Today we share a sad story with you.
Sandy wrote to me with a tale that we can all learn from. “BUYER BEWARE” as Sandy says. We could also say that if it looks too good it generally is. We get expert comment on Sandy’s situation from Shannon Davis who says he sees this all too often.
Kevin: I’m going to feature a question that came in – well, probably not so much a question as more a comment or a statement from Sandy, who shares an experience with us that I want to share with you because I think there’s a lot of lessons inside this.
“Kevin, just writing about an unsuccessful investing experience.” This is Sandy writing this message. “I really enjoy the success stories of others but here’s one from the other side.
“I’ve been interested in property for about 10 years and currently have 11 properties. It sounds reasonable on paper and could be marketed in a magazine as a success story if you stopped there. But the reality is I’ve hardly any equity in those properties and all of them have underperformed in terms of their equivalents in even good markets like Sydney, and the majority are in dismally performing areas.”
“How did I get myself into this situation?” asks Sandy. “I got spruiked. I blame myself and not the spruiker. Buyer beware, although I feel like there was a breach of trust in this process. I joined a well-known real estate mentoring group and was sold what I now realize overpriced, undesirable developer stock. There was little transparency in the process of the commissions the sales agent posing as a real estate mentor received.
“I’m now in the process of taking a $250,000-plus hit to steady the ship and start again, this time in the inner ring areas of the four major capital cities and most likely pay a buyer’s agent a fee to find me something that ticks all the boxes – an expensive learning process and one that I would feel much better about had I chosen these properties myself, rather than pay for a mentoring program and then pay much more dearly for biased advice. Once again, buyer beware.”
Sandy says that she writes this as a warning to many of those looking at joining certain groups with underlying vested interests to sell you certain properties.
“Kevin, thank you for a great show. I listen to it regularly and religiously, and I find all your guests very interesting. I feel it’s kept me on the property pathway rather than giving it up due to my recent failures. Kind regards, Sandy.”
Sandy, thank you so much for sharing that with us.
Joining me to talk about this, Shannon Davis from Metropole Property Strategists.
Shannon, a really sad story there for Sandy. What would be your advice to her?
Shannon: I think first and foremost we have to educate ourselves. I think whenever we go to a supposed mentor – or in this case, spruiker – and say, “I’ve got money; what should I do with it?” you’re abdicating your responsibility and you’re setting yourself up for failure with that.
So let’s educate ourselves first, and the best way to do that is to ask questions – and if a person’s always bringing you back to a certain set of properties or a certain area to invest, it might be that they’re in a process of selling property rather than selling investment strategies.
Kevin: Sandy talks there about going to see this group, a well-known buying group, and I guess one of the warning signs is if they are representing property. In other words they come to you and say, “Look, this is the solution. I think you should buy this,” that is a warning sign, isn’t it?
Shannon: Oh, yes, definitely. Stock lists: they’re masquerading as sellers for developers, really. And you might be paying a commission but they’re getting further undisclosed or disclosed commissions from the builders as well, and very little empathy as to whether you’re going to get capital growth or not.
Kevin: Shannon, there are a number of questions I want to ask you, one about working out what area you should be involved in, but Sandy did mention there her strategy of four major capital cities. What’s your reaction to that?
Shannon: Yes, I think Sandy’s on the right track there because she’s starting to look for a little bit more scarcity. I think if it’s a new area that you haven’t really quite heard the name of that suburb before and it’s stage one or stage five to go, there’s not really a lot of scarcity in that investment, and at the end of the day, they’re the properties that are going to be more prone to a correction or a big run on prices.
Kevin: So, mate, how would someone go about finding it an independent person to talk to about this?
Shannon: I think that they have no ties to anything at all. They can be unbiased and independent and survey each property for what it is and not on how they’re going to get paid. I think if you’re not paying the person working for you, buyer beware because obviously nothing’s for nothing in this world and they’re getting paid somewhere else, and that’s going to compromise their advice.
Kevin: Yes. I’m going to repeat this little part because I think it’s quite relevant. Sandy says, “I write this as a warning to many of those looking at joining certain groups with underlying vested interests to sell you certain properties.”
Now that’s the key – that they actually will come to you and say, “Well, look, here’s a portfolio of properties.” You’re going to find that they’re new. They’re probably developer stock. If you do your research properly, Shannon and I would suggest to you that you’d probably find that it’s also grossly overpriced, because they tend to build their own commission in above on top of that, don’t they?
Shannon: Yes, it’s a very contrived market. Offer stock lists, like you said there, and they’re going to really preach the tax deduction of buying new, but what you find out is you’ve bought very expensive development stock that underperforms in areas of little known establishment, and moving forward, it’s not quite the investment you thought it was.
Kevin: Another warning sign will be if you are offered any kind of a rental guarantee. Normally what happens here…—You explain it, Shannon: what happens with a rental guarantee?
Shannon: Again, priced in. It originates to put new investors at ease, but again, it’s priced into the price, and their biggest fear of finding a tenant, you pay a lot for that and you’ll see a significant drop once those leases expire.
Kevin: Yes, so effectively they build in… They’re prepared to put in over the above rental that you would normally get for that property to make it look a lot more attractive in terms of its return, and as you said, once that guarantee runs out, it will go back to a normal rent, which is grossly under what it is now.
Shannon: Yes, that’s right. And often, they’ll recommend their own solicitors and own financiers as well to help it escape the scrutiny, as well.
Kevin: Good talking to you, Shannon, thank you. A very timely warning. And, Sandy, thank you for sharing that experience with us, and I hope that’s a great lesson for many other people, as well.
Shannon, thanks for your time.
Shannon: Thanks, Kevin.