How to spot a property investing scam
Not all property seminars are scams, but these 7 tips will help you separate the experts from the charlatans.
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Knowledge is power and education is a great thing, especially if you're thinking about investing a considerable amount of money in property. Unfortunately, not all property seminars are on the same level. In fact, some of them are downright scams perpetuated by property spruikers.
7 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!
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 email you out of the blue with an awesome opportunity to get rich, but only after you've listened to their entire spiel. You get the idea.
2. The long sales spiel
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 need 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. These types of spiels have been known to last for up to six hours, after which time anyone will be willing to sign up for almost anything at all.
3. Build your way to wealth
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 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. Then the sales person will point out that you could try to do it all by yourself, but you won't get as good tax benefits as you would by buying their deal instead. This is simply because they can hike up the price you pay and boost their own profits.
4. Up-and-coming investment suburbs
The majority of these types of "deals" will offer you the opportunity to construct new homes in outlying suburbs or low socio-economic areas. You may also be offered investment opportunities in different states to the one in which you live.
5. All under control
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. 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. 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.
7. Clever mortgage structure
The mortgage broker recommended by the property spruiker will be extremely well informed about exactly what property you've been set up to buy. That broker will then work on ways to set up a mortgage over your own family home. This is usually done in an attempt to stop you seeing that the property you're buying is overpriced. After all, any bank taking security over a property for a mortgage will conduct a licensed valuation on that home. If that valuation shows that the real property value is tens of thousands of dollars lower than the amount you just paid for it, you might not proceed. The spruikers really don't want that to happen.
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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