A SCAM THAT CONTINUES

Many years ago I lost $250,000.  I’m not stupid, merely as trusting of professionals as most lay people. My life savings were stolen by a group of Company Directors, Accountants, Solicitors, Valuers, Financial Advisers, so-called Consultants and Real Estate Agents, working together in such a way as to totally confuse and bewilder even the most experienced investor or business person.  Since then more Accountants, calling themselves Receivers this time, more Solicitors and more Advisers and Consultants have taken whatever was left after properties were sold and proceeds distributed.  Fellow investors and I advanced $2 million on a land valuation of $3 million supplied by a well-known firm. When the scheme collapsed, the land sold for just $220,000.00! The Receiver’s costs were $270,000!  One fellow investor died from the stress of it all.

I live on the Gold Coast, a fabulous choice for lifestyle, weather, good times and close friends. There are, however, more sharks on the land than in the water.  There are more people here per square metre, than anywhere in Australia, whose sole aim in life is to relieve you of your money.

There were dozens of people who had lost their life savings, gathered in a local RSL Club. We were told that we were fools for trusting Solicitors and Accountants, professionals who had to abide by a Code of Ethics, and that we deserved to lose our money for being less than intelligent about our investment choices.  I argued, albeit unsuccessfully, that we do not ask to see a surgeon’s CV before the knife or laser is put to our bodies, as there is an element of trust that exists between the general public and professional people.  I, as an air traffic controller for many years, never once had an airline pilot or member of the travelling public, call the Control Tower to see if I was licensed, properly trained or experienced enough to do my job.

I’ve conducted extensive research into the marketing companies who sell property to investors locally, interstate and overseas, Solicitor’s Mortgage Lending, the development of medium to large-scale housing projects on the Gold Coast, the role of Valuers and some government departments, and the Banks’ and State Governments input.  The stories are horrifying, and there are thousands of ordinary people out there who have or are suffering as a result of investing in negatively geared properties offered by these rogues. Families are losing their investment property and family home, businesses are up for sale, Trust and Superannuation Funds gone.

I am not condemning the practice of negative-gearing to buy an investment property. Properly applied, it gives investors good returns and tax breaks, provides new housing stock for Australia, well-priced rental accommodation for tenants and work for thousands of people in construction and related industries……. however…

A Story of Fraud and Corruption……………..Picture this from around 2002 but the example is still true today except the prices, and losses, are much higher.  A developer buys some land and decides to build, say 100 townhouses.  These townhouses are worth, at a curb-side valuation, $140,000 each.  At this price they represent good buying and would rent for between $140 and $175 a week. The developer wants them sold quickly to reduce holding costs and give a quick profit so a move can be made to the next project.  Good business….or so it seems.

The developer engages a ‘Marketing’ company, who charges $30,000.00 per Town House to sell them quickly. (I have heard reports of up to $50,000.00 per property being demanded for ‘Marketing’ services.)  The marketing company arranges free ‘‘negative gearing’’ seminars in Sydney, Melbourne, or rich mining towns, with some marketers targeting rural Australia.  Meantime ‘sales’ of 15 or 20 of the Units are ‘arranged’ at $175,000 to $190,000.00.  Any ‘lightweight’ investigation into the ‘Contracts of Sale’ for these properties would reveal a Contract, Stamp Duty being paid, but not one cent changing hands or being transferred into anyone’s Bank Account, least of all the Developer.  These sales are ‘settled’ with no money changing hands so that the Valuer General’s Government database now has recent sales in the area at these inflated prices. Registered Valuers called in by banks or other lenders are guided by Valuer General statistics and therefore have satisfied due diligence under their professional indemnity insurance policies.

Cost to the marketing company or Developer for this vital exercise – Stamp Duty. The State Government appears to be an unwitting partner to this deception. It will collect a second lot of stamp duty when the properties are subsequently ‘re-sold’  to interstate or overseas investors.

