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Unethical property investment

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					                                                                                                                                                                FEATURE

                    Tim O’Dwyer:
                    “Remember the
                    old adage that if
                    it sounds too
                    good to be true,
                    it probably is.”
HEATHER FAULKNER




                                                                         Don’t be
                                Get-rich-quick scams
                                                     scammed!                        nethical property investment      emerged from a property boom. Prices
                             aren’t as easy to spot as
                            you might think. One API
                             reader shared her story
                                 with us because she
                                                                         U           schemes don’t come with a
                                                                                     warning sign. Property
                                                                                     spruikers will always assure
                                                                         you that they’re “not like the others”. And
                                                                         they might seem like the real deal on the
                                                                                                                       have gone up nearly everywhere in
                                                                                                                       Australia. So, many people who have
                                                                                                                       invested through property spruikers
                                                                                                                       actually managed to make solid capital
                                                                                                                       gains in the past few years which have, in
                                                                         surface.                                      a way, compensated for the inflated prices
                             wanted to warn others.
                                                                           “Property scams can be incredibly slick     they were originally charged.
                                BY MICHAELA RYAN                         and sophisticated, or completely                On the other hand, O’Dwyer points
                                                                         amateurish, but either way, real estate       out, “If you paid $20,000, $50,000 or even
                                                                         racketeers work on getting their              $100,000 too much for a property in
                                                                         percentage of ‘bunnies’,” says solicitor      the past, no matter how much its value
                                                                         and real estate watchdog Tim O’Dwyer.         has gone up, you’ve still lost what you
                                                                           Don’t be fooled by glowing testimonials     over-paid.”
                                                                         from satisfied customers. We’ve just            With the property market set to take a


                   AUSTRALIAN PROPERTY INVESTOR|www.apimagazine.com.au                                                                                               17
FEATURE      DON’T BE SCAMMED




