How do banks and insurance companies finance usuriously overpriced real estate? Scrap real estate is a topic for up to more than two million affected investors. The Investors’ Council says: “Only invest in investments that you understand yourself”. This applies to the timing of investments and the ongoing monitoring of capital investments. More often, experts are only consulted after asset losses have already occurred.
The predominant, but inapplicable, approach when considering returns is to look at rental income, the so-called gross yield. Sample calculations of the seller on the property yield typically do not include maintenance costs, insurance costs, risk of loss of rent and costs for modernisation measures. Neither rent indexes nor the purchase price collections of the municipalities are of any help here.
The Federal Court of Justice sentences management boards for granting loans in breach of duty
Since the 1980s (BGH, judgement of 15.11.2001, Az. 1 StR 185/01), many a credit institution has financed scrap metal properties on a massive scale. In the event of a serious breach of the obligation to carry out a careful credit assessment, embezzlement to the detriment of the bank’s assets may be considered. Banking associations have therefore regularly developed “valuation instructions”.
Gang fraud through structured sales networks
The BGH (ruling of 08.10.2014, Az. I StR 359/13) sanctions commercial gang fraud by “deception of a fact in forecast calculations for real estate financing”. Deception is not the result of the forecast, but is the incorrect information on the basis of the forecast.
Developers and initiators of closed-end real estate funds must be liable under civil law for misconduct on the part of sales staff employed as vicarious agents (BGH, ruling of 4 July 2017, ref. II ZR 358/16). There is an unsolicited obligation to provide information about both internal and external commissions from a total amount of 15 percent (BGH, ruling of 19 October 2017, ref. III ZR 565/16).
Your own tax advisor is also obliged to warn you if a danger is imminent (OLG Cologne, judgement of 12.04.2017, Az. 16 U 94/15). This may be the case if the interest costs for a fixed loan or policy loan appear questionable from a tax perspective, or if there are currency risks. Also, the promised maturity payment of a life insurance policy for the suspension of redemption often proved to be doubtful or unrealistic from the outset in order to repay the bullet property loan.
30 percent concealed internal commission – neither punishable nor usurious
A typical scrap property sales system can calculate with up to more than 30 percent internal commission (BGH, judgement of 20.05.2015, 5 StR 547/14). A disclosure obligation only exists if the limits of usury or immorality have been reached (BGH, ruling of 14.03.2003, V ZR 308/02). A revaluation obtained years after the purchase can be due to influencing factors which only later determine the value – the decisive factor is the time of valuation.
Usury is to be examined more closely from an overpricing of 50 percent – from 89 percent it is present without further ado; however, incidental acquisition costs assumed by the seller are to be deducted beforehand (BGH, ruling of 15.01.2016, Az. V ZR 278/14). A “simplified capitalised earnings value method” by simply duplicating net rents would not be suitable even on the letterhead of an expert (BGH, ruling of 18 October 2016, ref. XI ZR 145/14).
The bank’s knowledge advantage: No obligation to repay the loan from the outset
Frequently the financier of scrap real estate is entitled to “a claim for damages opposing its loan claims from pre-contractual fault for clarification due to a knowledge lead, which is subject to clarification, about a fraudulent deception … about the investment object by the developer and distributor or agent as well as the sales prospectus” (OLG Cologne, judgement of 01.10.2010, Az. 13 U 119/06):
“In this context, the knowledge of the bank of such a fraudulent misrepresentation is refutably presumed if the seller or fund initiator, the intermediaries commissioned by them and the financing bank cooperate in an institutionalised manner, even the financing of the capital investment was offered by the seller or intermediary, even if only via a special financing intermediary appointed by him, and the incorrectness of the information provided by the seller, fund initiator or the intermediaries or the sales or fund prospectus is evident under the circumstances of the case, so that it is obvious that the bank “virtually closed itself off” to knowledge of the fraudulent deception.
This is the case, for example, if a rent guarantor, who later becomes insolvent, had promised an unrealistically high market rent. This also applies if a bank form suggests that the rental income is far too high – so an expert is often required for proof in addition to the rent index.
Compensation partially tax-free
If the seller, the distributor or the initiator of a real estate fund later pays compensation to the investor, such repayments are usually “at the same time to be assessed as remuneration for the waiver of claims for damages from tortious and contractual liability and the withdrawal of the claims for damages”, are thus partly tax-free (BFH, judgements of 06.09.2016, file no. IX R 44/14, IX R 45/14, IX R 27/15).
Unsuitable administrators and owners transfer to the scrap property state
Occasionally, vacancies and repair backlogs in condominiums increase because managers do not enforce the necessary resolutions or because a growing number of owners owe their housing benefit over time, leave apartments vacant and accept that they become completely unrentable.
From the minutes of the condominium owners’ meetings, it can then be seen how often receivership and foreclosure sales have remained economically fruitless, so that potential future owners shy away from buying – no matter how cheap it seems.
When the Jesters’ Society invites you to a Jesters’ meeting, you should know what to expect.
Communities of homeowners appear to be more solid if there are up to more than 50 percent owner-occupiers – and if a tax-saving model is not sold in distance selling.
You can make good money with real scrap real estate just as you can with other scrap – if you know that it is scrap for which you have only paid scrap prices. However, it is bad, if it concerns scrap metal owners, who let the normal object degenerate to a scrap metal real estate, within a few years, also because they do not come anyway because of excessive purchase price payment on no more green branch. If a signature at the notary public leads straight into over-indebtedness, every euro still invested would only benefit the bank.
Then, at best, so-called “collateral management” or insolvency, in which the unusability of the scrap property can even be helpful in order to take away the creditors’ hope for more proceeds. It is not uncommon for the revocation of the life insurance policy to lead to an actuarially assessed supplement.
by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
by courtesy of
www.kulturexpress.info (published on 07.01.2019)
www.Submissionsanzeiger.de (published in issue no. 11, page 1 and 24 on 16.01.2019 under the heading: How banks and insurance companies finance even usuriously overpriced real estate)
www.experten.de (published on 22.01.2019 under the heading How banks and insurance companies finance even overpriced real estate)
www.network-karriere.com (published in issue 2/2019, page 30 under the heading: Two million investors are sitting on junk real estate)
At home in Bochum (issue 01/2019, page 10 under the heading: When investor junk turns normal real estate into junk real estate)
www.kulturexpress.de (published on 07.01.2019 under the heading: When real estate becomes junk real estate)
Our office in Munich
You will find our office at Fasolt-Strasse 7 in Munich, very close to Schloss Nymphenburg. Our team consists of highly motivated attorneys who are available for all the needs of our clients. In special cases, our law firm cooperates with selected experts to represent your interests in the best possible way.
About the author
Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
»More about Dr. Johannes Fiala
On these pages, Dr. Fiala provides information on current legal and economic topics as well as on current political changes that are of social and/or corporate relevance.
Arrange your personal appointment with us.
You are already receiving legal advice and would like a second opinion? In this case please contact Dr. Fiala directly via the following link.
The first telephone call about your request is free of charge.