Investors Beware
Property spruikers want to eat into your life savings, your home, or both.
Buying investment property is a serious undertaking and one of the most important decisions you will ever make.
With property dominating the headlines, anyone who can qualify for a loan seems to want in on the game and unfortunately the ensuing boom has opened the industry up to predators looking to take advantage. The problem is widespread and these property spruikers are becoming more active by the day.
They will often target people with self-managed super funds by offering their advisors huge commissions, or lure you to supposedly free wealth creation and education seminars with the promise of investment tips and opportunities. These seminars typically use fear of failure, dying poor and pop psychology to steer the novice investor, teaching you to buy completely on logic and to ignore gut-feel warnings. The spruiker schemes will promise to turn you into a millionaire with low risk investments and above average returns. They won’t tell you about the huge fees and insurance charges they slap on, or the fact that the properties on offer are overpriced, or from stock that real estate agents and developers are finding difficult to offload.
A lot of spruikers will promote big benefits through tax, such as negative gearing, superannuation or tax-free capital gains at retirement.
You are taught about negative gearing, but the implications aren’t explained. You are buying a product that makes a loss. This means you pay out of your own pocket each week and you’re advised to use depreciation to reduce tax. What they don’t explain is the trap you’re now in. Retire and you stop earning which means you can no longer claim a tax advantage and negative gearing increases, leaving you paying more when you’re earning less. So you decide to sell, but once you sell the ATO wants the depreciation back because it’s not a tax write off but a tax deferral.
While there are still some reputable companies, spruiking has become much more mainstream and expected across the industry.
Typically an investor now faces $20,000 or more on top of the property value, with many investors later finding that the property is worth less than they paid for it after settlement, despite independent bank valuations.
These spruikers are now using other real estate agents as channel partners and offering 5% or more to the channel partner. The agent still keeps at least 2% in commission so that increases the purchase price by 7%. Developers are spending closer to 10% when you factor in marketing and advertising which means that 10% of the property value is now carried by the investor in fees.
In 2017, the government’s investor watchdog, ASIC said that recent court decisions had given it a green light to launch a probe into spruikers. ASIC ruled that real estate agents who promote negatively geared investment packages are in effect providing retail financial advice without the necessary licence and banned the practice. To circumvent the law, the spruikers now set up two separate companies, one in real estate and one in financial planning. The financial planner is supposed to provide independent advice, but is instead priming the investor for the purchase of a property.
At KingsCoin, our ethos is honest property investment and our mission is helping people retire comfortably without the stress of finances during retirement.
Needless to say we find the practice of spruiking abhorrent.
If you are unsure who you are dealing with or would like a second opinion, feel free to get in touch, even if you are not buying from ourselves.
*Sources:
www.consumerlaw.gov.au/spruikers
http://www.afr.com/real-estate/asic-goes-undercover-to-expose-property-spruikers-20170216-gue7um
http://www.smh.com.au/money/investing/how-to-spot-a-property-spruiker-20170310-guv6ok.html
http://download.asic.gov.au/media/1340000/irfin.pdf
http://download.asic.gov.au/media/1247141/rg246.pdf
