A few months ago, we cracked open Pandora’s box to uncover the answers to the unspoken questions you’ve always wanted to ask the property industry. The response was overwhelming, and after fielding even more of your questions we realised we’d only just scratched the surface.
The property industry has always had something of an inconsistent reputation. With some segments of the industry highly regulated, and other parts lacking virtually any oversight whatsoever, it’s a fractured community that includes people who are passionate about helping everyday Australians get ahead – and people who are simply in it to line their own pockets.
Which begs the question: as property investors, how do you make sure you’re working with qualified, experienced, trustworthy people and businesses, when the spruikers and rip-off merchants of the industry can be so convincing?
To further muddy the waters, we have to take into consideration the fact that some of our most trusted advisors and well-known brands have been operating without the purest of intentions.
The royal commission into the financial services industry has kicked off this conversation in a big way. With several banks and lenders admitting to dubious and unethical business practices, it confirms that we need to be more diligent than ever to protect our wealth.
There are many ‘experts’ and property professionals you will encounter as an investor and landlord, and it’s important that you don’t get discouraged and assume the worst from everyone you encounter. Instead, follow the philosophy that forewarned is forearmed: the more questions you ask and the more knowledge you gain the better placed you are to weed out the dodgy operators from the reputable advisors.
Last time, we asked some big and curly questions of mortgage brokers, insurers, property advisors and buyers’ agents. This issue, we have follow-up questions for all of these experts – plus we’ve also got property managers and real estate agents in our sights.
We ask all the unusual, embarrassing, challenging and downright difficult questions you’ve always wanted to ask, so that you don’t have to.
ROYAL COMMISSION: EXPLAINED
The financial services royal commission is investigating allegations of financial deception and improper practices in the financial services sector, before reviewing what can be done about them.
- The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was established on 30 November 2017.
- It is expected to run for a full 12 months, and an interim report is due to be delivered by September 2018.
- A final report, including recommendations, will be presented to the government for review in February 2019.
- A number of major banks and financial institutions have been publicly named and shamed for poor and unethical practices.
- Over the last decade, $383.1m has been paid in compensation to clients who suffered financial loss as a result of financial advice or a failure to provide ongoing advice services.
- Roughly 306,000 customers of Commonwealth Bank, National Australia Bank, Westpac, ANZ and AMP have been paid $216.4m as a result of fees paid in exchange for no service.
Q: Do property managers get kickbacks or commissions from the tradies and suppliers they recommend, and if so, do they have to tell the landlord?
A: In NSW particularly – and I’m sure it’s similar in other states – it’s prescribed in the Act that any third-party payments must be disclosed to the owner of the property, and the owner has the right to agree or disagree.
In general practice, it doesn’t take place. Many years ago, there were cases of what we call ‘kickbacks’, but in today’s business it is against the law, and most tradespeople are aware of it. In practice, the reason I have preferred tradespeople is because those people are normally on 24-hour call-out, and they’re reliable. So often you choose not the cheapest quote but the quote that’s reliable, and you know that the work will be done properly. Most agents have a group of preferred tradespeople and will advise the landlords if they would prefer to use them because they have a history of providing good, reliable service. – Malcolm Gunning
Q: How reliable are rental appraisals, especially if it’s one offered by the property manager from the same office as the selling agent?
A: Rental appraisals can be as reliable as a profile photo on Tinder/a dating website. As always, do your own research and consult other local agents or industry professionals for advice. Of course, if there is a current lease in place, you can obviously check the terms of the lease. – James Nihill
Q: Do property managers always shop around for the best quotes, or do you just book the same suppliers over and over because it’s easier?
A: Whether a number of quotes are required will depend on what the job entails. Typically, several quotes are arranged for a larger job such as replacement of carpets or repainting. If the job is minor, such as replacing a loose hinge, then a spending limit will be added to the work order. We tend to use a number of tradies on a regular basis as we know they offer a high level of service, guarantee their work, are reliable and have the correct insurances and licences. – Lauren Robinson
Q: What value does a real estate agent really add? These days, isn’t it easy enough to sell your property yourself?
A: Anyone can whack up a ‘For sale’ sign and create a slick online ad for their house, so yes, vendors can easily list their own homes on the market. Where an agent adds value, though, is in helping you achieve the best possible price for your property. Put simply, this is what agents do. A good agent is intuitive and can read potential buyers, asking the right questions and quickly determining how much they are willing to pay. These skills can’t be underestimated and can mean the difference between getting a fair, or a great, price for your property. – James Nihill
REAL ESTATE AGENTS
Q: If I hire a buyer’s agent, how do I know you’re not intentionally negotiating for a higher sales price in order to nab a higher commission?
