How to spot a property investing scam
It can be hard to separate a genuine property seminar or program from a scam that could send you broke. These 6 red flags will help you separate the experts from the charlatans.
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Property scams are unfortunately all too common in Australia, as the industry lacks regulation and our cultural fascination with property prices means there's always demand for real estate "education". Knowledge is power, so we share some of the red flags that indicate the property seminar you're signing up for could be a downright scam, perpetuated by property spruikers.
6 signs of a property scam
Here are some common signs to look for that should ring some alarm bells.
1. Have they got an offer for you! It expires soon...
These types of seminars are always initiated by them – not you. They'll send you an invitation to a "free" seminar teaching you how to build wealth through property. They'll call you on the phone and ask if you want to reduce your tax bill at the same time as becoming a property millionaire, just by turning up to their seminar. They'll contact you with an awesome opportunity to get rich – but you have to act now. This opportunity has a deadline and if you don't act now, you'll miss out. Forever!
2. They play the long game
The seminar might feature some interesting tips and points about investing in real estate, backed by a few speakers. Then the real sales pitch will begin. The spruiker will want to set up an appointment with you at your home to talk with you personally about how it all works and to see if you "qualify" for their deal. They apply a lot of pressure to get you to sign – some will even fly you interstate to show you the properties they're so certain you'll make money from. It's not a free flight; the cost has been baked into the property's price, along with their hefty commission.
3. They only want to sell you 'new' property
Constructing a new home for investment purposes isn't a bad thing, but when you're being sold an overpriced property that costs you far more than what other similar, established homes in that area are worth, you could be in trouble. You'll be told that you can save on stamp duty, which is true. You'll be told that building a new home gets you some better tax advantages, which is also true. But a new property has a number of massive costs built into it, including stamp duty, marketing costs, and again, their big commission.
4. They share 'exclusive' up-and-coming investment suburbs
Quality research is good. "Exclusive" research that only they have? This is a red flag, because if a particular area has good fundamentals for growth, other people are going to know about it. You may be offered investment opportunities in different states to the one in which you live - this is because you're less likely to know much about the area, so they can mislead you into believing it's a growth suburb. In reality? The majority of these types of "deals" encourage you to construct new homes in outlying suburbs or low socio-economic areas, where demand is low and supply is high.
5. They discourage you from doing you're own research
Experienced investors understand that it's very possible to build wealth by seeking good quality properties that are priced well and that represent good value for their own investment strategies. However, these property spruikers will make it very clear that they have already done all your homework for you. They will tell you they've struck a deal with a developer so they can get better prices through bulk buying (the opposite may be true, and the price is actually higher due to their big commission). They'll even tell you that there's no way you could possibly go out and get it right if you do it all on your own. You need them, or you'll fail!
6. They offer a one-stop-shop where it's all managed for you
The sales sharks pushing these deals will be keen to take control of the entire transaction. They'll control the conveyancer working on your transfer documents, the mortgage broker arranging your finance, the builder you have to build the property through, and the rental agent handling your tenants. While this might sound like an easy solution for many newer investors, it's simply a way for the sales person to keep control of the transaction so you don't get to see that you're buying an overpriced dud. They also may be getting referrals fees from each and every 'expert' they introduce you to.
Avoiding the property investing scams
Perhaps the best possible way to avoid being caught by these types of property investing scams is to sit down and do your homework yourself. The key is to be sure you understand what you want to buy and how it will affect your overall financial and investment situation before you begin.
Take the time to research any suburb in which you want to buy. Understand the median prices for homes in that area and compare the options of buying an established home versus building a new home in the same area. Do the sums and work out whether you're able to build any capital growth into your property simply by choosing construction in a given area. Do a little research into the anticipated rental income you're likely to receive.
Talk to a good accountant about how to structure your investment loans and about your taxation options before you buy. Ask plenty of questions until you're sure you understand. Discuss the differences between negative gearing and positive gearing and decide which one is better suited to your own investment strategy.
Then spend some time talking to your bank or a good mortgage broker about setting up your investment loans in the way your accountant suggested.
If you can do all these things on your own, you should find that you end up with some great real estate bargains that can become excellent investments over time.
Organisations or associations whom you can contact for advice
- Archicentre - This is the home advisory division of the Royal Australian Institute of Architects.
- Australian Chamber of Commerce and Industry - This is the peak council of Australian businesses and works with multiple organisation to help develop housing market policies.
- Australian Property Institute - They represent members involved in valuation, administration and use of land, property and machinery.
- Housing Industry Association - They work on behalf of builders members who a small or medium sized companies.
- The Insitute of Chartered Accountants Australia - This is the governing body of Chartered Accountants who can assist with any taxation or accounting advice.
- The Institute of Public Accountants - This is for accountants that are more practical and hands-on and have been recognised for this as well as a broader understanding of the total business environment.
- Insurance Council of Australia - This is the council who look after and represent the interests of the Australian general insurance industry.
- Master Builders Australia - Represent multiple Master Builders Associations in each state and territory that represent businesses within their state or territory within the building and construction industry.
- Property Council of Australia - Represent the interests of those who use land or invest in the built environment to generate economic returns within the property community.
- Urban Development Insititute of Australia - Represent the urban development industry in Australia.
- Australian Securities and Investments Commission - They offer information and advice to help inform, educate and protect the rights of the Australian consumer when it comes to any financial transaction.
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