The massive fraudulent lending scandal known as the Suruga Shock and the Pumpkin Carriage Scandal is still fresh in our memories.
Both the nature of the case and the way it was resolved were unprecedented and attracted a great deal of attention at the time.
This time, let's take another look at the Suruga Shock and the Kabocha no Basha incident and explore the important ways of thinking to succeed as a real estate investor.

The secret behind the Pumpkin Carriage incident

"Pumpkin Carriage" was the name of a women-only shared house formerly operated by Smart Days.
The brand name was inspired by the Cinderella image of a young woman who moves from rural areas to cities and becomes successful, but the rental business plan was quite sloppy.

Let's look back at the whole story of the Pumpkin Carriage incident to see why such a sloppy business plan was allowed to go ahead.

Property prices that are too high for the market

The median price range for a Pumpkin Carriage is said to be around 100 million to 130 million yen.
Each room is quite compact, measuring around 8 m2.
The common areas only include a kitchen, shower room, toilet, and washing machine, but there are no shared spaces or workspaces where residents can relax.
Because the property itself was small to begin with, after the problem was discovered it was discovered that the property's value was only about 60 million yen.
However, Smart Days colluded with construction companies to add a significant profit to the property prices they sold to customers, and received an exorbitant 20% kickback from the construction companies.
The land was procured by Smart Days, but they also added a considerable profit to it, allowing buyers to purchase the property at a high price.

Poor business planning and the sublease trap

At this price, a real estate investment professional would have noticed something wrong with the business plan, but most of the investors were individual salaried workers who were not familiar with real estate investment. Without carefully considering the market price of the property or the rental price, they trusted the salesperson's "30-year rent guarantee and 8% return through subleasing" and decided to purchase the property.
In reality, Smart Days was run on a shoestring, with kickback income from construction funds being used to pay sublease rent.
From the start, it was impossible for this type of rental management to be viable, and when other companies in the same industry went bankrupt and Suruga Bank stopped providing similar loans, Smart Days' sublease rent payments also fell behind.

Suruga Bank's Lax Loan Screening and Falsification of Screening Documents

What made this case even more heinous was the fraudulent lending by Suruga Bank.
A Smart Days representative explained that no down payment was required at the time of purchase, and that unsecured loans were also available for registration fees, real estate acquisition tax, and other expenses, suggesting that the loan had fairly lenient screening criteria.
Lending interest rates are high at 3.5-4.5%, and unsecured loans are 7%.

The sloppy screening criteria were a problem, but after Smart Days' collapse, the shocking fact came to light that loan officers at Suruga Bank had falsified the balances of customers' bank deposits.
In fact, the conclusive evidence was that the recordings of the Suruga bank employees were made public at the press club, which led to the matter developing into a social issue.

What happened to the deceived victims?

At least 960 people were deceived, the number of properties was over 1,200, and the total amount of loans (including secured and unsecured) was over 150 billion yen.
Shortly after Smart Days' bankruptcy, the victims formed the SS Victims Federation and, through their legal team, engaged in repeated mediation with Suruga Bank.
As a result, in April 2022, the victims' legal team will win an unprecedented comprehensive settlement.

Changing public perception of the victims

When Smart Days first went bankrupt, there was a perception that buyers had simply made a bad investment and that it was their own responsibility to resolve the situation.
There were many cases of buyers committing suicide due to failed investments, and others taking time off work due to mental and physical instability, and this became a major social problem.

However, after Suruga Bank's fraudulent lending was revealed, the malicious actions of Suruga Bank, Smart Days and their affiliated companies were widely reported, and the perception changed to that the purchasers were now the victims.
A legal team was formed to resolve the Suruga issue, and various discussions were held in the Diet about where the problem lay.

Arbitration scheme for loans totaling approximately 150 billion yen

The Suruga problem was resolved through a scheme that was previously unthinkable.
Considering a model in which a single buyer receives a loan of 130 million yen, the following solution scheme was presented:
First, Suruga Bank will pay the buyer a settlement of 70 million yen to offset the loan.
The remaining 60 million yen loan will be transferred to a third party.

The third party owed the purchaser 60 million yen, but the purchaser paid off the debt by transferring the property to the third party.
As a result, ownership of the property was transferred to a third party and the buyer's debt was discharged.
All victims who filed for mediation with Suruga Bank over this scheme agreed, and the Suruga problem came to a resolution.

Changes in banks' lending attitudes after the Suruga shock

After the Suruga Shock, the Financial Services Agency took administrative action against Suruga Bank, including suspending new lending secured by investment real estate for six months.
In addition, the Financial Services Agency published a survey of financial institutions nationwide on the appropriateness of their lending attitudes, screening procedures, and the appropriateness of the work of those who introduce loan cases, expressing concerns about the appropriateness of customer protection and risk management. This is having a significant impact on the attitudes of regional banks, credit unions, and credit associations in particular in regard to real estate lending.

Stricter loan screening

After the Suruga Shock, screening for real estate loans for individual investors became stricter, and it became almost impossible to accept investment real estate loans for new customers.
Even in cases where existing customers were being asked to provide a full loan, there were many cases where a down payment of 10 to 20 percent was being demanded for a loan.

Rather, it could be said that real estate lending to individuals has returned to normal.

New lending to real estate investors plummets

After the Suruga Shock, the amount of new real estate loans in 2018 decreased by 5.7% compared to the previous year.
This is the biggest decline since the Lehman Shock. In particular, new loans, mainly apartment loans to individual investors, fell by 16.4%, which was reported to be the largest decline since the survey began in 2007.

Self-protection measures to avoid becoming involved in similar incidents

In the past, real estate loans were mainly for apartments and condominiums, but now there are many different types of real estate investments, such as shared houses, private lodgings, garage houses, and storage rooms.
It's tempting to jump on board when a new form of real estate investment gains popularity, but first consider your own business plan. It's also effective to conduct on-site surveys of the occupancy rates and building conditions of similar properties.

It's not okay just because the bank will lend you money or the sales person has guaranteed it; it's important to understand the flow of money and your business plan to the point where you can explain it to the loan officer, and be convinced before investing.