The Blue Chip scandal: the valuations process

This meant the sales process was not covered by the regulations which govern the way real estate agents operate, such as requiring the use of trust accounts when handling investors' money.
May 19, 2008

The Blue Chip scandal: the valuations process

INVESTORS WHO paid Blue Chip a substantial deposit for apartments that have not been built have probably lost their money, but they may be the lucky ones.

Many of those who have taken title to completed apartments they bought through Blue Chip could face bigger losses when they try to sell them because in some cases, the properties may be worth tens of thousands of dollars less than what they paid for them.
It is widely assumed that this is because apartment prices generally have fallen, and although that may be a contributing factor, it is not the full story.

It is likely that apartments sold by Blue Chip would never have fetched the prices they were sold for had they been sold on the open market.

Blue Chip's business model appears to have worked something like this:

A developer (who may have been a related party) would propose building a new development such as a block of apartments.

The cost of construction and the developer's margin might average $300,000 per apartment.

This might be a problem, because similar apartments being sold on the open market may have been selling for just $280,000, a price at which the new development would be uneconomic.

On top of that, if Blue Chip was to sell the apartments to investors it would need to cover its own marketing costs and make a profit. This might add another $50,000 to the cost, bringing the total price that needed to be achieved to $350,000.

To achieve that it would form a marketing company called, say, Puffed Ltd.

Puffed would sign sale and purchase agreements with the developer to buy all of the apartments and begin selling them to investors for $350,000 each through Blue Chip's adviser network.

At this stage the apartment block would still be a piece of bare land and an architect's drawing, so Puffed was on-selling the apartments before they were built and before it had title to them.

Once the first few sales were made, Puffed could go to a valuer and say, "Look, we have sold these apartments for $350,000 each, so all of them in the building must be worth that much."

The valuer would then provide registered valuations for $350,000 for all of the apartments in the building, which would help Puffed sell the rest of them.

Once investors had agreed to buy the apartments and the building was completed, settlement of the sales process, from the developer to Puffed to the investor, would be completed at the same time.

So although Puffed's name would appear on the title of the property, it never actually took possession and more importantly, never had to pay for it.

Using a company like Puffed to sell the properties had another purpose.

It allowed Blue Chip to sell large numbers of properties without involving real estate agents. This was because the sale and purchase agreements companies like Puffed signed with developers allowed them to claim they were selling their own properties.

This meant the sales process was not covered by the regulations which govern the way real estate agents operate, such as requiring the use of trust accounts when handling investors' money.

If investors who had bought an apartment later decided to sell, they may have found that it was only ever worth $280,000 and that prices of similar apartments had dropped a further $30,000 since they signed up for it, leaving them $100,000 out of pocket.

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Risks: Follow the money: franchising re-distributes (not creates) wealth, Franchisor corporation created to fail, Ponzi (pyramid) scheme, Predatory franchise lending, Bankruptcies, Asset appraisals inflated, Trust account irregularities, Related company transactions, New Zealand, 20080519 The Blue

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