EXTRACT FROM ‘THE LISTENER

By award winning journalist, Pamela Stirling.

Consumer advocates say it’s the seminar kings who should have to prove themselves. They say anyone can promote a get-rich-quick scheme that entails people putting their home equity on the line, without any requirement to be qualified or to explain the real risks. People can lose their homes: 10 years ago when the real estate market collapsed in England, 80,000 families lost their homes through mortgage foreclosures.

But while the boom continues, there are few complaints from the public. Almost 500 people turned up recently for Entrepreneurs Success Centre’s Richmastery seminars run by Phil Jones and David Hows, who “became serious investors less than three years ago”, starting out with only $25,000 between them. Their Richmastery property mentoring course shares the secrets of how to “turn $6995 into $150,000 in one year or your money back!” At a $2999 three-day academy you will learn “the techniques that can’t be published!” You will learn that “property investing is one of the few things anybody can do”. You will learn to give a big round of applause when people say these things.

But what do punters at all these seminars actually learn about buying property? The mantra is to buy below market value. Royce stands up at the de Roos seminar and says that he has bought a property for $795,000, which, after subdividing – we never hear the development costs – will be worth $1.5m. We give Royce a very big clap.

Jones says all his recent purchases have been between 12 and 23 percent below valuation. Last year, the Advertising Standards Authority (ASA) upheld a complaint against Richmastery for advertising “property deals 20-45 below valuation emailed to you daily”. This was misleading, said the ASA, as the complainant said the properties offered were only 10 percent average below the claimed valuation. The board observed that in advertisements of that nature “there was no room for exaggeration or hyperbole as financial matters were of great significance to a consumer’s well-being …”

Jones, a former electrician, claims investors in the Richmastery Property Mentoring Group are purchasing property at 20 percent plus discounts, even in this tight market. How? Get a motivated vendor. An example, he says, “would be a developer who needs to get across a presales line with the development”. Jones talks of the “six Ds of motivated vendors” . Besides Developers, he cites Divorce, Death (deceased estates), D’bank (debt pressure) and Deadlines (anyone who has to sell by a certain date). He misses one “D” out. “Um, mental block.” Let us help. According to page 100 of the book Jones co-wrote on the subject, it’s “Dummies”. People “who don’t know what their property is worth”.

In an earlier section in his book, Real Money Real Estate, co-written by Jones with Brad Sugars and David Hows, there is an example of how to get around agents who might negotiate prices up for such sellers. “Simple.” After they’ve shown you around the property for the first time, return later that evening, knock on the door and say, “I was here earlier today with your agent, and I just love the place. In fact, it’s the best I’ve seen so far. We were just driving past on our way home, and my wife asked me what colour the bathroom is … mind if I look?” They rarely ever refuse. You then say, “I’m ready to make an offer, but I’d prefer not to go through the agent, as I didn’t get on too well with them. Of course, I’m more than willing to pay their commission because they were the one who led me to you.” Then you draw up the contract and verbally negotiate and get it signed before leaving.

And now there’s one more “D”. Drought. I ask Jones about the outcry in Australia over an advertisement that featured one of his Australian Richmastery customers who was looking for someone with a cheap property to unload quickly. “It occurred to me,” wrote this customer, “that I might be able to help out some drought-stricken farmers who live out west and have beach houses or investment houses in my area. I found a house/shack that was owned by a farmer who had some very hungry cows. After getting a valuation of $70,000 I put in an offer unconditional with a short contract time of $45,000. He came back with $60,000. I returned with $50,000 and he signed. That’s 28 percent below market value returning $140 per week with a $35pw surplus … Richmastery’s Property Education is just fantastic!”

Jones’s response? “It was never something that we ever promoted. Yes, we’re guilty of a customer telling the story on our website, but that’s not something we’ve ever promoted in a book, seminar or anything else.”
No? That drought story featured this year in an advertisement that ran in Australian Property Investor, with photographs of Jones and Hows, and included the heading “Investor buys 28% Below Valuation! And you can too!”

Australian real estate consumer advocate Neil Jenman believes Richmastery’s strategies to find “dummies and the desperate, including drought-stricken farmers”, is both “offensive and predatory”. It is a “disgrace”, he says, to prey on affected people in order to make money. The Australian Financial Review headlined a story on the ad “Disgust at ad that exploits Farmers”. The Australian Property Investor has refused to run the ad again, also describing it as “offensive”. Jones responds that the situation comes down to “willing buyer willing seller. People don’t get upset

if someone pays too much money for property. If someone accepts an offer, then that to me indicates that they are happy with the price.”

