SUMMARY: Siren call of property is a Greek tragedy that is claiming far too many SMSF victims. Here’s how to save yourself.
The single greatest threat to newbie self-managed super fund trustees continues to be geared property investment.
It is a Greek tragedy. The luring song of the property spruiking sirens have been calling out to SMSFs. And they’ve taken in thousands of unsuspecting victims.
But, clearly, it’s not all SMSF trustees. And not even all property-investing SMSFs.
Those who get stung by the property spruiking sirens are, sadly, often those who didn’t previously have a SMSF, those who are relatively new to SMSFs, or those who are not necessarily either, but are desperate to buy a property inside a SMSF and are just unlucky enough to watch an advertisement from interests that are, almost solely, about flogging properties being developed, with little (arguably no) interest in the actual financial welfare of clients.
The problem is the following.
When a person attends a property seminar, they are most usually attending a session that is put on, or at least partly sponsored, by interests associated with a property developer. The developer is there for no other reason than to sell their developments.
There may be other interests represented (financial advisers, accountants, mortgage brokers, lawyers), but the real money is at the property development end of the equation.
The hangers on might make a few thousand dollars for the work related to their area of expertise.
But when properties get sold, some of those same people will pick up massive bonus paycheques, largely in hidden, sometimes declared, commissions.
I know because the money has been offered to me, regularly. Almost always by property developers, or interests closely associated.
The money on offer is utterly ludicrous. For as little as a referral phone call, the hangers on can receive, in some instances, tens of thousands of dollars.
The offer is usually some percentage of the property’s sale price. Typically, for a $600,000 property being sold, the dollars to be paid could be as much as $10,000-$40,000.
For a simple phone call to “unnamed developer”, along the lines of: “I’ve spoken to Mr and Mrs Smith and I believe they would be a good candidate for purchasing an investment property with you. Here are their contact details.”
Who pays that $10,000, $20,000 or $40,000?
Sure, it might be physically paid by the developer to the referrer. But if you answered anything other than “the buyer”, then you got the answer horribly wrong. The buyer pays the commission to the referrer – it’s built into the sales price of the property.
Loving SMSFs as much as I do, and property and gearing similarly (as the author of six books on, predominantly, property investment), I’ve watched the growth in opportunities to gear into property in SMSFs with huge interest and some concern.
The rules to allow geared super investments started in 2007. They’ve been refined a few times since and the rules we now know as limited recourse borrowing arrangements (LRBAs) started in 2010.
From this, a new target for developers emerged … SMSFs.
A court case that I’ve been following had an update this week.
Park Trent Properties Group first hit the headlines when the Australian Securities Investment Commission launched legal action a little over a year ago.
Park Trent is a facilitator in property transactions. They have, according to documents lodged in court, helped at least 860 members of the public to set up SMSFs and move their super savings into them to purchase those properties.
Park Trent isn’t licensed to provide financial advice. And this is what ASIC has pursued them over in the NSW Supreme Court.
According to ASIC, the NSW Supreme Court observed Park Trent’s business model depended on “persuading relatively unsophisticated investors of the virtues of using their superannuation accounts to purchase investment properties and to establish SMSFs”.
“Investors were influenced to make important decisions concerning their superannuation strategy with little or no genuine consideration of whether the decision took proper account of their individual financial circumstances. Some suffered financial loss as a consequence.”
ASIC’s initial filing to the courts alleged Park Trent had advised hundreds of funds to “establish and switch funds into an SMSF which are then used to purchase investment properties that are owned or promoted by Park Trent companies”.
It’s not the only one. I see the advertisements for similar proposals across the media far too regularly.
And each time I see one, I know that a whole bunch of people will show up, sign up and, essentially, hand over their retirement savings to shonks.
Property investment can be a particularly powerful investment strategy. The leverage it can afford to investors can create enormous wealth, if the right assets are chosen and enough care is taken.
ASIC is cracking down on these one-stop shops – who often wrap up the purchase, set up, loans and ongoing management into one package for convenience, for a reasonable clip – for good reason.
Investors, particularly SMSFs as the ASIC case against Park Trent shows, are getting fleeced.
More needs to be done.
(For disclosure, I have never advised a client to buy a property from a developer. When I do recommend investment property to clients, it has always been with fixed fee-for-service property advocates, where development property is specifically banned.)
The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.