Buying a property to rent out is a popular form of investment. However, there are certain methods of high-risk property investment you should be wary of. You should always get independent legal and financial advice before investing.
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Property spruikers are investment promoters who often run wealth creation seminars, offering property investment training and materials, and discussing property investment, generally through self-managed superannuation funds. They advertise their seminars in newspapers, via social media, flyers in letterboxes, online and in financial and investment publications.
Property spruikers target inexperienced prospective investors with promises of easy and quick wealth creation through property investment, often with very little up-front or ongoing cost. Unscrupulous operators mislead investors into paying for their advice or investing in property developments that could result in big financial losses.
Tips to protect yourself
- Always seek independent financial and legal advice before investing in property. For free financial information and tips, visit the Australian Securities & Investments Commission (ASIC) MoneySmart website.
- If the claims about the returns from the scheme sound too good to be true, they probably are. Attending a seminar is unlikely to result in you becoming a millionaire property investor.
- Check the rental yields and financial gains promised by property spruikers by seeking independent advice.
- Be sure that you fully understand and have thoroughly considered the proposed investment before committing – otherwise, don’t invest.
- Having a diverse superannuation portfolio is a good idea – for more information and to obtain independent financial advice, visit the ASIC MoneySmart website.
Be wary of:
- high-pressure tactics rushing you into decisions, signing contracts or paying fees (including discounts offered to seminar attendees who sign up on the day)
- spruikers who advocate high-risk property investment through self-managed super funds
- property deals in which mortgage broking, conveyancing or tax advice is supplied by the spruiker
- spruikers offering personal loans or credit to help you pay the enrolment fees for training
- property investment strategies that involve putting your current home at risk by using the equity to borrow a significant amount of money to invest
- spruikers who don’t allow you to ask questions or ignore or downplay the risks and costs involved
- spruikers who suggest specific investment opportunities such as a particular property development. They may be receiving a commission for promoting the development or have an undisclosed interest in it
- spruikers pushing you to purchase properties interstate that you have not seen, or off-the-plan properties that do not yet exist.
Video transcript: Getting rich from property spruiking (Word, 87.5KB)
Land banking schemes
Land banking is a type of investment scheme in which property developers try to make money by buying large blocks of empty, undeveloped land (for example, in rural areas), dividing it into smaller blocks and then offering it for sale to investors.
You may hear about a land banking scheme through property investment promoters, such as:
- estate agents
- property developers
- a member of your local community
- speakers at investment or 'wealth creation' seminars.
You may be offered a small block of land or an option to buy a block of land. the option agreement is generally triggered when the land has been approved for development by the relevant planning authority (usually the local council).
You may be told that investing in a land banking scheme will make you money and that it is a cheap way of getting into the property market. You may be offered land at a cheap price and told that once it is rezoned or approved for residential development, its value will increase dramatically, allowing you to sell it at a profit.
What are the risks?
Developers often sell blocks of land from 'concept plans' that have not yet been approved for sub-division. There is no guarantee that this land will be rezoned (for example, from rural farming to residential land), or get council approval for development in the future. This makes land banking a very risky investment option. There may also be restrictions on how the land can be used or developed.
If you invest in a land banking scheme, you could end up buying a piece of land that you are not able to build anything on, use in the way you want, or resell at a profit.
Tips to protect yourself
If you are thinking of investing in a land banking scheme, you should:
- ask the local council if the land will be released for residential development, or be rezoned. Property developers may tell you that the local council does not know about all planned developments, but you should not rely on their advice. Local councils are responsible for rezoning and development decisions in their area
- be wary of property developers who offer to refer you to certain lawyers, accountants or financial advisers. Always seek your own independent legal advice
- always do you own research - do not rely only on what the property developer tells you. Never sign anything you do not completely understand. Contracts are legally binding and they can be extremely difficult and expensive to cancel.
Vendor terms property sales
These are transactions where the seller offers finance to the buyer. The buyer pays a relatively small deposit for the property and must pay the remaining balance of the purchase price to the vendor in regular instalments.
Vendor terms sales are often promoted to sellers and buyers who are unable to obtain bank loans due to a poor credit history or an unstable employment record.
In this type of transaction:
- the buyer's name only goes on the property title when the final payment is made
- sellers are effectively locked into an extended (long-term) settlement period, in which the purchase price is fixed (even though the property value may increase during that time)
- there may be a lack of security for the finance that the vendor is effectively offering to the buyer to purchase the property
- buyers create equity in the property when they pay instalments to the seller, but do not have access to that equity until the final payment is made.
Always get independent legal and financial advice before buying or selling a property under a vendor terms contract.
This variation of a vendor terms property sale often targets lower income earners, or prospective property buyers unable to get mainstream finance.
Under a rent-to-buy scheme, the buyer enters into a rental agreement with the seller, in which they are charged high rent (well above market rate). At the end of the rental period they may buy the property, but ownership does not pass until the buyer exercises the ‘option to purchase’ - that is, pays an additional amount (option fee) to buy the property. Buyers have limited legal rights if something goes wrong.
Always get independent legal and financial advice, including having the contract checked, before buying or selling a property under such an agreement. For free financial information, tips and tools, visit the ASIC MoneySmart website.
- Rent-to-buy contracts are high-risk schemes because the title of the property is not transferred to you until you have purchased the property outright.
- You will likely be paying significantly above market rate rent but will not have any equity in the property until the full purchase price is paid.
- The rental period may last several years and, if your circumstances change, you may be unable to complete the payments. If this happens, you won’t get your money back and will not have any claim over the property
- Even if you complete the rental payments, you may still not obtain a home loan and lose not only the property, but also all the money you have spent.
- Be aware that if you use your first home buyers grant to buy a property, you will lose the right to apply it to any future property transactions.
- Some rent-to-buy contracts may indicate that if you miss a single payment, you will lose all payments made and have no claim over the property.
- As well as rent payments and an option fee (for the option of purchasing), contracts generally require you to pay for repairs and maintenance, council rates, insurance and other outgoings.
- Costs may be substantial, particularly with an older or run-down property.
- If the seller has a mortgage over the property and fails to keep up their own repayments, their lender has the right to repossess the property. In this case, the buyer would lose all rights to continue making payments towards eventual ownership of the property, as their contract is with the seller, not the seller's lender.
Be aware that you will:
- have to abide by the terms and conditions of the rent-to-buy contract and cannot sell the property to a different buyer (perhaps offering a higher price) while the contract is in force, even if you need to liquidate your assets due to a change in circumstances
- be effectively locked into a long-term settlement period during which the purchase price is fixed and you will lose any right to future capital growth if the property’s value increases over that time
- remain legally responsible for the property until the buyer makes the final payment and the property title is transferred into their name.
There are also potential risks that:
- if you are using the rent payments to cover your mortgage, you could be left out of pocket if the buyer fails to pay their rent
- the renters may choose not to buy the property. Therefore, there is a possibility that you will have to find another buyer or tenant after the rental period has ended.
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