These are just some of the questions we’ve been throwing around the office since we first had the idea to throw curly questions at the real estate industry.
The property industry is the biggest employer in Australia – more than a million people nationwide work in real-estate related jobs. As a result, there are all sorts of property professionals you are likely to encounter throughout your journey from wannabe investor to accomplished landlord.
Sometimes, working together will be easy, seamless and intuitive. Other times, however, it can be a real struggle to get on the same page – especially if you don’t know much about the topic at hand.
Let’s look at mortgages, for instance. When you’re just starting out, you don’t know what you don’t know, as the saying goes. There are myriad ways you can set up your mortgage accounts, with some techniques (such as an offset account) being more beneficial than others (we’re looking at you, cross-collateralisation!).
Adding an offset account to your mortgage is a smart way to minimise the amount of mortgage interest you pay whilst keeping your cash accessible. But unless you know what an offset account is or how it works, you can’t ask your lender to set one up for you, which puts you behind the eight ball from the outset.
This is precisely what we want you to avoid. It’s our goal to ensure you’re as educated as possible as an investor, so we’ve interviewed a number of property professionals to get ‘the lowdown’ on their industry.
What does an insurance broker really do to earn their commissions? Are their services worth the fee, or can you just as easily arrange the same deal with an insurer directly? The same goes for finance brokers: What value do they really offer – and is it true that they receive ongoing kickbacks on your loan?
We asked all the curly questions you always wanted to ask so you never have to be behind the eight ball again.
Q: Why do I need a mortgage broker at all?
A: At your bank, you’re only going to be given their rates and products. Every lender has a different policy, and as your broker, we’ll guide you towards the one that most suits your situation. At your bank, for instance, you might be able to borrow $600k, but when we run your figures through our calculators with a different lender, we might be able to get you $630,000, or a lower rate or better loan conditions. – Nancy Youssef
Q: How do some borrowers, like lawyers and doctors, get away with not paying LMI? Is that really fair?
A: Fair is an interesting word to use here. Everyone’s situation is different. People with short-term employment can find it harder to get a loan than those with longer-term employment. I wouldn’t say that is unfair; it’s simply a question of risk to the bank.
If someone has been in their career for a long period of time, usually their financial position is more stable, and thus they are more likely to continue to meet their mortgage repayments. Banks are businesses, after all, and they can’t stay profitable if they don’t get the money they lent back. Doctors and lawyers have spent six or more years of study in some cases, and are usually unlikely to change careers
Based on that, the likelihood of their employment remaining stable is greater than most, if not all, other professions, and thus the banks see them as a reduced risk. Remember that while they may be subject to no LMI, they still have to show the same serviceability as any other borrower. – David Wegener
Q: How do mortgage brokers get paid?
A: Banks and our lenders pay us a commission – kind of a like a referral fee to the broker for introducing the client. We don’t just refer the client, of course. The broker must also interview the client, collect the paperwork, put the loan together, ensure it is compliant and follow it through to settlement. We are effectively the client referrer, introducer, manager, credit manager and administrator. We have to be great at dealing with people and technically sound. We don’t sell credit cards or life insurance; we broker loans, and as such, we are going to be better at this than anyone else in the market. – David Wegener
Q: Can’t I get the same mortgage directly from the bank, rather than using a broker?
A: Yes, you can often get the same deal going through a bank as a broker. However, having access to multiple lenders is always better than having access to one. Obtaining finance isn't like it might have been years ago; the customer’s objectives and suitability must be taken into consideration. With so many different lenders and products in the marketplace, having a professional who deals in just that one thing – obtaining finance – is surely a better option. Brokers work for the client and are not beholden to any one organisation; we offer unbiased advice, and our livelihood relies on our ability to choose the best solution for our client. – David Wegener
Q: How many loan options are you legally required to show me?
A: There’s no set in stone rule. We tend to show at least show a minimum of three options, but sometimes we may compare several options, only to find that it’s blatantly obvious there’s only one solution, as it offers the best interest rate or borrowing capacity by far. It really comes down to the individual needs of the client – Nancy Youssef
Q: What kind of work do you really do as a mortgage broker, other than filing a loan application?