The ‘sold’ units are put straight back on to the market. The marketing company highlights these units as ‘SOLD’ on ‘stock lists’ that are shown to prospective purchasers to give the impression that sales are proceeding nicely, with up to $190,000 being achieved. Clients are told that they are able to buy through the marketing company at a discount price of $170,000.00. Rent guarantees of $200.00 per week for 2 years are offered to make the figures ‘stack up’. The developer and/or the marketing company fund the rent guarantee and the new ‘owner’ will never see a copy of a lease at $160 per week, only a statement of $200 per week, less fees and charges.  It is easy to see that it will only cost the developer and marketer about $4,000 over 2 years, or, between 6 and 12 percent of their fees. Should market rents rise above $160.00, even less.

The marketeers run their ‘seminars’, using cleverly written ‘scripts’ and statistics carefully chosen and used entirely out of context, to convince people to fly free, or at greatly subsidised rates, to the Gold Coast, Sunshine Coast, Brisbane or elsewhere in the Sunshine State. Once there, they are put up in a nice resort, and totally cared for during their visit by a trained ‘Consultant’ or ‘Runner’ as the industry calls them.  Negative gearing seminars give direct investment in shares and mutual funds, Banks and superannuation a bashing, taking ‘worst-case’ newspaper and magazine articles to reinforce the need for positive action by attendees lest they lose all tomorrow, or retire in poverty unless they invest NOW in negatively-geared property! Seminars that I have attended misuse and misquote Australian Bureau of Statistics published figures.

The ‘Runners’ job is to stick to their clients like glue. Potential buyers must not be able to tour by themselves, and are kept away from all local Real Estate Offices and Agents, lest they discover ‘true’ values in the area.  Runners use varying and clever techniques for establishing their credibility with prospective purchasers.  Purchasers are eventually confused to the point where they are convinced that if they do not ‘sign’ immediately, they will miss the opportunity of a lifetime. I am told that one runner makes over a million dollars a year, with most averaging $150-200,000 p.a.!  I am reliably informed that ‘Runners’ typically receive between $1,000 and $3,500 for each sale.

The lies and deception continue as the purchasers are led on a merry-go-round of lavish lunches, free trips to theme parks, and finally, interviews with more ‘financial consultants’, solicitors or conveyancing people, signed, sealed and delivered to the airport where they are heartily farewelled.  The financial consultants misuse proprietary software packages, entering ridiculous tax allowances and inaccurate tax scales. They ignore the effects of business tax reform and the Ralph Report, and ‘convince’ the unwary that this $200,000 property they are buying will cost them nothing down (as they get their $1,000 deposit back after the loan goes through!) and as little as $10.00 per week. AND…there’s more…., they will, as a result of re-financing, reduce their home loan from 16 years of toil to 3 and a half years and save $150,000 in payments, which, as any blind freddy can see, is most of the price of their investment property…so isn’t that marvellous Mr and Mrs Smith…look what we are doing for YOU!

Purchasers have no ‘cooling off period’, as unscrupulous lawyers sign off on their purchase and have been committed to the purchase of an over-valued property that could be their financial downfall.

So-called Finance Brokers use the equity in the investor’s own home to structure finance at 80% of the Contract price of the Investment property, thereby avoiding the strict requirements of Mortgage Insurers.  The balance of the price of the Investment property, (plus the ridiculous fees and charges) is financed out of equity in the investor’s principal place of residence.

The marketeers carefully choose purchasers.  They really like the over 30’s, a couple of children, one income over $45,000 a year, or 2 incomes totalling more than $70,000 a year.  Not too much personal debt, credit card debt under control, and the real clincher, at least $60,000 equity in their principal residence.

The marketeers like to talk in terms of DSR (Debt Servicing Ratios) and LVR (Loan to Valuation Ratios).  Valuations on the townhouse, yet to be constructed home, or unit, have already been carefully, and in many instances falsely established.

If the valuation on the investment property doesn’t ‘stack up’, the marketing firm and/or developer will sacrifice some profit to ‘make it work’ as they say, or, the lender will adjust the loan to take more equity out of the purchaser’s home.  There are hundreds of stories of investors losing $40,000 to $100,000 on the sale of their investment after 12 months to 3 years.  I owned an investment unit in a building where investors, instead of making an expected $36,000.00 capital gain in 4 years as predicted by the marketeers, have lost $65,000 on the forced sale of their unit. The original owner of my one-bedroom unit, paid about $145,000 as a result of a skilful marketing exercise conducted in New Zealand-I bought the unit from him, 2 years later, for $90,000. I have heard stories of people who earn $150,000 per annum in Sydney as high-flying executives, losing $200,000 inside a year, on ONE property!

