Investment clubs: are they as dodgy as they sound?

By
16/05/2008


Question: A friend of ours is talking about property investment through an investment club – which apparently builds or sources properties, and provides the finance and ongoing management of properties. I’m curious about this and wonder whether these clubs are genuine and how safe they are.

 

Answer: As Australia presently has no regulation in the property investment industry, there are many schemes and strategies that have popped up, which could breach a law, if there was one. Hopefully, this situation will soon change, with the PIAA (Property Investment Association of Australia) leading the push for nationwide regulation to protect all property investors. Until this happens, investors must be wary of any group selling property that uses clever marketing strategies such as these.

 

Investment clubs have begun to spring up around the country, using a carefully cultivated approach that trades on the Aussie need to congregate and be ‘mates’. On the surface, these clubs appear to be a group of your peers, working voluntarily for the good of all members to provide education and guidance to allow for successful wealth creation. In some cases, however, this is just a cover for an intricate network of seasoned con artists, who use the club as a front for their own moneymaking ventures, and a fence to sell overpriced and overvalued real estate to the unsuspecting public.

 

Typically, the marketing material advertises freedom, friendship and financial success through group support. Help is reportedly available, free of charge, any time you need it. There are usually group meetings where fellow investors help each other. And in all fairness, in some of these clubs many of the members offering this support are in fact genuine in their concern – they themselves are unaware of the dishonest network of money-hungry opportunists who lurk in the shadows.

 

In fact, money is made for the stakeholders (not the investors, or ‘members’) through a comprehensive commission structure, usually involving 6% added to the purchase price. Although this might seem palatable, evidence has suggested to me that a lot of these properties already have a substantial amount of developer profit built into the price before the 6% is added.  I have known of investors who have had properties that they bought via these clubs independently valued, at which point they have discovered that they were worth at least 20% less than what was actually paid for them – suggesting that the real profit for the club owners is vast and undisclosed. Investors needing to exit early, or wanting to leverage against equity into more property have, during times of stabilised property values, found themselves with an asset worth considerably less than what is owing on it.

 

While these clubs may seem ‘free’ and independent, I caution you to question the impartiality of any wealth creation group that charges a ‘commission’ on the sale of the properties it recommends. Don’t be taken in by the welcome grin. They are not what they seem, their advice is subjective and they profit from every purchase you make, both through profit on the sale and commissions way above acceptable levels.

 

The experts

Margaret Lomas is the founder of Destiny Financial Solutions, and is a qualified financial advisorand the author of five bestselling property investment books. She was the 2006 Telstra NSW Business womanof the Year. Visit: www.destiny.net.au

Helen Collier-Kogtevs is the director of Real Wealth Australia, which provides simple and easy education programs for investors who want to take control of their financial future. She has used her own strategies to accumulate $7.2m worth of property in just seven years. Visit: www.realwealthaustralia.com.au

Greg Sugars has had 18 years’ experience in the property industry, and is the CEO of Opteon Property Group, Australia’s largest truly national independent property services group. Opteon specialises in property valuations, quantity surveying and advisory.Visit: www.opteonpropertygroup.com.au

 

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