A: A lot! At the very beginning, we stress test your income across a lot of different lenders, and then we research different policies to ensure your life situation fits into the policy.
We’re almost always negotiating on pricing; it’s very rare for us to place a borrower into a loan, especially over $500,000, without having first negotiated with the lender to ask for a better rate. Sometimes banks offer deals that they don’t advertise, and because we’re placing such a high volume of loans overall, we are in a good position to negotiate.
Most importantly, we manage the entire process, ensuring there are no delays when a loan is lodged. If the banker isn't returning calls or emails, we're following up day in and day out so you don't have to. – Nancy Youssef
Q: Is it true that brokers make money off my loan for years to come? What work are you doing to earn that ongoing income?
A: Brokers get paid a small trail commission to manage the loan and the customer moving forward. Just like with an insurance broker, if you need assistance after the loan has settled, the finance broker is there to liaise between you and the bank.
Of course you are free to deal direct with the bank, but the broker usually has significantly more experience when dealing with the credit aspect of the loan – and this is where the ongoing small commission is designed to keep the broker available and accountable, to ensure the customer continues to have the best outcome. Countries that don’t have trail commission have been shown to have a much higher proportion of loans written that are more in the interests of the organisation than the client. – David Wegener
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Q: How can buyers be sure that they’ll get a better deal using a buyer’s agent? Can they just buy direct and save the commission?
A: People engage a buyer’s agent for many reasons. Some of our clients are too busy, others don’t have the knowledge or confidence to do it on their own, and others just want to have someone on their side rather than dealing with sales agents on their own.
For an investor who has fallen victim to procrastination, how do you measure the value of keeping the momentum going for them and ensuring that they are active in the market? There is an opportunity cost lost by letting year after year go past without taking action. Nobody has ever retired on the intention to invest – you need to actually take the action. Just like a personal trainer optimising your fitness, a buyer’s agent keeps you on track to keep you moving towards your investment goals.
While we can never guarantee saving a certain amount off the asking price, as other parties are involved in the transaction, we always work hard to ensure that our client has the upper hand wherever possible. Apart from the extensive due diligence and research that we undertake for every client, we are often privy to behind-the-scenes information that a buyer on their own would never be revealed. We negotiate the best possible price and conditions, but that is only a small part of what we do. What is most important is that you select the right property for your personal circumstances. – Paul Wilson
Q: We hear that buyers agent’s can ‘double dip’ and make money from the buyer and seller. How does this work?
A: Genuine buyer’s agents don’t double dip – they are exclusive buyers agents. As such, they are not allowed to double dip, as it’s prohibited by law. You’re not allowed to receive a fee on both sides of the transaction, so you have to decide if you’re working for the buyer or the seller. We’re a straight fixed-fee service, and our fee schedule is about the equivalent of 2% on purchases up to $1m, then over $1m it’s slightly less than 2%. That’s how we make our money. – Rich Harvey
Q: How do I know if I’m getting ripped off?
A: A lot people don’t know they’re getting ripped off because they don’t know how the industry works. That said, Australians have a high BS metre. What the person’s wearing, their office, their online presence – they’re all opportunities to get a sense of whether they are a shark or the real deal.
But that’s still not good enough, so how do you ascertain if you’re really dealing with someone reputable? First, be very clear about what you’re asking them to do and what you’re paying for it. If they’re offering it for free, well, they’re getting paid somewhere – they have to feed their family, so they’re getting a kickback. If it sounds too good to be true, it is. – Rich Harvey
Q: Can you guarantee you will save your client at least the same amount that you charge them on the purchase price of the property?
A: How does the client determine what the value is? How do you determine how much you saved? What you saved in 2017 is different to what you might save in 2018. You can’t guarantee something you don’t have control over, and we don’t have control over what others will bid at auction or what the market will do. What we can guarantee is that we’ll deliver the highest standard of ethics and service. – Rich Harvey
Q: How specific should I be in reading the wording of a policy? Are there clauses designed to catch me out?
