

But yes, it gets worse. At this point—due to non-fulfillment of conditions (again, the positive due diligence report is a condition)—the buyer may even demand compensation to part ways on the deal.

Such demands in and of themself are admittedly outrageous. Even more so when they are put down in numbers.

“In our case, our client was thinking a negotiated settlement,” said the aforementioned investigator. “He was in fact ready to cut a deal, as this had simply gone on too long, and the land is valuable. Of course, he was a fair and logical client, and believed this would be a refund of a small part of the down payment. Maybe PLN 100,000.

“But no, the scammers wanted the full down payment back plus several million zlotys compensation for ‘lost time.'

"Our client was very shocked."

Widespread, but not impossible to beat…

Yes, quite shocking indeed. But is this just a one-off? The antics of a lone group of professional grifters?

Nope.

“We spoke to lawyers who specialize in real estate,” said the aforementioned detective, “and this is happening all over Poland. He have finally heard that there are  now discussions in the Sejm (the lower house of Polish Parliament) about this, as previously prosecutors did not want to hear about this at all because they are facing professionals who have good lawyers—but we are hoping for change.

“Still, for now, you have to be ready to protect yourself.”

Other detectives have related essentially the same story to this correspondent, as have local lawyers and real estate professionals. But just how to protect yourself is in fact not that simple. In part two of this series we will reveal just how one victim managed to slip the noose, but for now here are a few first suggestions to put right at the top of your list:

• If you are selling a large amount of property, especially if land has already been partially prepared, do not skim of a true real estate lawyer. As in a specialist. A lawyer that is capable of doing a real estate deal is not the answer here. And neither is your notary. This scam actually is built to fool non-specialists with the appearance of a very professional take on due diligence.
• The less conditions, the better. In fact, conditions are meant to remain unfulfilled. As soon as you receive a preliminary agreement from the other side, read it yourself—even if you are a layman—and see how many conditions/warunki you yourself can cross out (starting with positive due diligence). In fact, a good real estate lawyer can turn this around on such scammers by establishing a deadline for due diligence (and removing the word positive) and even inserting clauses that are equally vague, but which protect your side (such as providing all answers to the company conducting due diligence as long as costs are reasonable and done in good faith).
• Reject any due diligence company immediately put forward by the buyer and demand to sign off/agree on a mutual choice. There are plenty of legitimate property experts and due diligence advisors that have high standards of ethics and actually will not be bought. (Or so we would like to believe). Be ready to put your foot down on this.
• Remember, if you have attractive property, you are the boss. In short, the word “no” is very powerful, which means be ready to walk away from the deal right from the start. Scammers do not like to waste a lot of time. If they see you are not a mark and that they are not going to have it all their way, you will quickly see that they are simply no serious enough to stick around.
• Remember the right to enforce a payment deadline with the signage of a power-of-attorney statement at the same time that you sign the preliminary agreement. This will enable you, as the seller, to represent the buyer and remove ownership information in the land registry should the final payment or next trance fail to hit the account. That said, this is not as simple a task (or an ask) as it is when, for example, selling a single apartment. So once again, an experienced lawyer—but a specialist—is the way to go.

Finally, do not be passive. Very surprising is that honest people are often far too polite even (if not especially) in business--to the point that they allow themselves to be run over even when potentially life-changing fortunes are at stake. There is absolutely nothing wrong with fighting for your rights, and once again, the most powerful word in such a deal is “no.” If you immediately say to endless or vague conditions, pretenders (in other words, grifters) will soon scatter. Still, do not go cheap on expertise and legal help. You will save money and potentially years of time in the end.

And stay tuned for part two: The Additional Land Plot Grift…

Preston Smith is a former investigative journalist, writer, 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.