The Office of Fair Trading, here on the Gold Coast (old ‘Consumer Affairs) have allegedly had a Task Force in place for months, infiltrating two-tier marketing firms, gathering evidence, ready to strike when new legislation hits the streets.  It didn’t work.

One of the other effects that these marketers have is a ‘flow-on’ to the general real estate market.  People who retire from Victoria, New South Wales or the ACT travel to the Gold Coast, often pay way too much for property as they rely on valuations that have a basis on recent sales of similar properties that may have been sold by marketeers.

Last paragraphs…here’s a great tale…sorry I don’t know which development it was.  Imagine a HUGE number of ‘very ordinary’ townhouses.  The same set-up as previously mentioned.  The first 150 sell for $185,000 with $200 per week rent guarantees supplied by the developer and marketer in concert. (I am told that some marketers and finance brokers build their own stock for sale)  Developer makes a nice profit and has 30 or 40 townhouses left.  Developer has the next ‘red hot’ real estate deal pending the sale of the rest of this development so they have to clear them fast.  Bring in the Auctioneer and out they go at between $98,000 and $105,000.  These new places come with no rent guarantee but at $98,000 and good negative gearing advantages an investor can get away with receiving as little as $120 per week, so that’s where the market puts the rent.  The standard of tenant drops like a stone.  The developers rent guarantee stops. Owners who bought at $185,000 are screaming for their $200 per week rent, but all the tenants have moved into the other units at $120 per week, instead of $160 per week they WERE paying (plus $40 per week developer’s subsidy). Empty townhouses everywhere now as the place has a reputation as being a ‘slum’. Now, if you have paid $185,000 for a place, and borrowed $205,000 against the townhouse AND your own home to fund the purchase and the onerous fees and charges levied by everyone in the process, how long are you going to last funding an ‘interest-only’ payment of $340 per week, plus rates, body corporate and insurances of another $75 per week, total of $415 a week!  When most of the investors earn less than $50,000 gross per annum, $415 per week nett out of a take-home of $730, leaves $315 per week to look after a family!  PANIC sets in and we have another round of ‘mortgagee-in-possession’ sales, and guess what….no buyers.. or maybe some at $80,000 or $90,000!

Our poor punter sells out for $90,000 (lucky), less agent’s commissions, and is left with no investment property and owing $115,000, plus their own home loan, secured against their own home which is probably worth less than $200,000.  Typically their own home loan is over 50% of the value of their home, so they are left owing say $215,000 on a home worth $200,000.  This scenario makes the Banks very nervous and they are made to sell their home, in a fire-sale situation, for $170,000, less fees and commissions from all involved.

Before these poor people met their ‘saviours’, they were paying off their mortgage, living comfortably, and had $100,000 equity in their home.

After their encounter with these ‘sharks’, they have lost their home, are on-the-street, and owe the Bank $55,000.

Marketeers sell thousands of these properties this way in South-East Queensland every year…

Hardly the Aussie way is it?

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2 thoughts on “A SCAM THAT CONTINUES

  1. Arvid says:

    A Well known Sydney Identity was in the crosshairs of the NSW Consumer Afairs and reported in the Australian recently for having orhestrated something like this with appearing to be independent entities, lawyers, mortgage brokers, REA’s, valuers, Maintenance People, then strip the place with exhorbitant fees, levees until you have nothing left.

    Caveat Emptor comes to mind here. If it is too good to be true, it probably is. Do you want to buy or are people ramping up the pressure to sell. In other words if you are the chaser, you will do your homework and probably a good deal. If you are being chased, it is rarely a good deal.

  2. Hi Arvid and thank for your timely comment. As long as people fail to engage competent professionals to protect their interests, these type of scams will continue to flourish. Trust your instincts and ask questions until you are hoarse.

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