Real estate sharks targeting DIY super trustees

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I’ve lately been alarmed at the number of self-styled ‘Property Investment Advisers’ (and their companies) who have set about targeting self-managed superannuation funds (SMSFs) to move real estate that they are having difficulty selling to individual investors. That alarm grows greater when I see the number of SMSF trustees who blindly acquire these same investments, using significantly less care and due diligence than they would were they to be considering that same investment as a direct purchase.

The dodgy spruiker has become part of the property investment landscape and they are easy to spot; generally the deals offered are of a type that is a departure from what we would normally recognise as being a standard residential or commercial property investment.

Spotting a shark

Such deals are often characterised by features such as:

  • Some kind of incentive, such as a rent guarantee, to lure an investor into feeling like the yield is in some way protected.
  • The deal is offered via a telemarketer or a seminar (sometimes a telemarketed seminar!)
  • There is usually a middleman – a marketer or developer’s agent who on-sells the property on behalf of the developer, usually for a large, undisclosed commission.
  • The properties usually exist in a state other than the one in which they are being marketed.
  • They are often off-the-plan, or of a niche market variety, such as tourist accommodation, or offered under some government scheme such as NRAS. At their worst, they can be properties in the US or in a high-risk area within Australia.

There are always great, glossy brochures and lots of ‘forecast’ information, usually designed to reduce your need to do your own independent research.

A house of cards

Prior to the global financial crisis (GFC), there were plenty of unsuspecting investors available to buy these properties. We were in a time of property abundance, and pretty much any property purchased, as long as it was held for a few years, did well and grew in value.

In some cases $20,000-$30,000 worth of commission had been added to the purchase price, but the growth that was occurring everywhere masked this and usually the underlying value of the property caught up pretty quickly. Valuers were returning property valuations at this inflated ‘purchase price’ confident that in a few months to a year the actual value would support this, and banks hadn’t yet rationalised their panels of valuers, as they did subsequent to the GFC when they realised so many older valuations could not be trusted.

Once property markets everywhere began to stabilise and falter, as they do in fairly predictable cycles, property investors began to exercise caution and leave the market – at least for a while. This was occurring at around the same time that the new SMSF borrowing rules were being developed and pretty soon, hungry marketers looking for new avenues to shift stock realised that a whole new opportunity existed.

SMSFs easy targets

For some reason, many SMSF trustees have a tendency to be less careful with where they invest their fund’s money when it comes to property. The distance created between them and what will one day become their only source of income creates a disjointed sense of ownership, as if the funds aren’t really theirs and more risk can be taken with them. And so SMSFs became easy targets for almost any dodgy deal and the fallout has yet to become apparent.

Make no mistake, the funds within your self-managed super are perhaps the most precious you have. They determine, in some cases completely, the standard of living with which you can expect to live out your twilight years.

A property purchased over market value, with unconfirmed tenant demand in areas where there are no significant growth drivers, or in areas at risk, such as single-industry or mining towns, will result in a vastly different outcome than one that has a proven demand and is situated in areas with identified growth drivers. To put it in dollar terms, well bought property within a super fund may result in sufficient income to ensure a sound retirement income stream, whereas a property in a high-risk category that doesn’t work out may result in a super fund with no capacity to deliver income when you need it most.

Buy smart

Due diligence is more important when buying in a super fund than it is when making that purchase in any other entity because it is your long-term future at risk. A super fund, as a tax-sheltered environment, can potentially deliver a sound retirement income stream, but the advantageous tax treatment of these funds doesn’t assure that outcome if the underlying assets are poor performers. A poor property choice is still a poor choice within the super fund environment.

So, ramp up your research skills and take extra care when considering property for your super fund. A poor property purchase in your own name while you are young is a situation you may ultimately recover from. But, buying an inferior investment in your super fund will impact you at your most vulnerable – the years when your capacity to earn an income elsewhere is diminished and you are relying entirely on the choices you made in the past.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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