Royal commission to miss property investment

 

Bruce Brammall, The West Australian, 4 December 2017

So, we now have a royal commission into the banking sector. A bloody big microscope is bound to find some really ugly stuff.

Conflicts of interest, fee gouging, insurance scandals and rorts, conflicted remuneration. There’s plenty of rocks to peer under. The commissioner will no doubt find some disturbing stuff. (And probably lots of good stuff.)

I’m sure it will be brutal for the industry. There are more, necessary, consumer protections coming. And many professionals will be shamed out of the industry.

But, I reckon, a huge part of the “wealth destruction” industry is going to be completely overlooked. Glossed over completely. Simply not looked at. Not in the terms of reference.

I’m talking about property developers. How they sell their expensive products through intermediaries. And how many billions of dollars consumers get dudded out of each year.

The wealth destroyed puts some other scandals to shame.

But the largely unregulated property development industry looks like it gets away scot free. Despite its octopus-like tentacles reaching into so many parts of the wealth industry.

I reckon more wealth is destroyed – or, more accurately, is transferred from “investor” to “seller” – via crap property being purchased, annually, than any other form of wealth destruction available.

I’ve listened to countless personal stories from individuals losing tens of thousands, sometimes hundreds of thousands, of dollars, from patently ridiculous property “investment” opportunities.

High rises in cities with no land content. Houses in “next big thing” resource areas, where the project fails to get off the ground. Properties in rural and regional areas where demand is, at best, fickle.

As I’ve written here before, there are rarely winners in this investment space.

I believe governments know this. But they need land and properties to be developed, to create housing for growing populations. So they offer incentives to the industry, and to the purchasers, in the form of grants and stamp duty concessions, to make sure it all happens.

They are rubbish investments. Absolute garbage. And all the while, more people lose more money this way than probably through any other “investment opportunity” in Australia each and every year.

But nothing is done.

From the time I started my business in early 2009, I have been approached by all parts of the property development industry. “If one of your clients buys one of our properties, we will pay you $X.”

When I say $X, I am usually talking somewhere between $5000 and $30,000.

This would, in essence, be a commission. Either they pay me, or they pay an expensive professional sales force, or real estate agents, to sell their property for them.

In one such offer, I was told that a particular company would do the real sales pitch for me. They earned 5.5 per cent of the sales price. At the time, the average property being sold was $500,000. (It’s much higher now.) So they earned about $27,500 for every property they sold.

If I was to refer a client into them and they managed to sell one of my clients one of these dud properties, I would receive 30 per cent of their $27,500 payday.

That is, I might need to do as little as make a quick phone call. “Hi Mick, I’ve got Bob and Betty here with me. I’ve talked to them about your property solution. Can they come along to your seminar next Tuesday night?”

If they bought, I’d get $8250.

Who’s paying for that? Bob and Betty are, that’s who. (And they also pay the developer’s profit margin.)

In my experience, the average high-rise development property, or “next big thing” property, that goes for sale for $500,000, is worth $400,000 to $440,000 a year later.

Those investors have blown up, on average, about $80,000.

Those that sold it to you … they don’t care. They’ve moved on. Found other suckers.

But Bob and Betty have got a lemon. It’s costing them a fortune. And too many, faced with these horrendous losses, feel like they have little choice but to ride it out. And hope that some day, they will be able to sell it for a modest profit.

They’re looking at years. Maybe a decade.

As “property investors”, no-one feels sorry for them. But they deserve protection. Doesn’t look like the punters will get it during this royal commission.

Bruce Brammall is the author of Mortgages Made Easy and is both a financial advisor and mortgage broker. E: bruce@brucebrammallfinancial.com.au.