Be wary of property advice
If you are a property investor, you may be unaware of the fact that anything you do to invest in property, any move you make, any advice you take may leave you at greater risk than you thought. This is because the property investment Industry remains, to this day, unregulated.
Yes, you heard correctly, and to put it into perspective, let’s think about this:
Imagine you had $250,000 to invest. Your visit to a financial planner will result in, firstly, a risk profile to determine just what asset class will be right for you. Next will be a financial plan, designed to take into account not only your present needs in terms of income and cash flow, but also your future financial needs, time till retirement and future expected net worth in terms of your assets. Then, a written recommendation, complete with projected outcomes, and a bold statement about risk is presented to you along with product disclosure statements about any chosen products. Since 1 July 2013, your adviser isn’t allowed to take any commissions on any of these products, and so you will pay a fee to the adviser which must also be clearly disclosed.
As you can see from this transparent approach, while it may seem a little onerous, protection for you is built in every step of the way. And, it’s unlikely that you will be recommended a product not right for you just because the adviser gets a better commission – the new laws stamped out the possibility of that behavior on all but life insurance products.
Let’s now project this same scenario onto a property investment, where you have that same $250,000 to invest, which, with leverage through borrowing, could provide over $1m to invest. The range of options for guidance are numerous – and include the straight mentor deal, where you purportedly just get training and education, the seminar where you are introduced to an actual product, or the marketer who you come across in some way (including via telemarketing) who is looking for buyers on specific developments.
You may think you are dealing with a property investment adviser, but the truth is nothing works as it does with other financial advice. You most likely won’t be provided with a risk analysis, and so the property which is ultimately spruiked to you will have no relationship to your own attitude to risk. Few actual property advisers provide any kind of financial plan – most who do are basing it on your purchase of their product only, with no comparisons to anything else. The recommendations are likely to be incredibly skewed – how is it possible that the single property the ‘adviser’ has available for you to buy is also the best possible one for you out of all properties available, one which also matches your risk profile and happens to be in the area that has the best opportunity for capital growth?
But the worst part about all of this is that, while you are being told that you pay nothing for this service, it’s likely you’re paying through the nose. This is because there is no law in Australia compelling ‘property advisers’ to disclose commissions to you, outside of that requiring mortgage brokers to tell you what they get from a lender. Yes, that’s right – NOTHING. This wonderful, free advice you are getting, which I have already shown is likely heavily skewed to the interests of the adviser, can net that adviser commissions upwards of $40,000 per property, including back door payments from developers, conveyancers, real estate agents, accountants, or middle men marketers employed by the developers to shift their product.
You won’t know about these payments, because there is no law in Australia covering property investment, and therefore no law requiring disclosure of them to you at any stage of the process. But you’ll be affected by them, because they must be paid, and the only place they can originate is from the money you pay for the property. It’s highly likely that, despite any protests from the seller to the contrary, the purchase price has been inflated to cover all commissions being paid. This means that you start well behind the eight-ball, and it’s a long climb back to ground zero, especially in a stagnating market.
Caveat Emptor is a well- known expression – ‘let the buyer beware’, and nowhere does it apply more than in the property investing industry. If you have decided to buy property as an investment, and you rightly also make the decision not to try a do-it-yourself approach (because despite how you may feel you really don’t have an instinct for knowing how to buy property well), be sure that:
1. The ‘Property Adviser’ is qualified. – The not-for-profit Property Investment Professionals of Australia have a great qualification process resulting in the post nominals QPIA (Qualified Property Investment Adviser). Be advised, though, that a company cannot be a QPIA – only individuals can, so be sure that the company you choose to help you is not only a member of PIPA, but the adviser you work with is a QPIA.
2. The course, mentoring or ‘advice’ is not disguising an ultimate property sale. If the ‘adviser’ is selling property too, then their advice cannot be independent. They either need to be up front about the fact that they sell property and therefore cannot comment on its appropriateness for you, or they advise you on how to best invest in property without being involved in any way in the subsequent property transaction.
3. If the company is involved in the transaction, they disclose all commissions, kickbacks or soft dollar rewards to you, including the dollar value, in a signed disclosure document. If the company or person is acting purely as an adviser, mentor or educator who charges you, then all of the fees to be paid at any time during the relationship should be disclosed to you, along with an outline of exactly what you’ll be getting for your money.
4. In the case of an independent adviser, you should also receive a personalised plan which outlines the strategy, the forecasted outcomes, your capacity to afford to undertake that strategy and the risks involved.
Until regulation is invoked, you need to be hyper-vigilant when engaging a professional property investing company, regardless of how they deliver their services. The present situation is highly dangerous and engaging a professional with no qualifications, experience or background in financial advising (which is the case with a good majority of self- styled property experts) may be just as unsuccessful in the end as trying to invest without professional help.