A: No, the clauses in landlord insurance policies exist to show you the level of cover provided and any terms or conditions relevant to that cover. Landlord insurance is a risk-management mechanism whereby the risk of investing in property is transferred to the insurer, protecting the landlord from personal financial expense. It’s important that you read the wording to ensure you understand what is considered an ‘insurable event’ and that the policy meets your needs.
Landlords need to be aware of the duty of disclosure; for instance, they may be asked if they have any pre-existing insurable events relating to their investment before taking out the policy, such as a tenant who is behind in their rent or if there is damage to the property. These events cannot be insured after they've occurred. To draw an analogy, you wouldn’t take out a car insurance policy after you’ve crashed your car. It’s important that you answer all of the questions honestly … or your claim may be declined. – Carolyn Parrella
Q: Is there really any point in using an insurance broker, or can I get a great deal going direct?
A: You may get what you think is a great deal by going direct; however, a broker acts on your behalf and will ensure that you are properly informed and can assist you if you need to make a claim. They have specific knowledge that the average person doesn’t generally have. You may also find that some specialised products are not even available without going through a broker. – Sharon Fox-Slater
Q: If I have a meticulous tenant agreement and a great tenant, do I really need insurance?
A: Even the best of tenants can cause issues at some stage. Unemployment and sickness can change their circumstances very quickly, and once the problem begins – such as no paid rent, for example – it’s too late to take out insurance to cover it, as it will be a pre-existing problem. Further to that, most landlord insurance policies are designed to cover far more than just tenant-related problems.
Importantly, one area it will cover you for is liability, so in the event that the tenant or a visitor suffers an injury or another loss and you are found to be liable, even for reasons you may not be aware of, the insurance will cover the costs and legal expenses, which often run into tens of thousands of dollars. Policies are also likely to cover 'defined events; such as a fire, storm or water damage to your contents, such as carpets, curtains and blinds. – Sharon Fox-Slater
Q: As an insurance broker, do you have to disclose your cut/commission value to clients?
A: Yes, always – it is a legal requirement. It’s usually anywhere from 0% to 20%. For many consumers, the value of an insurance broker is not realised until they have a claim. This is when we really spring into action and of less than $5,000 normally take about 10 working hours to complete and be finalised. More complex or major claims may take months to finalise.
As well as lodging the claim, a good insurance broker will assist you in dealing with assessors or pesky insurers on your behalf. We get your claim settled to the maximum allowed under your policy terms and conditions, including additional benefits. Investors should never baulk at insurance broker commissions – they should be thankful that most brokers are not charging by the hour, like an accountant or solicitor. – Karen Hardy
Q: Honestly, what's the worst that could happen if I don't have landlord's insurance – a few weeks of missed rental income?
A: From my experience, landlords generally invest in property to generate wealth and provide financial security for their family. Landlords need to consider how they would cope financially – such as making mortgage repayments – if their investment property stopped generating rental income and/or required major repairs due to tenant damage. This could put their investment strategy at risk and provide significant hardship if the landlord has to find the funds to cover their loss. We have paid single claims as high as hundreds of thousands of dollars. – Carolyn Parrella
Q: How do we know when an insurance broker is offering the best advice and not just suggesting things that make them the highest commissions?
A: Licensed insurance brokers have a legal and moral obligation to act in the best interests of their clients, regardless of income derived. We are consumer advocates, paid by clients to protect their interests and act on their behalves for all things relating to insurance, including claims handling.
A good insurance broker will give you all the options available, including covers you may not have even thought of, based on their knowledge and experience.
If you call your broker and they don’t ask you one question that you’re not prepared for, I would run for the hills. It is our job to ask inappropriate personal questions when gathering information about your risk. We can’t do our job with only half the facts. – Karen Hardy
Q: How do I genuinely know if the insurance policy you're selling is the best one for me?
