How to spot a property investing scam

Property scams abound 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 biggest red flags that could indicate the property seminar you're signing up for might be dodgy, over-priced, providing poor advice, or is a downright scam.

6 signs of a property investing scam

1. The offer expires SOON

Have we 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 and ask if you want to reduce your tax bill and become a property millionaire, just by turning up to their seminar and hearing their "secret strategies".

Then they'll present 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!

Red flag: This is a tactic used to put pressure on you to make a decision quickly. When you are making a property investing decision, you're considering spending hundreds of thousands of dollars and getting into massive debt. This is NOT a decision that should be rushed. If anyone that tries to pressure you in a fast decision, you should proceed with caution.

2. They fly you to the property location

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.

Red flag: It's not a free flight; the cost has been baked into the property's price, along with their hefty commission. The reason they fly you in is to tap into your emotions and build hype, to convince you to make a decision on the spot, rather than taking the time to weigh up all the pros and cons.

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 also 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.

Red flag: If the only property they want to sell you is a specific, new property in one particular development, you can guarantee they're being paid a big fat commission, which is factored into the purchase price. This can be worth tens of thousands of dollars. Ask how much commission they're being paid and whether they own any properties in the project themselves to see if they have genuine intentions.

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.

Red flag: You can nix this red flag pretty fast with your own research. See if what they're telling stacks up when you look for other sources to back up their claims.

5. They discourage you from doing your 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!

Red flag: You can nix this red flag pretty fast with your own research. As well as looking up reputable sources like the ABS and CoreLogic, check with your own sources (like local property managers who have nothing to do with the property project or sale) to make sure the area is genuinely in demand with local tenants.

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.

Red flag: Ask them if you can use your own experts, like your own independent mortgage broker, solicitor, accountant and quantity surveyor. If they're open to this, then they're more likely to be reputable. If they want to keep it all in house, beware.

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 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 Institute 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 Institute 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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