Presented by KIS Finance
Development loans are ideal short-term financing options to facilitate the purchase and build costs of both residential and commercial projects. Anyone from private individuals to full-scale development companies can take out these development loans to complete their next projects.
But like any form of financing, there’s always the chance that a malicious actor will aim to cheat you out of your money. Sadly, investment fraud is widespread, with the City of London Police reporting £612 million in losses from 30,130 reports of investment fraud.
Sadly, this is likely a massive undercount, as National Trading Standards estimate that fewer than a third report these scams. In this article, we explore some of the most common property loan scams impacting individuals and businesses, explaining how they work and how to avoid them.
Financial scams are impacting more and more people in the UK. According to Citizens Advice, one in five people fell victim to a finance scam in 2023, indicating an enormous need to protect legitimate investors and developers from harm.
The Nationwide Building Society Media Centre found that a rise in living costs has seen people taking greater risks than before, with one in four saying they’re willing to take more risks. Unfortunately, this ambition and boldness is a haven for scammers looking to profit from people’s hard work.
Another issue is the move toward digitisation, as more and more financial business moves online. In this day and age, investors don’t need to approach a development loan provider directly. Instead, the entire process can be managed online. Again, this is an environment rife with opportunities for scams and fraud to take place.
We also see the industry being used to wash dirty money through the UK’s property sector. One study found that the number of Suspicious Activity Reports submitted by property development firms had grown by 40% in the first half of 2024.
Many property developers and investors make the mistake of being on guard for sophisticated scams only to fall victim to more traditional attack vectors. Before proceeding with any form of financing, it’s critical to verify credentials and perform proper due diligence.
Let’s explore some of the most prominent development finance scams cheating developers out of millions of pounds.
Advance-fee scams involve a demand for an upfront payment to cover various fees and costs associated with development loans. Fraudsters usually pose as legitimate lenders or brokers, promising financing at generous rates to fund your next project.
Once the victim submits the fee, which could add up to thousands of pounds, the fraudster promptly breaks off contact and disappears. The beauty of this scam is that the fees are framed as legitimate, designed to cover things like:
For example, a developer may seek a £3 million loan for a new block of flats. The lender agrees to the loan but requires £30,000 in legal and processing fees. The developer transfers £30,000 and never hears from the “lender” again.
It’s a type of scam impacting every sector of the financial world, with Lloyds Banking Group reporting an 82% increase in advance-fee scam reports in the last year.
Unfortunately, the cure for these scams couldn’t be more straightforward. No legitimate loan company will guarantee approval on any financial product, nor will they ask for funds upfront.
Bridging loans are another form of development financing commonly utilised by developers and investors. They’re often used to refinance out of a development loan or provide short-term coverage until they can obtain a development loan.
In this scam, the fraudster will pose as a bridging loan specialist designed explicitly for investors working with development loans. They might even create a website to give the impression of legitimacy, filled with loans with favourable rates and guarantees of fast approval.
Like advance-fee scams, the goal is to get you to send an upfront payment to cover one expense or another. That’s why you’ll encounter fake loan documents, and they may even claim to have conducted credit checks. Developers often fall for this because they’re desperate for quick funding or another bridging loan provider has rejected them.
Scammers take advantage of developer desperation, so they fail to spot overly favourable loan terms, lower-than-average interest rates, or the fact that the lenders themselves lack Financial Conduct Authority (FCA) accreditation.
Development loans are often used to secure prime land for future projects. In this scenario, it’s a simple confidence trick aiming to exploit developer greed.
A scammer will market some land under false pretences. It’s the classic example whereby a developer hears that a piece of land in a high-value market is available on the cheap, and it’ll be part of a new development. After the developer buys the land, it turns out to be in a greenbelt, where planning permission would never be granted anyway.
The problem is that the developer may have already secured a development or bridging loan to facilitate the purchase. By the time they realise what’s happened, the seller has already vanished, leaving the developer with a piece of land they can’t do anything with and a loan that has to be paid back.
