“We’ll find you the perfect property and you won’t have to pay me anything to do it for you.” Sound good? Rest assured, if you hear this, you’ll be easily paying $100,000+ more than you should for your next purchase.
Not only will you be paying too much, the property probably won’t achieve the capital growth targets you’re told it will achieve, you will be competing for good tenants so the rental return will under perform and you won’t have an opportunity to add value.
The reason is that you’re in the hands of a property marketer instead of a qualified property advisor. Alternatively, you’ll hear this from a dodgy mortgage broker, shonky accountant, or bad financial planner and they’re all being paid by the seller to flog the property to you – payments usually start from $20,000 and rise to $100,000 or more.
Even worse, some ‘investment advisors’ are hip to this warning . . . so they’ll charge you an ‘education’ fee telling you that they will look at both new and existing property. But . .it just so happens that the ‘numbers’ work so much better with the new property. So they’re getting cash from you as well as the kick backs.
But don’t just listen to me. Outlined below is a story by Digital Finance Analytics and ABC’s ‘The Business’ program which covers how Real estate sales companies are using big commissions to pay mortgage brokers, financial planners and accountants to sell overpriced properties to unsuspecting clients. Here is the segment from ABC The Business. View it here.
It is a business model that has been operating for years, but is raising more concern now that many of Australia’s largest property markets are heading for a potential apartment glut. Developers generally contract out sales to these companies when they are having difficulty shifting their stock, such as when there is an oversupply of new apartments or houses in the area.
Real estate agents say developers use these sales companies, which often market themselves as property investment firms, because they can achieve higher-than-market prices.
One reason the properties are so far above market prices is to cover the cost of the commissions going to the marketing firm. Those fees can add tens of thousands of dollars to the cost of a new apartment or house.
A large part of those commissions are often then passed on to mortgage brokers, accountants or financial planners who refer their clients to the marketing firms.
The Real Estate Institute of Australia (REIA) said it has been “ferociously lobbying” both the federal and state governments to impose more regulation on this type of property sales tactic.
In the meantime, the REIA’s president, Malcolm Gunning, said clients need to do their homework if offered a property deal that sounds too good to be true.
“This is really aimed at, I suppose, the new investor or the lazy investor who really doesn’t want to go out and do their own due diligence,” he said.
“You should always cross-check. You should go off, walk down to your local real estate agent who’s been there for 25 years and say, ‘if I buy this property, what rent can I get for it and what in your opinion is the current market value?’
“So at least you’re making an informed decision. Don’t rely just on one source of information.”
So if an adviser or broker tries to sell you a property investment, it is worth asking who is paying theirs.
Here’s how to protect yourself and save $100,000s on your next property purchase.
- Do a sense check on any properties ‘presented’ to you. Just take a few minutes to look the suburb up on realestate.com.au or domain and review other properties and related prices in the area. The sales hype from the ‘advisor’ will be that your property is new so can’t be compared to an existing property, and you need to pay more because the new building will be better quality. This is simply not true.
- Have the suggested property / package reviewed by a reputable specialist who won’t receive a benefit from the purchase.
- Make a few calls to the area’s local real estate agents to obtain feedback on what is really happening in the area, discuss rental demand and comparable properties on the market.
- Use the ‘selected’ property as leverage to save yourself $100,000+ by selecting an established property in a bordering suburb. You’ll find properties that are often half the price, with bigger land parcels and plenty of opportunity to increase value. They will be easier to rent because the services are established – schools, transport, shops – rather than having to wait for these to be added to a new suburb or area. The extra bonus is that these types of properties will usually be cash flow positive.
- If you would like a second (or third) opinion, The Property Frontline offers free sense checks on house and land packages, and off the plan purchases. Contact us directly on 1300 289 289 to receive an independent evaluation of your potential purchase. No judgement – just facts. Then you can make an informed decision.
About the author
Debra Beck-Mewing is the Editor of the Property Portfolio Magazine and CEO of The Property Frontline. She has more than 20 years’ experience in property investing Australia-wide and has used a range of strategies to build her property portfolio including renovating, granny flats, sub-division and development. Debra is a skilled property strategist, and a master in sourcing properties that have multiple uses and multiple exit strategies. She is a Qualified Property Investment Advisor, licensed real estate agent and also holds a Bachelor of Commerce and Master of Business. As a passionate advocate for increasing transparency in the property and wealth industries, Debra is a popular speaker on these topics. She is also an author, podcast host, and participates on numerous committees including the Property Owners’ Association.