When you're seeking advice to build your portfolio, the investment experts you work with should begin by offering advice dependent upon on your experience and where you are in your property investment journey.
If you are not experienced, don’t have a clear property strategy, haven’t set your budget, and you are not sure where to buy, then don’t worry, you’re not alone. This description covers a large chunk of property investors!
However, the reality is that this group of investors is at risk of making a poor property decision, potentially at the hands of a shoddy property spruiker.
“A lot of the messages and scripts that people in the industry have are pretty good, and they raise the interest and curiosity of the potential investor,” explains Ben Kingsley, chair of Property Investment Professionals of Australia.
“Sometimes, they are 70% on message, discussing the safety of bricks and mortar. Some of them are up to 85% on message when they start to look at benefits of investing and how to structure your cash flow. It’s when it comes to asset selection where most people get it wrong, in terms of [falling for] companies that have a suite of offerings, and research around them might be inadequate.”
In other words, they are trying to flog stock in an area that may not have any growth credentials to support it, to unsuspecting buyers who put their trust in them unknowingly.
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Good intentions, poor results
Locating a dodgy operator can be straightforward in certain circumstances, as Australians have “a fairly well-built-in BS meter”, says Rich Harvey, president of the Real Estate Buyers Agents Association.
“We can tell when someone is being fake and disingenuous. When we hear inconsistencies in what they say, and get the feeling that they would say anything to win your business, it sets off an alarm,” he says.
“There are plenty of sharks still, trying to do a ‘one size fits all’ approach and trying to sell stock at all costs, without caring who buys it.”
However, there is another kind of spruiker to be aware of – and they’re not always obvious as “you won’t always spot them from their external appearance”, Harvey says.
They’re the kind who may actually be thinking they’re doing the right thing for the customer; however, they lack the experience and expertise to see how the risks could play out.
“They may be thinking that infrastructure and population growth is all that’s required to locate a solid investment, but they’ve forgotten the fundamentals of supply and demand,” Kingsley says.
“It’s not just about the supply and demand equation today, and what level of demand that area is experiencing; it’s also about what might be coming on in the future. Asset selection is not a perfect science: even the best in the world can get it wrong from time to time. But the reality is, those who are most successful are usually using better fundamental research to get the better results.”
“You need to be very careful about the areas you buy in, especially when you’ve got a low interest rate environment, as a rising tide lifts all ships”
This type of well-intentioned yet poor advice has hurt investors in the not-too-distant past, when they were encouraged to buy into mining towns after hearing that China would need 50 years of steel. The superpower appeared to have a major appetite for Australian commodities, but the mega boom “obviously didn’t play out”, Kingsley says.
“People came to that party late, and they suffered accordingly. This is why you need to be very careful about the areas you buy in, especially when you’ve got a low interest rate environment, as a rising tide lifts all ships,” he adds.
“When the tide goes out again, we will then see where the real, quality investments are.”
Taking full control
In order to invest in property successfully, you need to have a clear investment strategy
, which includes an understanding of your finances, your borrowing power and your risk appetite.
This will allow you to “take full control over the process from end to end”, explains Doron Peleg, CEO and founder of RiskWise Property Review.
“You want to buy a good investment property based on a structured process. A property should not be sold to you – there is a huge difference here,” Peleg says.
MUST-ASK QUESTIONS FOR ALL PROPERTY EXPERTS
• How long have you been working in the industry?
• How do you get paid, and do you receive any commission for helping me?
• Do you have any investment properties yourself, and how long have you been investing for?
• What experience do you have of working with investors specifically (rather than simply homebuyers)?
• Can you provide referrals so I can talk to some of your former clients?
• Are you a member of a recognised industry association, such as Property Investment Professionals of Australia?
MUST-ASK QUESTIONS FOR PROPERTY ADVISORS
• Do you have a formal qualfication?
• How extensive has your own property investment experience been?
• Are you willing to share your successes and (just as importantly) your failures?
• What is your motivation for offering advice?
• What is your business model in terms of payment and transparency of fees?
• How does the advice you offer me differ from the advice you offer other clients (ie is it one size ﬁts all, or tailored to my circumstances?)
• What if I’m unhappy with the service you offer: do you have a disputes or complaints handling process in place?
“You should conduct your research and get information from an independent research company; this is a crucial step that will provide you with a clear direction on your investment, such as the areas that you need to consider and what to buy in each of these areas. The next step is to find an independent and reputable buyer’s agent, which is an independent person who receives his fees from you and who is a licensed professional who specialises in searching, negotiating and purchasing properties on behalf of buyers.”
If you can’t afford a buyer’s agent or you are confident that you can complete the transaction yourself, be sure to do extensive due diligence on any investments you consider purchasing.
“Always remember that any property professional who offers to sell you a property and doesn’t get fees from you gets his fees from the vendor or developer,” Peleg adds.
Number one red flag
The biggest red flag, suggests Doron Peleg, is an agent’s lack of independence, seen, for example, in those real estate agents who receive their commission or kickbacks from the vendor or developer, when recommending you buy their stock.
“If you’re not paying, it means that you are not the client”
“Any expert who provides you services for free most likely receives their income, directly or indirectly, from the vendor. A prime example is real estate agencies who offer ‘free’ seminars to ‘educate their clients’ on the current offerings on the market, and then sell them off-the-plan properties. People in this industry don’t work for free, and they have no reason to hire a very nice venue, at their own expense, unless it suits their business model.”
There’s a general rule of thumb that you can use to ascertain whether the property partners you’re working with are legitimate, he adds.
“If you’re not paying, it means that you are not the client.
“Furthermore, it means that there is a client that these property professionals have a contractual obligation to sell the property for.”