A: You don't. The only answer is to research as much as you are able, ask questions, seek the advice of experts in the industry and compare policies as best you can. You can also search property forums for advice, but look for balanced advice rather than ramblings from people with little or no knowledge. The best advice may be to look for policies from companies that are well recommended and that specialise in landlord insurance. – Sharon Fox-Slater
Q: If I sign a contract to buy a property, why do I have to get insurance before it settles and I officially own it? Isn't it the vendor's problem until then?
A: The exact implications can vary by state, but most would agree it is better to err on the safe side with such a major investment. The moment you sign a contract, you may be considered to have an insurable interest in the property. The person who is selling the property may not have insurance in place, and you have no way of knowing this, so the best option to protect your interest is to take out insurance when you sign the contract. In the worst-case scenario, there will be insurance on the property to protect your interest. – Sharon Fox-Slater
Q: How do I know who I can trust?
A: If it sounds too good to be true, it probably is. Consumers should not base their purchase decision on price alone, as you get what you pay for. There should never be more than a 20% variation in an insurance quotation (regardless of source) for the same level of cover. If a broker quotes you $1,000 and a direct insurer quotes $500, there’s a problem – the cover is different and usually inferior.
My suggestion to any investor is to use a local licensed insurance broker. We are highly qualified risk and insurance experts who will offer you many options, not just one. Local brokers are also aware of the geographic risks associated with your property, regulatory requirements within your state and market trends within your area. – Karen Hardy
Q: If I already have a financial planner, do I still need a property advisor?
A: In short, the answer is yes. Financial planners are not licensed to discuss real property, as under the Corporation Act 2001, real property is not regarded as a financial product. ASIC has regularly mentioned that they are aware of financial advisors being offered commissions and other benefits for recommending real property. The concern is that these commissions are banned under the Future of Financial Advice (FOFA) reforms, as they may compromise the advice, because it is reasonable to expect that commissions could influence the recommendations being given.
If a financial planner refers you to a property group, you still need to take precautions to ensure you will be working with a legitimate property investment advisor. If the people you are working with to secure the property only work with new and off-the-plan properties, and with only one or two cookie-cutter property groups, then alarm bells should be ringing. – Paul Wilson
Q: How do I know if I’m getting ripped off?
A: That's a good question, as you need to find someone who'll give you unbiased advice that is independent of any particular location or property. Most so-called ‘advisors’ will only tell you about properties on their stock list or that their buyer’s agents can source in a particular state.
On the other hand, a trusted advisor tailors their recommendations to your personal circumstances and warns you of the risks as well as the rewards. Their advice is not biased by any property, products or services to be sold, so they will have their own team of on-the-ground buyer’s agents in a number of states – not ones who fly in and out and think they’ve nabbed a bargain, while in reality the locals know they haven’t. – Michael Yardney
Q: Is there really any such thing as 'free advice'?
A: It's interesting – all the successful investors and business people I know are prepared to pay for professional advisors in various categories of their life. On the other hand, most unsuccessful investors get no advice or 'free' advice and then wonder what went wrong.
One of the first questions I’d ask any potential advisor is “How are you getting paid?” This will reveal a lot. If they are offering free advice, or they are being paid by a third party such as a developer or property vendor, then the advice cannot be independent. Put simply, if the advice is free, then you are the product!
Your advisor should be qualified and a member of a recognised organisation such as the Property Investment Professionals of Australia and be an investor themselves. They should have a thorough understanding of not only property, but also finance, economics and the taxation system as far as it relates to real estate investment. – Michael Yardney
Q: How do you make your money, and do you disclose all commissions to your clients?
A: How we get paid depends upon the services our clients request. Either way, our fees are always disclosed in full before we start working with a client, and we take no commissions from vendors, salespeople or developers.
Some of our clients pay a fee for service for a detailed strategic wealth plan, while others pay a success fee after we resesarch, source, negotiate for and secure an investment-grade property for them, which has been valued by their bank at or above what they paid for their investment. – Michael Yardney
“The Lowdown”, highlights the sorts of questions that many people don’t know they should ask. This article was so poular with our readers that we went back and asked even more questions! See The Lowdown part 2 for more.
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