Property is dominating the headlines, so anybody who can qualify for a loan appears to be trying to jump on the bandwagon. And of course, when any asset class is booming, the predators arrive.
In this case, they are called property spruikers, and judging by the emails I am receiving they are growing more active by the day.
A woman I will call Jane is just one of thousands of victims. She is 41 years old, single, and lives in Perth. She had worked hard to pay off her home, and was almost debt-free. Two years ago she accepted a friend’s invitation to go to a property seminar.
The seminar was supposed to be free – it cost Jane more than $200,000.
The seminars always follow the same pattern. The victims are given a long spiel about the growing pressure on government budgets caused by rising life expectancies, and are then shown vivid illustrations of the life of poverty that will be faced by those who don’t take steps to provide for themselves.
Then comes the sting – the way to wealth is to negative gear into residential property. This is followed by complex illustrations showing how quickly you can pay off the mortgage on your home by using the rent from the investment property to speed up the repayments. The cream on the cake is the huge amount of tax that is going to be saved.
That of itself is reasonably harmless – the killer blow is that the spruiker then convinces the victim that the best property for them is one that the spruiker, or its associates, will build on their behalf.
Unfortunately, Jane fell for it and found herself the owner of a property in a lower socio-economic area, near Brisbane, for a total cost of $421,000.
The spruikers set up a series of loans but it was done in such a convoluted fashion that Jane felt all she was doing was “robbing Peter to pay Paul”. After a few months she also noticed her debts were rising, not falling as promised.
By this stage the alarm bells were sounding. And it didn’t take much research for Jane to realise she’d been sold a dud.
Eventually the property sold for $299,000. In just two years, Jane has gone from owning a debt-free home to being saddled with a debt of more than $200,000.
There is now a growing pile of files in my office showing that Jane’s situation is becoming increasingly common.
This area is totally unregulated – this is why you will be on your own if you get taken in. Fortunately the scam is easy to spot once you know what to look for.
First. The approach will always come from the spruiker. This will either be by a “free” seminar showing you how to become a millionaire, or else by a phone call to urge you to come to an interview where you’ll be shown how to save tax while paying off your home faster. This is to get you in so they can put you under their spell.
Second. Even though any seasoned property investor knows the way to wealth is to search out bargains for yourself, the spruiker will take control and try to convince you that they are the only people who can find the right property for you. This is so they can sell you an overpriced property.
Third. There will nearly always be a building contract involved and the rationale is that you’ll save stamp duty, get a new home, and therefore bigger tax breaks. The real reason is it gives the spruiker a better chance to load the price.
Four. In most cases, they will be a one-stop shop – once again, to stay in control. You will find they control the lawyer, the mortgage broker, the builder and the managing agent.
Five. The properties will usually be in outlying suburbs and in lower socio-economic areas. Often, the properties offered will be in a different state to the one you live in.
Six. There will invariably be a mortgage required over your own home. The last thing the spruiker wants is for you to get a valuation on the overpriced property they are trying to force on you.
It’s a sad state of affairs, and I urge you to take careful note of what I have written and circulate it is widely as possible. Also, if you have any anecdotes I would love to hear them – just email me (or Money editor Caitlin Fitzsimmons). Right now the only protection we have is to take care of one another.
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: firstname.lastname@example.org