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ISCOVER
All advisers understand the importance of earning clients’ trust. Unfortunately, all it takes is a single referral to go bad for that trust to be eroded.
The investment property industry is full of talented people focused on the security of clients. But the industry has its share of spruikers and schemers too. There are four questions to ask a property group before you risk referring your clients.
1. What is the basis of their property recommendations?
Does the property group value security and a well-researched, measured approach to risk? Ensure they are able to undertake and document the right research before recommending an investment property.
The extent of this research must leave no stone unturned. Many factors can influence the success of an investment property: local capital growth rates, rental vacancy, expected rental income, anticipated yield, as well as social infrastructure factors relevant to the location, must all be considered. Even then, this is only scratching the surface.
Some property groups claim a robust research methodology, but will only report the results that favour their stock. Insist on a strong track record of long-term past performance. Property is a long-term investment, so recent short-term results won’t tell you much. Ask for the five-year returns on developments they have marketed and make sure they’re able to clearly articulate, through research, how and why an investment property will perform in the future.
2. Are there any hidden agendas?
Is the investment property recommended to your client priced within a reasonable range of an independent valuation? Your clients trust you to ensure they will pay a fair market price.
It’s critical to understand the motivations of the party presenting the investment property opportunity to your client.
Some property groups develop, market and sell apartments. Then they offer services such as leasing, maintenance and property management. Some even act as real estate agents when investors are ready to sell. With this type of structure, investors can often be provided biased information from the company, as their own vested interest is high.
Not all investment property companies insist on obtaining an independent valuation, so work with one that does. Never rely on the word of a developer or agent when it comes to how much a property is worth.
3. Is the fee structure transparent – and reasonable?
What fee will the property group earn? If a group isn’t upfront about their fees, alarm bells should sound.
An investment property company is typically remunerated by the developer. The fee is generally expressed as a percentage of the property sale price. Traditional real estate agents generally receive a commission of two per cent to three per cent; for property investment groups, commissions might vary from five per cent to eight per cent.
This higher fee reflects costs associated with servicing clients, research expenses and longer lead times, as settlements can take up to 24 months. Some groups charge as much as 12 per cent to 15 per cent. Anything above 6 per cent is excessive, moving away from benefiting your client.
Insist the investment property group charges a capped rate. This way, they aren’t swayed to present a particular property to your client because it’s offered with a higher commission. When a higher rate is offered, the amount above the stated rate should be rebated to the investor at settlement.
4. Is the property group accredited?
Which reputable financial institutions have accredited the property group?
Each institution has its own due diligence, forming the basis of a recommendation of a property group. Make sure you recognise the financial institutions and ask for details if you are unsure.
Neil Smoli, founder and managing director, Aviate Group
Aviate Group was founded in 2001 when Neil recognised a gap in the market. It was clear that the appetite among Australians to invest in property was strong, but most investors lacked the knowledge and access to research to guide them down the right path. Aviate was established so Australians could benefit from a more systematic, safe and secure approach to property investing.
