How can you ensure the advice you're receiving benefits your portfolio and not a spruiker's bottom line?
Blogger: Andrew Crossley, Australian Property Advisory Group
In recent years there has been considerable publicity regarding purchasing property – both residential and commercial – in a self-managed super fund (SMSF). According to the latest Australian Prudential Regulation Authority (APRA) figures, SMSFs now account for approximately one third of total superannuation assets in Australia.
According to the Australian Securities and Investments Commission (ASIC), the primary reasons for establishing an SMSF include a desire to control investments and lower costs. Despite their booming popularity and apparent appeal, this structure is not suited to everyone, and anyone wanting to set up an SMSF should seek out appropriate advice.
The Australian Taxation Office (ATO) is increasing its compliance activities on this front due to the growth of the SMSF sector in Australia in recent years. ASIC has regulated this market, treating an SMSF as a financial product – so anyone providing advice on an SMSF should have an Australian Financial Services Licence (AFSL).
Most AFSL holders though are not in a position where they should be providing advice on specific property. If an AFSL holder is helping you establish an SMSF for the purposes of investing in real property, they can refer you to a property professional to help with sourcing an investment, or you can source it yourself.
If you choose to seek out a professional, make sure they don’t already have a property lined up ready to sell you; instead, source properties for you or your SMSF after first understanding your individual needs and situation.
The professional who’s helping you source properties for your SMSF should openly disclose their fees, commissions and any vested interests. All too often investors in or out of an SMSF structure go through someone who should not ethically be guiding that person to make a decision.
This opportunity to assist investors in acquiring property for their SMSF has been widely exploited by property sales companies and spruikers. They typically run seminars where they deliver many purported positive points about the SMSF industry and having an SMSF. There are numerous reports of spruikers promoting SMSFs as a vehicle in which to purchase property through, and this is where it gets dangerous and where consumers need to be very careful.
Non-AFSL holders cannot provide financial advice. Typically, property sales companies and spruikers do not possess this licence and are not allowed to provide advice on SMSFs. More broadly speaking, the growing consensus is they should not provide advice on property investing anyway.
This makes sense because, in a majority of cases, they are representing the seller/developer(s) and are engaged to promote a project (sometimes up to seven projects at once). They are paid commissions and sometimes attractive bonuses and other incentives to promote one type of property or location over another.
This phenomenon has given ASIC cause for concern. ASIC, the way I see it, has several concerns, the biggest of which could be whether the investor has received appropriate and adequate advice.
Pitfalls of purchasing property through a spruiker
The three property types commonly purchased in an SMSF are:
* An existing dwelling
* A newly constructed dwelling similar to a house and land package, but with different purchase contracts (referred to as 10:90 contracts). It is normally 10 per cent down and the rest at settlement
* An off-the-plan contract. Normally a five per cent to 10 per cent deposit is put down and the balance is paid from 12 months to three years later
From a lending perspective, two of these three types of properties have led to problems and concerns – newly constructed and off-the-plan contracts. Investors too are cottoning on to the inherent risks of spruikers getting involved in these property transactions.
Off-the-plan properties and 10:90 contracts are ‘new’, sold by a developer usually via a spruiker or marketing company. The developer pays commissions of five per cent-plus and bonuses to spruikers to flog this stock, but these often aren’t disclosed to the end investor.
Recently, most lenders who were previously providing finance to an SMSF structure have ceased providing finance for a property that is being sold by the developer, whether via a spruiker, or even through a real estate agent. They prefer the property to already be second-hand stock. This leaves just a handful of lenders able to lend on new properties.
This loss of lending appetite is mainly due to a couple of reasons:
* The abundance of bad and improper advice being provided by spruikers who have no entitlement or qualification to provide it
* The amount of commissions, often undisclosed, and bonuses involved in the transactions. This regularly leads to valuations not stacking up. When this happens, lenders have wasted their time with the whole assessment because it will no longer proceed to settlement. Should they choose to proceed, the lender risks implicating themselves in poor practice. It could then be argued they were complicit in the SMSF failing to comply with the Superannuation Industry (Supervision) Act (SIS Act)
All of these changes have caused some SMSF investors concern. How will they obtain finance when their off-the-plan property is finished and they need to settle? What if more lenders pull out of this market? This could currently be one of the biggest concerns for investors.
Numerous lenders have implemented new policies in line with advice they have received on the sector and what they perceive to be ‘responsible lending’ – such as requiring that a minimum of $150,000 already be in the SMSF and that a 10 per cent balance remains as a buffer.
Lenders providing finance to SMSF structures have become even tougher. The loan-to-value ratio is generally limited to 80 per cent. The lender assesses the loan to ensure it stacks up in its own right.
As a result of a small number of people conducting unethical operations, purchasing a property through your SMSF is becoming increasingly complex. Even if you receive suitable advice about whether or not an SMSF is appropriate for you and how to go about setting up the structure, you will potentially be wading through yet another minefield when trying to buy a property in a good location with all the salient features that need to be considered when investing in a property.
To ensure success in this complex area of investing it is important that you understand the rules and regulations and know how to spot a spruiker.