So what does Jones think of techniques expounded in some seminars that advise real estate investors to buy an apartment in a development such as Auckland’s Gulf Harbour complex, but rent it out to gain tax benefits, while paying rent to live in an identical apartment? “Yeah, if that’s recommended by your accountant, take good accounting and legal advice and go from there.” What does de Roos say? “You mean to claim the mortgage interest on your own home? It sounds fishy to me. Because if you get caught out … are you really living in the other place?”

What does Jones think about the technique advocated at some seminars and known as “wrapping”? Wrapping, as Jenman explains, involves real estate investors giving loans to people to whom the bank refuses a loan. “The wrappers generally charge up to 20 percent above the market value for a home. So if a home is worth $100,000, the wrapper will sell it for $120,000. Then they charge much higher interest rates than the bank, some as high as 21 percent.” There are warnings in Australia that wrapping is, in effect, a way to steal the first homeowners grant of $7000. With rates and maintenance costs, it’s been estimated that it takes the buyer 10 years to reduce the average wrapper debt to just the true value of the property.

“If anything goes wrong, as it often does, and the buyers collapse under the strain of financially crippling repayments, they end up with nothing,” says Jenman. “They lose their deposit, their repayments, plus they lose the cost of any improvements they made to the home. But the investors who sold the homes just find another battler, take another deposit, inflate the interest rate and the purchase price and start the process all over again.”

In Real Money Real Estate, it asks what can go wrong from the wrapper’s position. “Not much, because if the tenant defaults, you take back the house because the title has not yet been transferred. You also have their deposit and they will have looked after the property really well, as in their minds it was their home that they were paying off.”

Wrapping can assist tax cheats. Some tenants, as Jenman recently discovered, are self-employed tradespeople: “Their official income for tax purposes might only be $20,000, so they can’t put down $80,000 on a bank loan application.” But many tenants are simply vulnerable people in impoverished circumstances whose dream of home ownership becomes a nightmare.

Jones’s response? “We don’t promote wrapping at all, the reason being that the New Zealand Mortgage Brokers Association is very negative towards wrapping properties. They consider it unscrupulous. We don’t promote wrapping simply because we consider that wrapping sells off the capital growth on the property day one.” You’re giving it to the tenant? “Correct. We have some books on the website for wraps and we have some software available for wraps [the Wrap package costs $849], but it’s not something which we promote.”

And yet Jenman has a Richmastery email sent to Australian clients last week. It has details of “new fantastic property deals!!” At the bottom it says, “How you could benefit from these Property Investments …”

One option: “Buy and Wrap: The gross yield is great but wrapping the property can increase this.”

Jones, in a recent article in his Kiwi Property Investor magazine, says, “It’s a sad fact that in our world there are people who are insincere: people that try to take advantage of others. Unsavoury vultures who sow deceit and feed off it seem to congregate in the real estate industry.”

He particularly warns New Zealanders about Australian Henry Kaye, who, despite being in trouble with authorities over the Tasman, has announced his intention to operate in New Zealand. A New Zealand finance company, Hanover Group, owns the company that finances loans to his clients. More than 100,000 Australians have attended his seminars, which cost from $4000 to $55,000.

Although Kaye claims only to provide investment education, the Melbourne Age says this modestly understates Kaye’s role as a developer. And a real estate agent. And as a loan broker. Kaye has arranged $16,000 loans for people just to attend his seminars – pressure from Jenman has forced refunds to vulnerable clients who can’t afford loan repayments. Kaye also buys properties in bulk from other developers and sells them to seminar clients, reports the Age. In one example, the property spruiker bought a property for $175,000, then sold it the same day to a Sydney client for $291,000 – “a hefty mark-up that was, however, reduced by the effects of Kaye’s ‘rebate scheme’”.

The newspaper obtained documents showing how it works. A client buys a property from Kaye for, say, $300,000. However, the price is marked on the contract at $360,000. The rebate scheme enables the buyer to go to a bank, which will only lend 80 percent of the value of a loan for an investment property, and using that contract “obtain a loan for the whole value of the property”.

Such schemes, also known in the seminar industry as “hydraulicing”, are often suggested by developers, reports Jenman, author of Don’t Sign Anything: How to protect yourself from the tricks and traps of real estate. “Once they can show that units in a building have sold at a certain price, the valuers – who rely on selling prices to set valuations – can often be influenced by these false prices to create inflated valuations. It is almost certain that, one day, people will be prosecuted over these scams.”

