Where there are property investors, spruikers will inevitably follow, but how do you tell the difference between spruikers and reliable professionals? Aidan Devine settles the ultimate due diligence conundrum: who can you trust?
Trust no one. That’s what characters in spy movies always say while camped out in a 1980s surveillance van, tracing stolen CIA codes that are on ... er ... a floppy disk. But ‘trust no one’ isn’t a bad slogan for property investment either.
Anyone who works in the real estate industry inevitably has to make money from somewhere, and there’s always the possibility they could do it at your expense. Even family and friends aren’t that reliable. As well intended as their advice may be, it can often come from the wrong place.
In an ideal investment scenario you would trust only yourself. An ideal scenario, of course, is not a real one. You can research property as much as you want, but at some point you’ll be forced to rely on somebody else.
Unless you’re qualified in multiple fields, you’ll need someone to sort out the respective legal and financial sides of a transaction. You’ll deal with agents and insurers and, if you lack the time to view properties, you might require a buyer’s advocate. If you lack investment knowledge, you may need a mentor.
It’s in your dealings with this last profession that you could run into trouble. “The problem with the property investment adviser space is that it remains unregulated,” says Destiny Group founder Margaret Lomas. “Property isn’t classed as a financial product, unlike shares or managed products. What you have [instead] is people standing up at seminars, couching advice about property.”
Property Investment Professionals of Australia (PIPA) chair Ben Kingsley agrees, pointing out that the property industry has been a magnet for spruikers in the past. He says the classic spruiker is one who hosts an event that ordinary people attend, free of charge, but which normally turns into a sales drive.
“There may be a lot of hype, maybe some quotation about exponential returns or how people have made lots and lots of money, and then there’s an ‘act now’ component,” Kingsley says.
He says the difference between that and a legitimate property company is stark. “A professional would deliver good education content. The information would be balanced, and there would be no call to act now.”
Finding reliable people
Qualifications
Kingsley says that a few simple checks can easily reveal who is a spruiker and who is providing a reliable service. The first thing you should be checking, he claims, is whether anyone you deal with has the relevant qualifications to be giving you advice. With accountants, mortgage brokers and financial planners this is normally fairly easy, because these professionals require strict qualifications. In the realm of property investment advice, which remains largely unregulated, Kingsley believes prospective customers should still lean towards providers with some form of qualification.
For Kingsley, this comes down to a simple question: “Do they have a formal qualification to be giving out property investment advice, such as a qualified property investment adviser qualification?”
Experience
It stands to reason that anyone dishing out advice should be practising what they preach. Crawford Real Estate’s Ryan Crawford says this highlights another thing investors should look for in any service provider they deal with – property investment experience.
“Take advice from those who have already walked your desired path,” Crawford says. “Ask them how long they have been in the market, what their portfolio looks like, and where they had successes and failures.”
Investors may be tempted to apply this rule only to property investment advisers, but accountants, solicitors and mortgage brokers should fit this requirement just as strictly. Seek out professionals who are active in the market, not just theorists.
There’s also the fact that anyone encouraging you to dive into an opportunity should conceivably have bought something similar themselves. Crawford sums it up as an easy red flag: “If they are not taking up their own advice, there should be cause for concern.”
Commissions
Perhaps the most obvious way of gauging the reliability of a property service provider’s advice is to find out how they make their money. As James Freudigmann, national manager of Propell Buyers Advocates, points out, a significant portion of the people recommending specific clusters of properties generally don’t get their money from buyers; they get it from developers.
“The aim is to ‘sell’ you something,” he says. “They generally use sales tactics to pressure you into purchasing something without it even necessarily being in the same state or area that they are located.” Freudigmann says a lot of these property service providers operate under the guise of being buyers’ advocates or investment advisers, when in reality they are simply project marketers.
“A project marketer [sells] a particular development, unit complex or has a stock list of properties at their disposal that they will recommend you purchase,” he says.
“They will never be recommending you purchase established properties; instead they will all be brand new properties. We’re not saying don’t buy new property, but don’t purchase from a project marketer that makes themselves out to be a buyer’s advocate or agent.”
Kingsley advises investors to use their common sense. “There is no such thing as a free lunch … always ask how their business is getting paid.”
Kingsley says many investors are surprised to learn how often commissions are hidden. And, while many reputable service providers might also not jump out of their seats to reveal how much money they make out of each transaction (who enjoys revealing their salary?), there will always be an air of transparency.
If the opportunity being presented to you is as attractive as claimed, it should stand up to scrutiny. The company or individual you’re dealing with should allow you to do your own independent research and allow you to contact other advisers or professionals to get a second opinion. This is especially true for valuations.
“Even if the property in question has been valued by whoever is promoting it, remember that the valuation has been paid for by them and may not be correct or current,” says Kingsley, who adds that interested investors should ask any promoter of a property opportunity if they would be prepared to pay for an independent valuer to give an assessment of the property.
Past customers
Another easy way to determine the reliability of a property service provider is by speaking to their past or present customers. Many companies may have testimonials on their websites or in marketing material, but take these with a pinch of salt. Testimonials can easily be made up, and even if they feature pictures and seemingly real names, think of how easy it is to acquire random people’s photographs from social media sites.
Ryan Crawford says it is a good idea to follow up testimonials and big claims about customers’ successes.
He suggests asking the company if they can provide contact details for some of their long-term clients who have successfully created wealth with their help.
“Many [companies] will have case studies and success stories to refer you to, but it is also extremely valuable to speak direct to other investors who can tell you one-to-one what their experiences have been like. Positive client references are a reliable indication of the credibility and capabilities of your strategist,” he says.
Crawford adds that the same applies to the claims that any supposed ‘mentor’ may be making about their own property successes.
“Your strategist should have the ability and confidence to share their own investment strategy with you and the growth and cash flow they are achieving, “This includes how they have structured and financed their investments, techniques for maximising equity and cash flow, where they have bought and why, and where professional services are required.”
Crawford says this should not be undertaken with a view to replicating their own model for success, because everyone’s financial situation is different. The key is for them to demonstrate a depth of knowledge and experience across all facets of property investment.