           breather for a while, capital growth has         would pay the purchaser $165 per unit            named, but the vendor’s solicitor was                introduced her to this property. They said              company’ is involved with ‘directors of       will give them the maximum profit. It’s up
           cooled down. So investors who buy                per week. Catherine and John did the             named. However, when Catherine later                 that the situation sounded like “two-tier               straw’.”                                      to you to protect your own interests.
           through these schemes in the coming              sums, and they were impressed by the             tried to call this solicitor, she could never        marketing”.                                           • “An investment property with                    Avoid the temptation to be lazy – if you
           years are likely to get burnt.                   huge return that was being promised.             reach him.                                              Someone from the website later called                significantly better-than-average rental      do your homework it could save you tens
             Property spruikers and many                       The vendor also undertook to recarpet            Strangely, the organisation in Sydney             Catherine back. He had somehow been                     incomes may be a goldmine that has            of thousands of dollars.
           investment groups effectively provide            and paint the block before the end of the        hadn’t organised for Catherine and John              in touch with the true vendor of the                    been ‘salted’.”                                 You should always:
           property investment advice. But they             five years.                                      to have access inside the block of flats.            property. (How he found out the vendor’s              • “Just because a vendor appears to be          • Get your own valuation to make sure the
           don’t fall under the same regulations as            Catherine spoke to the organisation           However, as luck would have it, a tenant             details was a mystery to Catherine). The                legally represented, it does not follow         property is not overpriced. You can find
           qualified real estate agents, financial          behind the website and told them she was         arrived home while they were inspecting              website representative had discovered that              that a solicitor is really involved or that     independent property valuers in the
           planners or accountants.                         interested in the property. They charged         the outside of the property, and he was              the vendor had an informal agreement                    this is a lawyer of repute. More solicitors     Yellow Pages. Local real estate agents will
             Sadly, the Federal and State                   her a $6000 finder’s fee, took the property      more than happy to let them look through             with the family trust that they would buy               and barristers have gone to jail than           also be able to provide you with a list of
           Governments have spent the past few              off their website, and put her in touch          his unit. He told Catherine and John that            the property for $430,000 if they found a               bank robbers.”                                  recent sales in the area. And if you do an
           years arguing over who’s responsible for         with the selling agent.                          he was paying $115 in rent per week –                purchaser to on-sell it to for $490,000.                                                                internet search or look in the real estate
           regulating this area, and in the meantime,          “The selling agent was in Sydney, which       much less than the $165 weekly rental                   “We would have been stuck with a                   HOW TO AVOID                                      section of the local newspaper you’ll get
           many unsuspecting investors have been            struck us as being a little bit strange, since   specified in the lease-back arrangement.             property that we’d paid $60,000 too much              BEING RIPPED OFF                                  a feel for the prices in the current market.
           taken for a ride.                                the property was in a regional town.                Catherine and John started to do some             for,” says Catherine. “And then I assume              Background search                               • Ask local property managers/real estate
                                                               “The company also had a really strange        homework. They phoned a number of                    we would have been stuck with a fictional             Before you get involved, put pen to paper         agents for an opinion about the amount
           CASE STUDY                                                                                                                                             rent agreement – when the property was
           For Catherine and John (not their real
           names), it was their due diligence which
                                                            One important factor saved                                                                            actually renting for $115 each week rather
                                                                                                                                                                  than the $165 which the lease back had.”
                                                                                                                                                                                                                        Avoid the temptation to be lazy – if
           saved them from being ripped off tens of
           thousands of dollars.
                                                            Catherine and John – they wanted                                                                         Catherine and John will never know
                                                                                                                                                                  whether the lease-back agreement would
                                                                                                                                                                                                                        you do your homework it could save
              Catherine came across a website where         to inspect the property.                                                                              have been honoured. It’s possible that the            you tens of thousands of dollars.
           you could sign up to receive free emails                                                                                                               people behind the family trust would have
           listing “hot” property deals.                    name which we’d never heard of.”                 local real estate agents and asked what sort         taken their $60,000 and disappeared. On               or hand over a single dollar, check the             of rent the property is likely to fetch.
              Eventually a property came into                  One important factor saved Catherine          of yields the units in the town were                 the other hand, using that $60,000 profit,            credentials and reputation of the                   O’Dwyer suggests you ask for this
           Catherine’s inbox that sounded amazing.          and John – they wanted to inspect the            fetching. They found out that the return             it would have been affordable for the trust           organisation. Do an internet search on the          opinion in writing.
           It was a block of five flats in a country        property.                                        they had been promised was much higher               to pay rent at the artificially high rate for         names of the individuals and the                •   Speak to property managers, real estate
           town for $490,000.                                  “We got tossed around to a few different      than anything else on offer in the area.             quite a few years.                                    organisation, and see what newspapers,              agents and locals to find out how