The sad thing is that land banking scams could be easily avoided by doing proper due diligence. However, victims often become greedy and skip the vital due diligence stage because they believe other buyers are already prepared to pull the trigger.
Impersonation scams are as old as the hills, and the development loan sector is no stranger to these scams.
A fraudster will set up a fake website that looks exactly like the website of a legitimate financing company or bank. Usually, the only sign that anything is wrong is a slight change in the site’s URL, but if you’re not looking for a scam, you likely won’t notice it.
Working with these lenders will seem perfectly legitimate, but they’ll often use:
The reason this scam is so sinister is that it works on two levels. The first part of the scam is that you’ll receive a fake “approval” and be asked to send fees to fraudulent accounts, believing you’ve already secured the development financing needed to initiate your project.
The second part of the scam is that you likely submitted various pieces of sensitive personal and financial information as part of the fake application. Not only do these fraudsters now have the money you sent to them to secure your loan, but also your personal data, which could be used to commit identity fraud and other crimes later.
And identity fraud is now the most rampant crime in the country. CIFAS found that identity fraud cases rose by a quarter in 2022, making up more than 70% of all fraud cases.
Practically all development loans are unregulated, enabling faster processing times and more flexibility. Current guidelines state that development financing only becomes regulated when 40% or more of a development is residential and will be used by the borrower.
Another problem is that banks typically don’t offer bridging loans since they are considered too risky after the 2008 financial crisis. Likewise, high-street banks generally remain averse to development loans, with 59% of brokers in the sector saying their proposal was rejected the last time they approached a high-street bank.
That’s led to a booming sector filled with brokers and private lenders serving the need for UK development financing. Despite growing liberally, the sector has also led to a rise in unregulated peer-to-peer platforms.
These platforms aim to connect developers and investors. The concept is legitimate but may also result in large-scale financing scams. Here are the strategies scammers employ:
Some variations of this scam also exist. For example, developers may even receive a partial loan payment, but then a problem arises, and the developer must send more money to receive the rest of their loan. After sending extra funds, the scammer disappears.
In another variation, the platform legitimately pays out loans to some early victims, which helps to establish their legitimacy. However, this then turns into a classic Ponzi scheme, and later developers are left empty-handed, causing the entire platform to collapse.
Not all development financing takes place alongside legitimate lenders and brokers. Property development companies may connect with investors outside of these platforms and decide on financing loan deals between themselves.
In this case, the fraudster poses as an equity investor. They offer funding in exchange for a share of the overall project, which may result in them acquiring partial control. Of course, they do this under false pretences.
The fraudster may take three possible routes to part you from your money:
In short, the goal is to hijack your project and the fake investor gains control. Again, a lack of developer due diligence is usually to blame for these scams. That’s why firm contractual agreements, transparent investment terms, and proper legal due diligence are essential if you’re looking to secure development funding with any other third party.
Despite the sophistication of many of these scams, protecting yourself is relatively simple.
What they all have in common is that all of them can be avoided by performing proper due diligence, looking for FCA accreditation, and refusing to provide any upfront fees before contracts are properly finalised.
Moreover, by working with a broker you can trust, you know you’re dealing with legitimate lenders. To begin finding legitimate development loans for your next venture, contact the independent finance brokers at KIS Finance today.
Development finance scams are often marked by operators lacking verifiable history, limited transparency in loan terms, and deals that seem too good to be true. Furthermore, if you’re feeling pressured into entering into an agreement, ask yourself why they’re eager to move so quickly.
The best way to verify a legitimate lender is to cross-check them with the Financial Conduct Authority (FCA). The FCA maintains an official register anyone can use to check whether their lender is licensed and registered. You can also work with your broker and solicitor to determine whether a lender or platform is suspicious.
Never send any money to cover fees. Lenders will deduct their fees from the loan amount after it’s been disbursed. Asking for an upfront payment isn’t a normal part of the process and should be treated as an enormous red flag.
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Last updated: 10 January 2025 | © KIS Bridging Loans 2024 | Terms & Conditions
