Investment approach
How to Read a Real Estate Investment Offer: 15 Red Flags
A project differs from an advertised return by having a property, an estimate, a term, a contract and a calculation base. Here are 15 signs that mean you should pause and check the documents.
Put an offer to invest in real estate on hold if it has a percentage but no property, no estimate, no term, no contract and no calculation base. A project can be checked against documents; an advertised return only promises. Below are 15 red flags in four groups. One flag is not a verdict. My working rule, not a standard: three or more mean that before you transfer money you need written answers and your own lawyer.
How to tell a project from an advertised return
In a project every figure has a source: the price of the property, the renovation estimate, the term, the taxes, a scenario worse than the base case. In an advertisement there is one percentage. The questions to put to the company itself are collected in the article on choosing a project partner; here we look at the document in front of you.
A worked example, not a forecast. An offer promises "20% return". An apartment is bought for €800,000 and sold for 1.13 M€. Costs: ITP (impuesto sobre transmisiones patrimoniales, the property transfer tax) of €82,000 (on the Catalan scale), closing costs of €18,000, renovation of €70,000, which together with the purchase price comes to €970,000. Profit is €160,000. Divide it by the purchase price and you get the advertised 20%; divide it by all the money put in and it is 16.5%. Over two years that is about 7.9% a year, and that is before taxes on sale, financing and holding costs. A percentage without a base and a term says nothing.
Red flags: promises and pressure
| No. | Flag | What to check |
|---|---|---|
| 1 | High returns at minimal risk. The CNMV (the Spanish securities regulator) describes this as a technique of unlicensed intermediaries (chiringuitos) | The base, the term and a scenario worse than the base case in a written calculation, see the methodology |
| 2 | A "guarantee" with no named guarantor | Who guarantees, from what money, up to what limit and for how long, all from the text of the contract |
| 3 | Urgency: "the last property", a discount for transferring today | The CNMV names pressure and a demand for an immediate decision as a warning sign |
| 4 | You did not look for the offer: the call or email came on its own, plus "personal closeness" (afinidad) | In the CNMV guide both points are among the warning signs |
| 5 | A request to bring in other investors, a bonus for joining | The CNMV lists pyramid schemes and joining bonuses among the warning signs |
Red flags: the sponsor and the money
| No. | Flag | What to check |
|---|---|---|
| 6 | The legal entity is not found in the Registro Mercantil (the commercial registry) or has not filed its accounts | Filing annual accounts is mandatory for capital companies (SL, SA) within a month of approval (art. 279 Ley de Sociedades de Capital) |
| 7 | The sponsor raises money from the public, and each person's result depends on the common total | Whether the structure falls within the definition of collective investment (art. 1 Ley 35/2003); check against the CNMV warnings list, a question for an abogado (lawyer) |
| 8 | You are asked to transfer money to a personal account or an account that is not in the contract | The payee in the contract and the account holder must match |
| 9 | Fees are not named or are tied to "success" without a base | The entry, management and exit fee and the base used to calculate it |
Red flags: the property and the documents
| No. | Flag | What to check |
|---|---|---|
| 10 | A refusal to provide documents before you transfer money | You request the nota simple (the registry extract on a property), the contract, the estimate and the licences yourself |
| 11 | The seller or sponsor does not appear in the registry as the owner | The nota simple shows the owner and encumbrances, but under art. 222 Ley Hipotecaria it is informational and does not certify the contents of the entries |
| 12 | The result depends on a licence, and there is no planning check | What the plan permits and which licence is needed; in Catalonia that is, for example, art. 187 of the Llei d'urbanisme |
| 13 | The contractor is "our own", with no estimate and no contract | An estimate with stages, a contract, the contractor's independence from the sponsor |
Red flags: transparency
| No. | Flag | What to check |
|---|---|---|
| 14 | One result instead of scenarios | A calculation with assumptions and a variant worse than the base case |
| 15 | After the transfer there is no reporting and no exit is described | The format and frequency of the investor report, the exit terms |
The CNMV warns separately that a sponsor's absence from the warnings list does not yet mean it is authorised (CNMV advice 1). Run the check on the regulator's website, not through a link from the offer.
How to apply the list to DNPI
The list works against DNPI itself. DNPI's fee is 50% of project profit; the other half stays with the investor. If the investor's return over the whole project, after distribution, falls below the contractual 10%, DNPI pays compensation out of its own fee. This is a return for the project, not an annual one; the terms and the calculation base are set by the contract for the specific project, and this is not a guarantee of capital. Renovation is carried out by BCNYARD, SLU, an independent construction company working as a contractor under a contract. The investor gets a digital account with the budget and the status of the works. All of this is checked against the text of the contract.
When the list does not work
It does not replace a lawyer: an honest offer can also contain bad terms, and fraudsters know how to answer well. The list is also not suited to assessing a property as a whole; for that there is the due diligence checklist before the arras (the preliminary contract with a deposit) and the nota simple. Check your own calculation in the calculator.
Questions and answers
How many red flags are acceptable in an offer?
There is no strict threshold. One flag calls for a written answer; my rule is that with three or more, the transfer waits until a lawyer has checked.
How do I check that a company exists?
Find it in the Registro Mercantil and request its filed accounts, and if the company collects money from several investors, check it on the CNMV website. Take the contacts from the regulator's website, not from the offer.
Is an advertised return always a bad sign?
No, but a percentage without a base, a term and a contract cannot be checked. Ask for a calculation with assumptions and a scenario worse than the base case.
What if the money is already transferred and flags have turned up?
Make no further payments, gather the documents and go to an abogado. The CNMV advises reporting the case to the regulator and to the police or a court, while acknowledging that the capital cannot always be recovered.
