Property investors seeking free advice can sometimes come at a very high price according to this article in the Australian.
The article gives a case study of Brisbane mechanic Danny Baltzer who sees real estate as his investment of choice, as he plans for retirement in 10 to 15 years.
“We are a typical family; working dad and mum with two kids aged six and nine. I am 49 and we’ve worked very hard to get to where we are. We want to set ourselves up financially,” Baltzer says.
He plans to buy three houses, using the rents to pay off the mortgages.
He hopes that by the time he retires the properties will be paid off so they can provide an income for the family.
Baltzer dealt with people purporting to offer property investment advice. Some offered free financial planning advice and or legal service as sweeteners to clinch a deal.
Baltzer went through the exercise with different “consultants” and met so-called “introducers”, and was appalled by their hard-sell tactics.
Among properties he was shown were ones at Redbank, near Ipswich, where the market was oversupplied.
“If these people came out clean and told me that they were trying to sell me properties because they were being paid commissions by developers that would have been a different story,” Baltzer says.
“These commissions are two to four times the rate set by the Real Estate Institute of Queensland.”
More investors turning to property
Baltzer typifies the thousands of Australian mums and dads who see safety in bricks and mortar in an uncertain world with falling interest rates and volatiles share prices.
Yet, unlike shares or managed investments, property investment does not come under the purview of the Australian Securities & Investments Commission.
“The biggest issue is the growing trend of professional services firms – mortgage brokers, accountants and financial planners – who are offering property investment advice,” says Simon Pressley, a Brisbane-based qualified specialist property investment adviser.
“These people know how to avoid breaching laws set down by ASIC. They talk about features and benefits of an area, talk up the tax advantages of buying brand-new apartments or houses.”
But they have very little knowledge about property growth drivers and they exploit the trust consumers place in them because their qualifications may be in a different field, he says.
Pressley says it is not illegal if they want to take commissions on property they sell to their clients but they should be compelled by law to become a licensed real estate agent and to disclose that they represent the sellers.
It is illegal under recently introduced legislation for financial planners to receive commission from shares and managed funds. Instead, they now charge clients fees for service.
The same legislation should extend to direct property assets, argue specialist property investment advisers.
Pressley says unless the government acts to regulate property investment advisers, it could end up dealing with another Storm Financial disaster. That collapse cost small investors $3bn of their savings. Only this time the losses will be huge because of the value of individual pieces of real estate, he says.
The Property Margaret Lomas, principal of Destiny Group, says: “We don’t know the extent of the problem, but we do see people with failed investment every day.
“Disclosure is a big issue. I see it as a huge conflict to be offering advice and selling property at the same time.”
As many as 5000 people are estimated to be offering their services as professional property advisers. Few have professional qualifications specific to property investment.
PIPA came out as a rearguard action to protect the investors and integrity of the profession.
Pressley says property may involve substantial investment but it is also often an emotional decision.
There are no “bad” investments when there are rapid capital gains to be had in a rising property market.
But the table has turned. In today’s sluggish property market, bad investment advice is soon exposed when the value of the asset starts to decline.
As well, faced with sluggish sales, the development industry looked for new channels of sales and it seems to have found a way to tap into the client base of financial planners, mortgage brokers and accountants.
They are being offered commissions ranging upwards of $20,000 a house or apartment, but more typically in the $35,000-$40,000 range, on properties priced up to $500,000.
“I get regular approaches from property marketing firms and developers for clients but I turn them down,” Pressley says. “I make my living from fees paid for my services.”
Property Investment Professionals of Australia
This is the model we have always adopted at Metropole Property Investment Strategists and it’s one of the reasons we became foundation members of the Property Investment Professionals of Australia (PIPA)
PIPA members charge a fee for their service, which includes researching a specific market and sector and investment plans.
Margaret Lomas, chairwoman of PIPA, says the organisation has repeatedly sought to engage the federal government to bring in legislation to protect investors from unqualified and unregulated property investment advisers.
Lomas says PIPA has made 16 representations to the federal government, all without avail. It also has been unable to persuade ASIC to take action.
When contacted by The Australian for the article, a spokesperson says ASIC does not see property investment as “a financial product”, as such it falls outside its jurisdiction.
Unless the government changes the legislation, ASIC does not have jurisdiction over property investment, she says.
The bottom line
Free advice could turn out to be very expensive.