Purchasing property is an emotional experience. When you combine the passionate responses that property investment elicits with the fact that the industry surrounding it is unregulated, you can easily find yourself saying ‘yes’ to a deal or operator who probably deserves more scrutiny.
Unfortunately, real-life investing and sorting the good from the bad isn’t as simple as some television current affairs programs would have us believe. The ‘dodgy operators’ don’t walk down the street in slow motion looking suspicious in black and white.
Instead, in many cases, property ‘spruikers’ and unscrupulous operators are good at what they do. It is not immediately obvious that they are operating in illegal, or even unethical, ways.
They are experienced salespeople with the ability to seemingly give you all the right answers.
If some people within the property investment industry are acting in their own best interests instead of that of the investor, how are you supposed to see that?
How can you see beyond the spin and know that what you’re being told – or what you’re being sold – isn’t worth your time and money?
“One of the most important issues for property investors is actually understanding the difference between who is providing decent advice versus who is selling property or selling their own agenda,” says Property Planning Australia’s David Johnston. “It can be quite hard to distinguish.
“It’s something which is increasingly difficult because most of the spruikers are smooth talkers.”
Steve Waters, director of Right Property Group, says as the market heats up and investment activity escalates, more and more people posing as ‘property professionals’ are likely to come out of the woodwork.
“The market in certain states is performing well, so lots of property ‘advisers’ have popped up out of nowhere,” he says. “It’s rampant at the moment.”
Investors, therefore, need to do their due diligence on the advice they’re getting and who they’re getting it from.
‘Due diligence’ is a term often wheeled out when discussing property. Most property investors would know all about conducting diligence on a property or strategy, but you can apply the same concepts to investigating the people giving you advice.
If you research your team of property investment experts, you are more likely to be able to avoid spruikers and unethical practitioners.
“We always advise our clients: do your diligence on our diligence,” explains Mr Waters. “You need to do it. Property is a major investment. You can’t shortcut the process anywhere.”
Todd Hunter, director of wHeregroup, says you can start this process by conducting a simple internet search.
“I would start with Google-ing their name, Google-ing their company and seeing what people are saying,” he says. “There are also various chat rooms and forums. Just have a bit of a read.”
Mr Hunter says not everything you will find should be taken as ‘gospel’ because everyone has different views on properties and the best investment strategies – but it’s a good starting point.
In conducting this due diligence, investors need to go beyond the first page of their internet search results, says Destiny Financial Solutions’ Margaret Lomas.
“Don’t just stop at page one on a Google search because a lot of these unscrupulous operators pay internet professionals a lot of money to maximise the searches so that whenever people do a search, the first two or three pages are populated with positive information,” she explains.
“The bad stuff gets buried at the end, so do some research.”
Mr Waters says investors should also ask their property professionals for clients to speak to and examples of strategy success.
“You should ask them for examples of results because after all, that’s what you’re after,” he says. “It’s not just about a transaction; it’s about the relationship, the ongoing consultancy.
“A lot of these spruikers will dress it up and say ‘Here’s a property’, shake your hand and say ‘Good luck, come back and see me when you want another one’ – as opposed to that ongoing consultancy.
“Property is not just a single transaction where you set and forget. It requires management. It requires continual fine tuning of the strategy and numbers – and that’s where your adviser is worth their weight in gold.”
Property is a major investment. You can’t shortcut the process anywhere.
Truth versus spin
Separating truth from spin can be one of the most difficult tasks for property investors, but Mr Hunter says research will put you in a better position to spot ‘little white lies’.
“It’s easy to check up on the products that people are offering,” he explains. “I like to tell my clients where I get my research from so they can go and verify it themselves.
“If someone is telling you about a great up-and-coming suburb, and rattling off facts and figures, you can easily cross-reference this with data at the back of property investment magazines.
“It’s great to see what an area will be like just by looking at those figures and seeing if the figures that they’re telling you are anything like the figures in the magazine.”
Mr Hunter says this process will also give you an idea about whether the person you’re dealing with is reputable because if they’re inflating a suburb or development’s potential, “it will come out with that information straight away”.
Jacque Parker, director of House Search Australia and president of the Real Estate Buyers Agents Association of Australia (REBAA) agrees and says solid ‘facts’ are a good way to establish if someone is “all talk”.
“Facts are verifiable,” she says. “Spin is emotive and designed to ‘sell’ services. Ask lots of questions and ensure you are 100 per cent comfortable with the person doing the work for you.”
Ms Parker says investors can also contact government agencies, such as the Office of Fair Trading, to investigate whether the business owner you’re dealing with has been dishonest in the past.
Truthful operators will also discuss what will happen if the market turns, according to Mr Waters.
“Investment is not just about how a property will perform in a good market, but also how it will perform in a bad market,” he says.
“That’s all part of your risk mitigation. You need to know that if something is painted up to be this ‘deal of a lifetime’, then you should probably walk away.
“There is always an opportunity in any market, so you shouldn’t be pushed into something that is time sensitive.”
If you have a smooth salesperson talking around the edges, they’ll only give you half answers.
Mastering your emotions
Once someone has decided to invest, they often want to talk about their potential strategy, purchases and profits with professionals and those around them.
Despite investors believing they have an ‘open mind’, Mr Johnston says they often only want to hear positive information.
“If someone is thinking about investing, or is keen to invest, they want to receive positive information. They’re often looking for positive reinforcement, so it can be easy to get caught up and be less critical of what you’re hearing,” he says.
Mr Waters says dubious operators exploit this flaw.
“A lot of these spruikers are very clever people,” he says. “They’ll use all sorts of techniques like NLP [neuro-linguistic programming] and body language to make you feel comfortable and positive.”
