Property investing scams and how to spot them!

Not all property seminars are scams, but these 7 tips will help you separate the experts from the potential scammers.

Knowledge is power and education is a great thing, especially if you're thinking about investing a considerable amount of money in property. Unfortunately, not all property seminars are on the same level. In fact, some of them are downright scams run by professional property spruikers.

Here are the 7 signs of a property scam:


1. Have they got an offer for you!

These types of seminars are always initiated by them – not you. They'll send you an invitation to a "free" seminar teaching you how to build wealth through property. They'll call you on the phone and ask if you want to reduce your tax bill at the same time as becoming a property millionaire just by turning up to their seminar. They'll email you out of the blue with an awesome opportunity to get rich, but only after you've listened to their entire spiel. You get the idea.

2. The long sales spiel

The seminar might feature some interesting tips and points about investing in real estate, backed by a few speakers. Then the real sales pitch will begin. The spruiker will need to set up an appointment with you at your home to talk with you personally about how it all works and to see if you qualify for their deal. These types of spiels have been known to last for hours, after which time you are so worn down that you will literally say “yes” to anything.

3. Build your way to wealth

Constructing a new home for investment purposes isn't a bad thing, but when you're being sold an overpriced property that costs you far more than what other similar homes in that area are worth, you could be in deep trouble. You'll be told that you can save on stamp duty, which is true. You'll be told that building a new home gets you some better tax advantages through large depreciation, which is also true. Then the salesperson will point out that you could try to do it all by yourself, but you won't get as good tax benefits as you would by buying their deal instead. This is simply because they can hike up the price you pay and boost their own commissions they receive, usually from the property developer.

4. Up-and-coming investment suburbs

The majority of these types of "deals" will offer you the opportunity to construct new homes in outlying suburbs pitched as the next “hot spot” or low socio-economic areas. You may also be offered investment opportunities in different states to the one in which you live which is not a negative strategy however the “wow this is cheap compared to our state prices” light bulb moment turns on in your head and creates a sudden rush to purchase on the perception that this is a  great deal that is of great value.

5. All under control

Experienced investors understand that it's very possible to build wealth by seeking good quality properties that are priced well and that represent good value for their own investment strategies. However, these property spruikers will make it very clear that they have already done all your homework for you. They will tell you they've struck a deal with a developer so they can get better prices through bulk buying (usually called wholesale price). They'll even tell you that there's no way you could possibly go out and get such a deal on your own. You need them or you will overpay and fail.

6. All managed for you

The sales sharks pushing these deals will be keen to take control of the entire transaction. They'll control the conveyancer working on your transfer documents, the mortgage broker arranging your finance, the builder you have to build the property through, and the rental agent handling your tenants. They may also throw in a rent guarantee period up to 5 years!  While this might sound like an easy solution for many newer investors, it's simply a way for the salesperson to keep control of the transaction in house so you don't get a chance to shop around and see that you're buying an overpriced lemon.

7. Clever mortgage structure

The mortgage broker recommended by the property spruiker will be extremely well informed about exactly what property you've been set up to buy. That broker will then work on ways to set up a mortgage over your own family home. This is usually done in an attempt to stop you seeing that the property you're buying is overpriced. After all, any bank taking security over a property for a mortgage will conduct a licensed valuation on that home. If that valuation shows that the real property value is tens of thousands of dollars lower than the amount you just paid for it, you might not proceed. The spruikers really don't want that to happen.

Avoiding the property investing scams

Perhaps the best possible way to avoid being caught by these types of property investing scams is to sit down and do your homework yourself. The key is to be sure you understand what you want to buy and how it will affect your overall financial and investment situation before you begin.

Take the time to research any suburb in which you want to buy. Understand the median prices for homes in that area and compare the options of buying an established home versus building a new home in the same area. Do the sums and work out whether you're able to build any capital growth into your property simply by choosing construction in a given area. Do a little research into the anticipated rental income you're likely to receive and also the current or past re-sales of similar property.

Talk to a good accountant about how to structure your investment loans and about your taxation options before you buy. Ask plenty of questions until you're sure you understand. Discuss the differences between negative gearing and positive gearing and decide which one is better suited to your own investment strategy. Then spend some time talking to a reputable mortgage broker in the way your accountant suggested.

If you can do all these things on your own, you should find that you end up with some great real estate purchases that can become excellent investments over time. If you need information about aspects of the property industry, try the list of references below or contact a reputable property manager like Real Property Manager.

  • Australian Property Institute - They represent members involved in valuation, administration and use of land, property and machinery.
  • Housing Industry Association - They work on behalf of builders members who a small or medium sized companies.
  • The Property Owners Association- This is a non-government organisation assisting private property investors about property
  • The Institute of Chartered Accountants Australia - This is the governing body of Chartered Accountants who can assist with any taxation or accounting advice.
  • Insurance Council of Australia - This is the council who look after and represent the interests of the Australian general insurance industry.
  • Master Builders Australia - Represent multiple Master Builders Associations in each state and territory that represent businesses within their state or territory within the building and construction industry.
  • Property Council of Australia - Represent the interests of those who use land or invest in the built environment to generate economic returns within the property community.
  • Australian Securities and Investments Commission - They offer information and advice to help inform, educate and protect the rights of the Australian consumer when it comes to any financial transaction.