A: An excellent question! In fact this is the question we get asked all the time! It comes down to how your buyer’s agent approaches the appraisal and negotiation process. Firstly, as your buyer’s agent I have a fiduciary duty to put your interests ahead of my own – this is my legal obligation.
Your buyer’s agent should also do a detailed written appraisal of the property. We share this with the client, so we might say we think this property is worth $1.2m–$1.25m based on recent sales, condition and size. We then have a fully transparent discussion before we negotiate on price. Furthermore, in terms of our fees, we charge in price brackets, which helps to remove what could be seen as a ‘negative incentive’. That said, I do hear from some selling agents who are very happy when certain unscrupulous buyers’ agents turn up – reputation is everything in this industry. – Rich Harvey
Q: Does the agent or vendor have to tell buyers about property issues or pertinent information (such as whether someone has died in the home or the house has been used for illegal purposes in the past)?
A: Yes, although this can vary depending on which state you are buying in, as each state and territory has its own laws around disclosure and what vendors and agents need to let buyers know. Agents are subject to regulation and codes of conduct designed to protect both the vendor and the purchaser, so while the vendor might not owe a duty to the purchaser, the agent certainly does.
For example, in New South Wales the obligation to reveal a home’s history lies with the agent, and real estate agents must disclose any “material fact” about the property. This definition is broad but can include death if it happens within the legal definition of the property. This means someone could have been murdered on the road in front of the house and there would be no obligation for that to be disclosed. This really is a can of worms, and the best advice is ‘buyer beware’. If you are superstitious or culturally sensitive, ask lots of questions of the agent, go and speak to some neighbours, and research newspaper articles online. – James Nihill
Q: Is there genuinely a ‘right’ time to buy or sell, or is that a myth?
A: It’s not a myth, but there are certainly circumstances that negate it. For instance, if you are buying and selling the family home in the same market it doesn’t really matter. However, with investment property, timing is everything. It is easy to capitalise on an investment property if you’re buying in the right location and the right cycle. For example, Sydney is at its peak and has enjoyed significant growth over the last few years, so when you compare it to other states in Australia, it isn’t the best investment proposition. On the other hand, Perth is coming out of a downturn and represents good buying for investors right now. – James Nihill
Q: What exactly do you do for your 2–3% commission? Don’t you just open doors?
A: Think of it this way: If you are the vendor, how can you possibly complain about a fee structure that encourages the agent to get the best possible price for your property? The bigger your price, the bigger the agent’s fee – it is a win-win for you both. – James Nihill
Q: Is using an insurance broker really going to make much difference? Won’t I save time and money by buying a landlords or building policy online?
A: A local licensed insurance broker can tailor a package just for you. We usually have a good working knowledge of the property you have invested in or are considering, which could be vital if you are buying a ‘lemon’. We have a vested interest in the community in which you are investing, and our credibility is at stake. Personally, I am wary of direct insurers for many reasons, including:
• Scripted advice: If you ask a direct insurer a curly question you will usually get a scripted response of “Read your Product Disclosure Statement”.
• Lack of accountability: Consumers are simply another sale. Call-centre staff don’t live in your community or give a toss about your individual needs; they just need to achieve their sales targets at any cost.
• Price-cutting strategies: Direct insurers tend to focus on price over cover and use pressure sales tactics to force unwary consumers into uneducated purchase decisions.
• Claim horror stories: We receive daily calls from consumers that have been dealt with unfairly during their claim. I am constantly appalled by my own industry.
– Karen Hardy
“Direct insurers tend to focus on price over cover and use pressure sales tactics to force unwary consumers into uneducated purchase decisions”
Q: Why are discounts only offered for the first year to new insurance customers, not existing/ongoing ones?
A: There is no doubt that, with any product, incentives are sometimes provided to encourage new customers to try it out. In the long term, however, it may not be possible to continue with discounted premiums. For insurance to be sustainable for an insurer, the loss ratio – which is claims paid compared to premiums received – must be maintained at an acceptable level.
Essentially this means that across the whole portfolio the insurer needs to pay less out in claims than it receives in premiums, otherwise it wouldn’t be in business. So although an incentive may be offered for the first 12 months, and it is considered as the cost of getting a new client, insurers rely on reverting to the correct premiums in subsequent years. It is in fact much the same as promotional pricing at the supermarket: products are often sold at a loss to get people through the doors, relying on them to buy some normally priced items as well. The supermarket wouldn’t survive if it sold every item at a loss. – Sharon Fox-Slater
Q: Does a more expensive insurance premium genuinely give me additional coverage, or is
that a ruse?
