Too many hardworking investors have been conned out of their life savings by scheming property con jobs. Instead of getting stitched up by a swift-talking swindler, learn their tricks to keep you and your money safe.
Unfortunately property scammers or spruikers are all to ready to prey on the dreams of unsuspecting hardworking families trying to get ahead, retiree couples or first homebuyers unfamiliar with navigating the terrain of property investment. In Australia, the property advisory market is largely unregulated, which means almost anyone can disguise themselves as “expert” advisers. So, before any “hot” property scheme comes your way, here are some signs a dodgy deal may be at hand.
The Money Trail
You must understand an adviser’s motivation. Ask how they’re paid from promoting a certain product or service. If advisers or companies refuse to disclose their kickbacks and commissions, Destiny founder and author Margaret Lomas says, that’s a warning sign.
“An adviser who providers a property investment plan, and then also sells and profits from direct sales commissions on the properties which satisfy that plan, that’s a conflict of interest, and that adviser can’t possibly be independent.” she warns.
Be sure to scrutinise compulsory agent disclosure forms, but don’t just accept and leave it at that, Louis Fourie, head of buyer’s advocacy at Propell, says. Ask more questions such as:
- Do you or your company or an affiliate company/person/business get paid by the land developer? If so, how much? Get it in writing.
- Do you or your company or an affiliate company/person/business get paid by the vendor? If so, how much?
- Do you or your company or an affiliate company/person/business get paid by the builder? If so, how much? And, or course, also get it all in writing.
Are they professional and reliable operators?
Establish if the company is legitimate before giving any personal information.
“Don’t provide any financial information or personal information before you establish whether the company is legitimate and you wish to proceed with the purchase,” Amanda Lynch, chief executive offer of the Real Estate Institute of Australia, says.
Just because promotional material may look professional, it doesn’t mean the company is, she says.
“The basis of many scams is the seemingly high qualify of personnel and material.”
It seems those expensive glossy brochures usually have more photos than facts. Lomas says the Property Investment Professionals of Australia (PIPA) was founded with the aim of lobbying government to regulate the property investment industry while also providing a standards and a code of conduct. Lomas is a director on the PIPA board and API is a corporate member.
“PIPA is the only not-for-profit association providing a framework under which property advisers can operate and keep an eye on the shop,” Lomas says.
“Without regulation, anyone can call themselves an adviser, yet consumers who deal with a Qualified Property Investment Adviser (QPIA) can expect a greater level of expertise along with that disclosure.”
“Free” Education workshop
Many of these free seminars are a warning sign in themselves, Lomas says.
“Why would a businessperson offer something free if there wasn’t some other way they would profit, usually from commissions that aren’t disclosed?”
Fourie warns that nothing is for free.
“It’s an opportunity to bombard you with some basic low-level information, get your name and contact details and line you up to buy a property from their property stock list.”
Alternatively, at the other end of the scale you may be asked to pay a fee to be part of an ‘exclusive club.’
“These fees could potentially run into the thousands,” Fourie says.
Be sure to ask for explanation of anything you don’t understand.
“The overwhelming majority of agents want to build a relationship with you and so they’ll patiently explain aspects of the purchasing process and answer your queries,” Lynch says.
“Scammers by nature don’t like people to ask too many questions so if you’re dealing with someone who is repeatedly vague, find another agent.
“Ask for the name of the person you’re speaking to, who they represent, obtain ABN’s, addresses, contact telephone numbers and keep notes of conversations.
“Ask if they belong to a Real Estate Institute (if appropriate) as a quality assurance.”
Feeling pressured to make a decision? Lynch says forget it.
“Make any decisions carefully and take the time you need. Don’t be rushed by high-pressure salespeople and short deadlines,” she says
Usually these scammers don’t want you to go away and get independent legal and financial advice.
Notoriously known as the ‘contract killer’, Brisbane lawyer Tim O’Dwyer says you should be wary of seminars with an emphasis on emotive words.
Likewise, in the late 1990s and early 2000s many scammers were flying victims to the Gold Coast and blindsiding them with overpriced property offerings. O’Dwyer says these days scammers are cutting their overheads and taking their seminars on the road.
“People are getting stitched up on the spot in their home state. It’s all done with smoke and mirrors, with all the non-independent advisers there on tap,” he says.
If you see terms such as ‘free higher specifications’ (that are actually built into the price) or ‘double the first homeowners grant’ beware, Fourie says.
“Or furniture packages included in the contract price, but this will be deducted from the contract price upon valuation,” he says
Check the disclosure forms. There will be exorbitantly high ‘marketing’ fees or higher than normal ‘sales commissions’ on the legal disclosure forms.
Although they’re very common in property sales, rent guarantees often aren’t worth the paper they’re written on, O’Dwyer says.
“They’re often a guarantee given by a $2 company. If the rent doesn’t come up to scratch there’s no one you can sue.”
Rental guarantees often don’t reflect market rent, so after the guarantee period the actual market rental is often substantially less than expected.
“This ‘additional’ rent is priced into the purchase price, which displays the enormous margins and kickbacks available. It’s often used to put people’s minds at ease about the difficulty of getting a tenant, but this exposure is always priced in,” Fourie says.
So, ask yourself this question: If it’s such a great property, why would I need a rental guarantee?
“Don’t accept their sales talk answers on this. It’s a sell!” Fourie says.
Of course, rental guarantees have become so common in the industry now they’re offered by reputable, well known developers as well as less reputable ones, so the presence of a rental guarantee is not, in itself, an indication of anything dodgy or that the property isn’t a good investment. Rental guarantees can provide security of cash flow for the term of the guarantee but aren’t a substitute for the investor’s obligation to research what the true open-market rent will be when the rental guarantee expires.
Investing in property through a self managed super fund (SMSF) can be an excellent investment strategy and many firms promoting SMSF property investments are reputable and provide valuable services to investors. But there are plenty of sharks swimming in this pond, according to O’Dwyer.
“They’re targeting people with the view to help them set up a super fund, invest in property and have it all managed through their mates,” he says
“They’re the marketeers, the middle men who are getting a percentage from sellers or developers.
“Often you might respond to an advert somewhere and the next thing you know you’re being stitched up in a property package combined with a self managed super fund. Usually these scammers don’t want you to go away and get independent legal or financial advice.”
What you should do is always seek independent advice. Think legal, financial and accounting advice before signing anything.
If a firm is recommending you purchase property through them for your SMSF, get independent advice from a professional not connected (and financially benefiting from) the sale.
Safe investing tips
So, how do you decipher the dodgy from the legitimate? Number one, O’Dwyer says, is don’t be in a hurry. Also, before you do anything get advice from your own solicitor and your own valuer, and seek advice from a reliable financial adviser and accountant.
“If you’ve got all four of those onside, advising before you go anywhere, you’re protecting yourself,” he says.
If you do encounter a problem, don’t let embarrassment or fear keep you from reporting fraud or abuse to the appropriate authorities.
At the end of the day, Lomas explains, there’s no easy way to creating a better life for ourselves, and new investors especially should be wary of any suggestion that someone can build riches with no money down, no effort and no risk.
“Property investing carries risk, required significant financial input via cash or property equity, and most certainly doesn’t result in short-term riches,” she says.
“Over time it can create a handsome nest egg, but new investors shouldn’t believe the promises of untold millions created out of nothing.”
Australian Property Investor, 2 July 2015, pages 32-34