              “There was a lease-back arrangement,          people within the agency and we told one            In their ring-around to local agents, they           Whether the lease back was honoured                online forums and other publications have           ‘tenantable’ a property is. If you can’t
           where the new owner would lease it back          person that we wanted to go to the town          discovered that, lo and behold, one agent            or not, if Catherine and John had needed              said about them.                                    find tenants, your investment will be a
           to the vendor for five years,” Catherine         and look at the property and he said,            was selling the very same block of flats             to sell the property, they would have made               “But be aware that media reports and             lemon. There should be infrastructure
           says.                                            ‘Why?’ And that caught our attention,            they had been considering. However, their            a big loss.                                           other comments may be self-serving                  (including public transport) close by. It
              Under the ‘lease back’, the vendor            that he tried to dissuade us from going to       price tag was $430,000 – some $60,000 less              Remember that $6000 finder’s fee                   ‘advertorials’ generated by the organisation        should also be close or accessible to a
                                                            look at the property.”                           than the price on the lease-back contract.           Catherine and John had paid to the                    and the individuals,” O’Dwyer warns.                major employment centre. Make sure it
 AUDITIONING A BUYERS AGENT                                    Nevertheless, Catherine and John                 Catherine and John paid this local                website? Well, for some time they received                                                                isn’t in a dodgy part of town that people
 There are legitimate buyers agents who will personally     insisted on seeing the block of flats. They      agent a visit, and they happened to see              assurances that the money would be                    Do your own comparisons and research                steer clear of. And avoid country towns
 inspect many properties until they find exactly what        made the trek to the country town and            the rent schedule for the block of flats.            refunded, and eventually it was.                      In Catherine and John’s case, they were             with a small or diminishing population
 their client is after.                                     arranged to meet someone outside the             The rent was being paid to an individual,               Tim O’Dwyer made the following                     left to do a lot of the legwork themselves.         (unless you are experienced and know
   Brisbane buyers agent Meighan Hetherington has this      property.                                        not the family trust listed as the vendor            observations after reviewing Catherine                However, some organisations offer to do             what you’re doing).
 advice for investors who are engaging a buyers agent:         “It took us a while to work out his role.     on the lease-back contract.                          and John’s case study:                                everything for you – from locating the          •   If a loan facility is offered to you,
 1. Ask if they, or their company, also work for sellers.
                                                            We worked out that he was an agent for              “We were in shock. We couldn’t believe            • “A finder’s fee can be a rip off in itself          property, to organising the valuation,              compare it with others on the market.
   If they also sell properties they may not really be
                                                            the company in Sydney, but he was                it,” Catherine says.                                    when an investment property has been               arranging your finance, engaging a solicitor        This can be done simply by making a
   working exclusively for you, and you will probably
   only be shown their listings.                            freelance and worked for a number of                They went down to the local council                  found which ought to have remained lost.”          and a rental agent. If this is the case, be         call to a mortgage broker. But make sure
 2. Check their qualifications. In some States, buyers       different agencies. He didn’t have a             and did a search to find the current owner           • “It’s not illegal for vendors to try to sell        very careful.                                       it is a mortgage broker you choose.
    agents must have the same qualifications as real         business card and he didn’t have the             of the property, and it was not the family              a property they don’t own, so long as                 It’s appealing to let someone else do all    •   Get independent legal advice about any
    estate agents.                                          phone numbers of the other guys in               trust. It was the individual whose name                 they have some legal entitlement to it             the hard work, but if you’re uninformed             contracts before you sign to make sure
 3. Find out exactly what the buyers agent will and         Sydney that we were dealing with.                they’d just seen on the rent schedule.                  (such as the equitable interest you have           about property investment, you take a big           you aren’t being stooged, or doing
    won’t do as part of their service. Make sure they          “He didn’t have answers to any                   To alert the true vendor to what was                 in a property when you enter a contract            risk when you delegate your investment              anything illegal.
    put it in writing.                                      questions, but interestingly what he did         happening, Catherine got in contact with                of sale which has not yet settled). But            research to someone else who may have a         •   Inspect the property… never buy a
 4. Agree on the fee and payment terms up front and         have was a faxed copy of the (lease-back)        his solicitor. The solicitor remembered                 it’s misrepresentation to hold out                 conflict of interest.                               property sight-unseen. When you’re
    put it in writing.                                      contract. He was reluctant to have us copy       that the family trust had put in an offer               ownership when a vendor has no                        Be very careful relying on advice or             there, ask lots of questions if you meet
   Solicitor and real estate watchdog Tim O’Dwyer
                                                            it, but we went and copied the contract.”        to purchase the property but the sale had               legitimate interest in the property.”              referrals from people who will make a profit        a tenant or neighbour.
 agrees but adds,“Don’t sign anything with any sort of
                                                               On the front of the contract there was        not proceeded.                                       • “Lease-back agreements with guaran-                 if you proceed with the deal. In general,       •   “Remember the old adage that if it
 agent, sales person or consultant until you’ve taken
 sound, independent legal advice.I                          the vendor’s name, and it was actually a            Catherine also rang the organisation                 teed rental returns should always be               their primary concern will be ensuring the          sounds too good to be true, it probably
                                                            family trust. No vendor’s agent was              who ran the website that had originally                 treated with caution, especially if a ‘$2          deal goes ahead, preferably at a price that         is,” O’Dwyer says.


18                                                                                                                   AUSTRALIAN PROPERTY INVESTOR|DECEMBER 2004   AUSTRALIAN PROPERTY INVESTOR|www.apimagazine.com.au                                                                                                    19

				
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