A: Although a danger sign with any insurance policy may be that it is significantly cheaper than others, the price does not necessarily indicate the level of cover. When taking out any insurance you shouldn’t buy the policy based on price (although it’s always a consideration), as the cover does vary and you need to understand what your policy covers. At the end of the day you should look for the best-value policy for the risks you wish to cover; unfortunately, policies do vary substantially so they are never easy to line up side by side to compare. – Sharon Fox-Slater
OTHER PROPERTY AND FINANCE
Q: Why do lenders charge prepayment penalties? Doesn’t this mean I’m getting penalised for paying off my own debt?
A: This applies to fixed rate loans only. Due to the term of the fixed rate, banks and lenders have to cost it out up front. Therefore they do place restrictions on how much extra you can pay. The simple solution to this is, if you want to pay extra, simply don’t fix, or take out a split loan where you have part fixed, part variable. That way you can pay as much extra off the variable part as you like, while having the comfort of knowing the fixed rate repayment won’t go up. – David Wegener
Q: Are bank valuations a reliable estimate of a property’s worth?
A: A bank valuation in the past has been a good safety net to determine if a brand-new property is being purchased for market value. However, over the past few years I have seen such a diverse range of valuations of the same property from one valuer to the next that the accuracy and professionalism of bank valuers has lost its credibility. – Paul Wilson
Q: Investors have been impacted by APRA-led lending restrictions and could be in for an even tougher ride after the royal commission into financial services is over. Will loans become harder to obtain, and should investors be worried?
A: The royal commission has sparked a lot of controversy and debate about Australian lending policy, and the ramifications will be lasting. There has been a great deal of talk about proposals to reduce borrowing capacity, but when you investigate the finer detail of what is proposed, combined with the way that borrowers are assessed by financial institutions, I actually see it as a reality check for Australians to wean themselves off their increasing reliance on credit and start living within their means.
What we have are several generations who have become too comfortable with debt and are enjoying a ‘champagne lifestyle on a beer budget’. Interest rates have been at historic lows, and some have opted for interest-only loans to lower mortgage repayments. Add to the mix increased ‘debt in disguise’. In addition to credit cards feeding our instant gratification fix, we can buy big-ticket items we don’t need on interest-free terms – but heaven help you if you don’t make all the payments in time, as you will get slugged with mega interest as a penalty. And now retailers are promoting After Pay – yet another way to buy something you can’t afford and most likely don’t need.
Access to credit has become way too easy, and life has become ‘have now, pay later’. What has been proposed by the royal commission is that financiers take into account a borrower’s lifestyle when assessing them for a loan – that is, whether their spending patterns indicate a ‘student’, ‘basic’, ‘moderate’ or ‘lavish’ lifestyle. Put simply, the more you like to spend, the less you will be able to borrow.
Over the last 12 months banks have assessed loan serviceability on an average rate of 7.25% – with $1,800 per month spending for a single adult and $3,800 per month for two adults with two kids. Considering a borrower’s lifestyle in their application could mean that, on an $80,000 salary, you would only qualify for a $200,000 loan, which would obviously not get you far in today’s market.
But let’s take a moment to appreciate that there is nothing wrong with ensuring that someone can actually repay their home loan!
It is not the spending on home loan repayments that causes mortgage stress, it is out-of-control spending on the credit card that causes pain. What all of this points to is a need to analyse and modify our spending patterns. We need to go back to basics and learn to live within our means, saving for and appreciating our ‘treats’. – James Nihill
“Financiers [may] take into account a borrower’s lifestyle when assessing them for a loan – that is, whether their spending patterns indicate a ‘student’, ‘basic’, ‘moderate’ or ‘lavish’ lifestyle”
Q: Is there any way to get out of long-term (20 years plus) management agreements? It can be near impossible to get support from the majority of owners, as the management rights include on-site letting, so the person with the rights has almost exclusive contact with the majority of owners. Are there any options?
A: Management rights agreements are contracts. For people buying off the plan before the building is built, they are disclosed as part of all of the body corporate disclosure. For existing buildings the body corporate records held by the body corporate manager will reveal the existence of [these agreements].
As a contract they cannot be brought to an end other than by agreement or in accordance with the terms of the contract itself. Every management rights agreement has a requirement to perform certain tasks. If those tasks are not completed and the manager fails to complete them after appropriate notice from the body corporate, then a body corporate may have the right to terminate if the failure on the part of the manager is substantial enough. As you would expect, these types of matters are usually heavily contested as the manager has an enormous financial investment in their business. So no body corporate should try to terminate lightly.
