In many communities there is a dangerous game of junk real estate, which is particularly flourishing where the economic situation is poor. Here, unscrupulous businessmen take advantage of foreclosures to acquire problem properties and then use and exploit them under precarious conditions. These practices take place particularly in areas with high migration densities, where the emergency and lack of adequate housing are exploited. The legal system is abused to make profits at the expense of the community. This form of abuse and exploitation not only takes a social and economic toll, but also undermines trust in the integrity of the real estate market.
Definition of junk property
Junk properties (also known as problem properties) are buildings or properties that have significant defects due to neglect, lack of maintenance or inadequate construction quality. They can include different property types such as residential buildings, commercial properties and industrial facilities. Although the term is not uniformly defined, it essentially encompasses a number of easily identifiable characteristics.
- Dilapidated Conditions: Junk properties often show obvious signs of disrepair and neglect. These include rusted or damaged roofs, peeling paint, broken windows and doors, leaky pipes and structural damage.
- Lack of maintenance: Owners of junk properties often do not invest adequately in the maintenance or repair of buildings and facilities. This can lead to progressive deterioration and affect the quality of life for tenants or users.
- Inadequate Construction Quality: Some junk properties are inherently shoddy in construction or are defectively constructed. This can cause structural problems that require expensive repairs to ensure the safety and livability of the building.
- Vacancy and Abandonment: Junk properties are often vacant buildings or land that have been abandoned by their owners or cannot be used due to financial difficulties. Vacancy can lead to further deterioration and problems such as vandalism or illegal occupation.
- Negative Impact on the Environment: Junk properties can be problematic not only for their immediate residents or users, but also for the surrounding communities. They can lower property values in the neighborhood, affect the appearance and attractiveness of the area, and contribute to social problems such as crime.
Due to their poor condition, junk properties pose a problem for several reasons. First of all, they significantly affect the quality of life of residents. People living in such properties often face inadequate housing conditions, health risks and safety issues. This can lead to a vicious circle of poverty and social exclusion. Junk properties also reduce property values in their area, which can lead to, among other things, reduced tax revenue.
In addition, they can strain public resources by placing additional burdens on municipal services such as police, fire and health care. Other problems include health risks, crime and difficult conditions for urban development. And there is another serious reason to take a closer look at junk properties.
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Junk real estate scam
The issue of fraud also plays a role in connection with junk properties. In quite a few cases, junk properties are promoted as investment opportunities that supposedly offer tax advantages. Unscrupulous sellers or brokers could entice investors to invest in such properties by making false promises such as high returns and tax benefits that do not actually exist. Often, fraudulent marketers lure potential buyers with fake or exaggerated information about property appreciation or rental yield. They often provide false information about location, demand or building condition in order to deceive investors.
Another fraud mechanism is to conceal or downplay important defects or problems with the property. This could include structural damage, lack of building permits, environmental issues or other legal issues that could significantly affect the value or use of the property.
Because quite a few fraudsters take advantage of legal loopholes and gray areas to conceal or justify their practices. Furthermore, it is often not easy to hold them accountable. Complex financial structures, opaque contractual conditions and false insurance are typical.
Investors who fall victim to junk real estate scams may suffer significant financial losses and face legal difficulties in recovering their investments or obtaining compensation. But it's not just investors who are affected. Fraudsters ultimately damage overall trust in the real estate market and undermine the integrity of the industry. It is therefore important that potential investors inform themselves thoroughly and exercise extreme caution when dealing with suspicious offers.
Risks for investors and buyers
When it comes to risks associated with junk properties, it is advisable to look at the problem from two perspectives. On the one hand, there are risks when buying junk properties conventionally, and on the other hand, there are risks associated with fraudulent transactions.
Risks for investors and buyers with legal junk properties
Junk properties often have a low market value due to their condition and location. Investors may have difficulty obtaining a reasonable sales price or achieving an acceptable return on rental. In addition, renovating or maintaining junk properties can be very expensive. Investors may need to spend significant funds on renovations, repairs and upgrades to make the property habitable or usable again.
Additionally, due to the high risk and low value of junk properties, banks and lenders may be reluctant to offer financing options. Investors may have difficulty obtaining credit or loans to finance the purchase or renovation of the property.
Risks of fraudulent junk real estate transactions
Fraudulent sellers may make false promises to investors or conceal important information about the condition or history of the property. This could tempt investors to make an investment that does not meet their expectations or involves unexpected risks. Especially if there is no intention to use the property later, but only to acquire it for tax saving purposes, there are often considerable risks of loss, which can extend to the total loss of the investment.
In some cases, fraudulent transactions could even result in investors purchasing a property that does not exist or has legal issues such as a lack of building permits, ownership disputes or environmental concerns. This can lead to legal conflicts and financial losses.
Current jurisprudence
The case law on junk properties is constantly evolving and complex. However, some current judgments show a clear tendency to better protect buyers. An example of this is the judgment of December 5, 2019, Ref.: V ZR 255/18. In it, the BGH decided that the seller of a junk property is obliged to inform the buyer about the need for renovation of the property. If he fails to do this, the buyer can withdraw from the purchase contract. Another example is the judgment of June 23, 2020, Ref.: VIII ZR 313/19: In it, the BGH decided that an expert report alone is not sufficient to fulfill the seller's obligation to provide information. The seller must also explain the specific results of the report to the buyer and give the buyer the opportunity to ask questions.
Current judgments at the higher regional court level also show that protecting buyers of junk properties has a high priority. For example, the Munich Higher Regional Court decided in its judgment of November 8, 2022, Ref.: 23 U 2437/21, that buyers of a junk property can claim damages even if they inspected the property before purchasing it. This is particularly true if the seller has concealed the need for renovation of the property.
At the same time, the federal government is planning to enable municipalities to take better action against abusive business models. For this purpose, an amendment to the law on compulsory auctions and compulsory administration (ZVG) is planned. The federal government passed a corresponding draft law on March 12th: the draft law to combat abusive auctions of junk properties.
Where can you find junk properties?
Junk properties can be found in different regions and urban areas. They are often found in older neighborhoods or city centers. These areas have sometimes not benefited from urban development projects, so demand for real estate here has collapsed.
Junk properties are also more common in economically disadvantaged areas where population density is low and unemployment is high. In such areas, owners may not be able to afford the financial resources to adequately maintain or renovate their properties. Other typical regions include industrial areas, rural areas and low-demand neighborhoods.
Junk properties are often found in foreclosures where owners lose their properties due to financial difficulties. They can also be found on common real estate portals, which is why you should always look closely at dubious offers.
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What do you have to pay attention to when it comes to junk properties?
An investment in scrap real estate offers certain prospects of return due to the high potential for appreciation, but this also comes with significantly higher risks. It is therefore important to consider a few things.
First of all, comprehensive due diligence is important. This thorough research and review of the property includes an on-site inspection as well as a review of the property's condition, local market trends and potential return on investment. One should be aware that junk properties often have hidden defects or problems, so it is important to look within the framework of a Property valuation to carefully consider all aspects.
It is also important to realistically estimate the costs for renovation, renovation and repairs. Junk properties often require significant investments to make them habitable or usable. Therefore, you should plan far enough in advance and budget appropriately to avoid excessive costs. In this context, it is also important to find a suitable financing option. Because junk properties are often considered high-risk, traditional lenders may be hesitant to offer loans. Here it may be advisable to use alternative financing options such as private loans, hard money loans or crowdfunding to secure financing.
To ensure that all contracts and legal documents are legally compliant, you should have them checked in advance by a qualified lawyer. This way you can be sure that no legal problems are overlooked. What is particularly important here are building permits and land register entries.
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