High-risk property investments

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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

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 Australian Securities & Investments Commission (ASIC) MoneySmart.
  • 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 MoneySmart.

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

New sale of land law changes affecting land banking schemes

A vendor must not sell an option to purchase land under a land banking scheme, except as provided under the provisions inserted into the Sale of Land Act 1962 by the Sale of Land Amendment Act 2019.

Any moneys paid to purchase an option in such a scheme must be paid to a legal practitioner, conveyancer or licensed estate agent and held in trust. This will ensure that property developers bear the financial risk of their land banking schemes, and return investors’ option fees if the scheme does not proceed.

Option agreements will automatically expire after five years if the trigger for the option does not occur.

Following the expiry of the option, a purchaser will be entitled to the return of any fees they have paid under the agreement.

A vendor who fails to transfer any money paid for an option to purchase land under a land banking scheme to a legal practitioner, conveyancer or licensed estate agent faces a fine of more than $39,000 (240 penalty units) or 2 years’ imprisonment or a fine of more than $198,000 (1200 penalty units) in the case of a body corporate.

The general prohibition on land banking schemes under the Sale of Land Act 1962 do not apply to:

  • Options that are financial products issued by the holder of an Australian financial services licence, as these are already regulated under federal laws.
  • Options issued in respect of land banking schemes that are registered managed investment schemes, as these are already regulated under federal laws.

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.

Terms contracts

Under a terms contract:

  • a person cannot sell residential land under a terms contract where the sale price is less than $750,000
  • it is also an offence to arrange, broker or induce the sale of any residential land under a terms contract where the sale price is less than $750,000.

If residential land is sold under a terms contract for under $750,000, the purchaser is entitled to:

  • void the contract before completion of the contract by giving written notice to the vendor, and
  • recover money paid under the contract (except for a sum representing fair market rent) if the contract is voided.

A terms contract will not be voidable by a purchaser if a court is satisfied that a vendor acted honestly and reasonably and ought to be excused for the contravention, and if the purchaser is substantially in as good a position as if the Sale of Land Act 1962 had been complied with.

Penalties

An individual who arranges, brokers, or induces the sale of any residential land under a terms contract faces a fine of more than $39,000 (240 penalty units), two years imprisonment, or both.

A body corporate who does this faces a fine of more than $198,000 (1200 penalty units).

A person who knowingly advertises the sale of any residential land under a terms contract, where the sale price is less than $750,000 faces a fine of more than $19,000 (120 penalty units).

A body corporate faces a fine of more than $82,000 (500 penalty units).

Where terms contracts are still permissible

Terms contracts will continue to be available for the sale of residential land over $750,000, as well as agricultural land and commercial land.

Rent-to-buy schemes

A rent-to-buy arrangement is an arrangement under which 1 or more people can purchase a property while occupying it, and includes two main components:

  • The ‘rent’ part- where a person occupies a property for a fee (including rent and other payments for the occupation of the property); and
  • The ‘buy’ part – where a person enters into a contract that provides the right for that person to purchase the land (which can only be exercised after a person has occupied the property for more than six months). Rent-to-buy payments are then made, which can include a deposit and other payments (and the interest earned on those payments).

The Amendment Act, from 1 March 2020, introduces a new definition of a rent-to-buy arrangement as one that involves a person entering into a contract, or contracts, that give them the right or obligation to purchase residential land.

If residential land is sold under a rent-to-buy arrangement in contravention of this prohibition, the purchaser is entitled to void the arrangement and have all money paid under the arrangement returned (except a sum representing fair market rent), when the contract is cancelled before it is completed.

Penalties for banned rent-to-buy arrangements

A person who knowingly sells any residential land under a rent-to-buy arrangement (that is not exempt) faces:

  • a fine of more than $39,000 (240 penalty units) or two years’ imprisonment, or
  • a fine of more than $198,000 (1200 penalty units) in the case of a body corporate.

For knowingly arranging or brokering a rent-to-buy arrangement for residential land, or knowingly inducing a person to enter such an arrangement:

  • an individual faces fine of more than $39,000 (240 penalty units), or
  • a body corporate faces a one year’s imprisonment or a fine of more than $198,000 (1200 penalty units).

For knowingly advertises the sale of residential land through a rent-to-buy arrangement, faces:

  • an individual faces a fine of more than $19,000 (120 penalty units), or
  • a body corporate faces a fine of more than $82,000 (500 penalty units).

Acceptable rent-to-buy arrangements

Some rent-to-buy arrangements may emerge which adequately protect purchasers.

A rent-to-buy agreement is still able to go ahead in cases where the contract is entered into:

  • by the Director of Housing
  • a registered housing association, or
  • if the rent-to-buy arrangement meets the prescribed requirements set out in the Regulations.

The prescribed requirements include that:

  • any contract must be in writing
  • any rent-to-buy payment must be placed in a trust, or special purpose account, until the sale is completed
  • the purchaser can terminate the sale deed any time before it becomes unconditional and they are entitled to a full refund of all money they have paid towards the purchase price within 60 days.