All owners have the right to get the contact details from the body corporate roll of all other owners, so everyone can eventually be contacted if you’ve got long enough to do it.
– Frank Higginson
Q: Why is lenders mortgage insurance so expensive?
A: Lending is matched to risk. Generally, lenders mortgage insurance (LMI) is a policy banks take out – which you pay for – that covers the bank’s risk, even though you as a borrower pay for that policy. Clients without a 20% deposit are deemed to be higher-risk, and the closer you get to 100% borrowing, the higher the risk, therefore the higher the LMI. – Nancy Youssef
Q: How can you tell if a professional you’re working with is receiving a kickback or commission that could compromise their advice?
A: Property spruiking, where marketeers get massive rebates from developers for pushing properties onto unsuspecting investors, has existed in this country for decades. In recent years I’ve observed an alarming new approach to property spruiking, in the form of mortgage brokers, accountants, financial planners and so-called buyers’ agents receiving between $10,000 and $50,000 each and every time they can convince one of their own trusting clients to buy a specific property.
These service providers often have a reasonable reputation in their chosen field, so the client’s guard is down when the advisor talks up a specific property. There’s no red flag screaming ‘marketeer!’ But they are no more qualified to give property investment advice than the local hairdresser, and it’s property investors who are paying the price.
I would like to see laws passed so that anyone at all who receives remuneration from the purchase or sale of a property must hold a real estate licence. A plumber who wants to also wear an electrician’s hat must first complete the apprenticeship and obtain a licence; the same should apply when a financial services business wants to suddenly earn a living from promoting property.
All forms of developer rebates need to be outlawed, too. It is hypocritical to suggest that any mortgage broker, accountant or financial planner who is being remunerated via a developer rebate is acting in their client’s best interests. Until we see legislative change, I have this advice for consumers: ask them how they make their money. Even if they disclose the rebates they receive, ask yourself why the property they’re pushing happens to be the right one for you, when there are 10 million properties to buy in Australia. Also, remember that qualifications as an accountant, mortgage broker or financial planner should not be confused with qualifications as a skilled property market analyst or accredited property investment advisor. – Simon Pressley
Q: Why is cross-collateralising your loan so risky? My bank told me it means I can borrow even more money, so why do so many people recommend against it?
A: Many times, I’ve worked with a client who has got into a sticky situation due to cross-collateralised loans. Generally, this happens when someone has taken out a loan to buy an investment property and the bank has used both the home they live in and the investment property as security for the loan.
Let’s say their own home was worth $800,000, with $500,000 owing on the mortgage, giving them $300,000 in equity. They’ve decided to purchase an investment property for $500,000 – and the bank has had no problem lending them the full amount, because it takes their home and the investment as security.
The bank will still have a good loan-to-value ratio (LVR) of around 76%; after all, the total amount owing to the bank is $1m, and the total value of the properties is $1.3m.
As a client, you may have thought it was a great idea, as it enabled you to buy an investment property without needing any cash for the deposit. However, in reality, there are other ways to secure this type of funding without sacrificing the security of your home against the loan.
This is a very risky way of securing finance. Let me explain why. Let’s say the client in this scenario decided they wanted to sell the investment property to start a business, for example. They could run into trouble if the sale of the property impacted on their LVR.
For instance, the bank may require the original home to be valued again, to ensure the LVR remains at an acceptable level. It could also demand that any proceeds from the sale go towards reducing the debt – leaving nothing for the client to start their business with – or, in the worst-case scenario, it could not allow the sale to happen at all.
In a situation such as this, the client has lost control over their finances and effectively handed this control over to the bank. These are the kinds of situations that we, as brokers, want to help our clients avoid.
And, ideally, we would like to help you avoid them before crunch time – that is, before you reach the moment when you’d like to sell a property or invest in a new business. – Nancy Youssef
Q: How much does a project marketer (spruiker) make when they sell a buyer one of their ‘recommended’ properties?
A: I’ve never sold this type of property or received this type of commission, but because of our large database of clients at Metropole I often receive unsolicited offers from developers and project marketers asking me to recommend (read: sell) their properties to our clients. I’ve been offered commission as low as 5% just to pass on a name (not even make a sale), but commissions are often closer to 8% or 10% and I’ve been offered as high as 12%.
This, plus the other marketing costs, is built into the price the unfortunate investor pays for these properties. – Michael Yardney