Mr Waters says mastering your emotions will help you spot spruikers and ensure you’re making more rational decisions – but in many cases it’s easier said than done.
“Mastering your emotions comes with experience. Usually there’s a certain amount of emotion involved, no matter how hard you try,” he says.
“It can be easy to get carried away with your first house and your second house. Emotion can be a major killer because that’s what spruikers will target.”
When it comes to property investing, the more you know, the better, but some property professionals have warned against seminars that offer more ‘hype’ than information.
"Be wary of seminars,” says Mr Hunter. “Not that they’re a bad thing – but you’ve got to take them with a pinch of salt. If you walk into a seminar and they have a credit card facility at the back of the room, be aware that they’re selling something.
“A good public speaker will get your emotions buzzing and will have a positive attitude that gets everyone feeling good.
“Make sure you don’t get too caught up in it all and make a decision that you’ll later regret.”
Ms Lomas agrees and says investors will be more likely to separate a good deal from a sales pitch if they take their time.
“Never sign up on the day. Take time to go away and reflect,” she says. “Do your due diligence before you sign anything. Even though it’s good to start your property investment portfolio as soon as possible, take two weeks to deliberate and think about what’s best for you.”
Questions to ask
It’s important to do your own due diligence on the property professionals you’re considering employing, but it’s also worth asking them some questions directly.
Property Planning Australia’s David Johnston says property investors should ask the following questions to their expert property team, and know the answers they’re seeking.
Questions to ask the 'experts':
- Do you sell property?
People who sell property and unscrupulous operators within the industry aren’t one and the same, but Mr Johnston says it’s worth keeping in mind that those selling property have a vested interest, so you need to closely scrutinise the information they give you.
There is nothing wrong with someone who develops or sells property, but investors need to make sure they know exactly what their property professional ¬is offering: is it advice, or is it property?
- Do you analyse property for a living?
“There are not many people who are great at something when it’s not their primary focus in life,” says Mr Johnston.
If someone is offering you property market analysis or predictions, investors should make sure it’s their main focus.
- Are you independent?
“People can undertake significant research and still find it hard to differentiate between what is fact and what is fiction,” says Mr Johnston.
- What is your experience?
How long have they been a professional in the industry? How long have they been at their current company? What was their history prior to that? Are they an investor themselves?
“A lot of the shonks, or the spruikers, are just salespeople. Finding out their experience can often provide a good background on the person and help you get an understanding of who you’re listening to,” says Mr Johnston.
- Do you earn income anywhere else?
Property professionals need to earn an income, but they need to disclose to their clients where the money comes from.
Even though any commission structure or kickbacks should be disclosed up front, “investors just really need to ask”, says Mr Johnston.
“If you have a smooth salesperson talking around the edges, they’ll only give you half answers.”
- What sets you apart?
Every business should be able to effectively tell you what they offer, how it will help you and how it differs from other alternatives in the marketplace.
QUESTIONS TO ASK YOURSELF
- Are they only selling one strategy?
Can this property professional offer you a tailor-made solution to your personal circumstances? Or are they just selling one type of property, one idea?
“A good business will understand you, your goals, your aims, your financial position – and then help you develop a strategy back the other way, based on your circumstances,” says Mr Johnston.
- Do they genuinely discuss my financial circumstances, long-term plans and risk management?
“People who are genuinely trying to help you will want to know about your circumstances and they’re actually going to want to help you understand the risks you’re potentially taking,” says Mr Johnston.
“A good investment adviser will help people manage their risk as much as anything. If they’re not talking to you about risks, they’re probably trying to sell something.”
- Do they jump straight to the purchase stage?
“Property is sexy. Property is emotional,” says Mr Johnston.
“So a lot of people, when it comes to buying property, will automatically jump to the selection of the property itself.”
Instead, the actual property should come after you and your adviser have an understanding of your financial situation.
The risks of DIY investing
Each time an unscrupulous operator within the property investment industry is revealed, there is a risk that all professionals will be tarred with the same brush and investors will try to ‘go it alone’ – but what are the risks of DIY investing?
There are ‘bad guys’ in every industry, says Destiny Financial Solutions’ Margaret Lomas, but that shouldn’t ruin an entire sector’s reputation.
“We see stories about tenants who trash properties – should that top us from becoming a landlord? Absolutely not – you’re seeing one story out of the 27percent of the population who rent.
“The chances are pretty small that you’re going to be the landlord who has the trashed property,” she explains.
“The same thing can be applied to [property investment professionals]; one bad report doesn’t mean they’re all bad.”
Ms Lomas concedes that the property investment industry is particularly susceptible to dishonest operators due to the lack of regulation, but she says in most cases, the risks of investing without the proper assistance will outweigh the chances that you’ll be stung by a spruiker.
“What people need to understand is that there could be a greater risk in doing it alone than there is if you do your due diligence, ask the right questions and try to choose someone to be on your team who can help you get ahead,” she says.
Ms Lomas says she understands that some people have been caught out and lost their life savings, regardless of the amount of initial research they undertook, but in most cases due diligence will help to mitigate the risks.
“We have to realise that in all likelihood, the risk of not seeking out professional help is going to be greater than the risk of seeking it out and finding yourself with one of the dodgy guys,” she says.
Jacque Parker, director of House Search Australia and president of the Real Estate Buyers Agents Association of Australia (REBAA) says under-informed investors can be a danger unto themselves.
“Lack of knowledge and unfamiliarity with areas, processes and best practices can obviously lead to poorer choices being made, overpaying to occur and inferior property selection,” she explains.
“The process can ultimately take longer as well, which may result in investors missing out on potential capital growth had they acted sooner.”