Jones: “In our seminars we actively teach against hydraulicing. That’s a huge no-no.” Nor, he says, is Richmastery a developer. “We don’t promote our own products at all.” No? But what about the Richmastery property finder service and the mortgage banking service, Leverage Investor Finance, both owned by Entrepreneurs Success Centre and promoted in their magazine KPI? “At no stage do we inflate the value of the property, nor do we own the property. We get no payments from any developers, we get no payments from any real estate agents. The buyer pays us.” Buyers, he says, are advised to get independent valuations and there is a money-back guarantee.

Some still question how people can buy at 10 percent below market value, as advised at these and many other seminars. Margaret Lomas, a bestselling Australian investment adviser (see box), is sceptical. “Chances are the property you’re buying had an asking price 20 percent above market valuation anyway and you just think you’re buying it below valuation. Market value is quite simply what the house next door or down the road sold for in the last three months. You could own an apartment and have paid $200,000 for it and then the person next door sells theirs for $150,000 because they’re desperate and yours becomes worth $150,000, whether you like it or not. In Australia, we’re two or three years down the track with all these property investment seminars and the fallout is huge. There are people falling over, going bankrupt, committing mortgage fraud. It’s just incredible.

Most of these property gurus,” she says, “have an ulterior motive to sell you some kind of property or service. Some advise people to go and borrow 95 percent across an entire property portfolio. Once you do that, you can’t handle that correction when it comes. You keep 20, 30 and maybe 40 percent ownership across your property portfolio and then you can manage those movements in the market without losing sleep.”

“Be very, very wary of some of the outrageous promises being made at the moment,” says Consumers’ Institute senior researcher David Hindley, who has spent several years investigating some of the more “dodgy” seminars. “The traps are still out there, absolutely. It’s probably busier than ever. I think one of the difficulties is that people don’t realise it’s happening. With the Gold Coast real estate rip-offs, after a while people started to realise what was going on. I think a lot of people just don’t realise that some very dubious tactics are being used right here.

“We’ve seen spreadsheets which just assume that prices are going to continuously go upward and that the rentals go upward each year. A lot of the spread sheets don’t have realistic costs built into them. The biggest problem is the use of the term ‘value’. They say you’ve instantly created equity of such and such and, of course, that’s rubbish because that only crystalises when you actually sell a property.

“One of the big concerns we have with a lot of these promotions is that people are told ‘you don’t need to get a valuation because we’ve done that for you’. And in some cases the valuations are what’s called ‘drive by’ valuations. In some cases, the valuer hasn’t even entered the building.”

Consumer recently reported a case where, a little over a year ago, a South Island couple bought an Auckland apartment as an investment, paying $296,000. But, according to a recent valuation, the apartment would sell on the open market for around $160,000. They would lose over $100,000. Another investor in the same building was receiving a rental return of $2175 per month based on a guaranteed return of eight percent provided by the building developer. Now that the guarantee has just finished, she could get as little as $590 per month. If that is the case, she will have to find $1544 per month to keep the mortgage of $2134 per month going, reports Consumer.

Hindley suspects what might happen in some cases is that some of the previous sales within a particular complex have been through a hardsell mechanism. “This is very common in Australia,” he says. “People have often been brought in from out of town, shown a property, given the hard sell, and they have signed up on the day without having an independent valuation done, haven’t dealt with their own lawyer. So what we’re getting is a series of sales which don’t reflect the true open market value of a property.” In Queensland, he says, the seminar market “started to actually distort valuations as a whole”. Two-tier pricing – one price list for locals and another for out-of-towners – has now been banned in Queensland.

Consumer advises that Dudley Quinlivan, a property marketer named in its article about Gold Coast scams, has several companies working for him in New Zealand. “One of his dodgy investment seminars is probably coming to a town near you,” says Consumer. The Australian Competition and Consumer Commission has taken a case in the Federal Court against Quinlivan and others involved in the marketing of properties for inflated prices. That judgment is due soon.

“It’s early days in New Zealand because we haven’t had many resales of these hard sells yet,” says Hindley. “At the moment the booming property market is actually hiding what’s happening. I suspect that it’s not until we have a reverse in the market that people who need to sell will actually find out the true value of things and I think some people are in for a big shock.

“Because a lot of these promotions are very heavily focusing on the tax aspect to maximise tax breaks, they encourage you to borrow as much as possible because borrowing to buy investment property is tax deductible. So people are not only borrowing 100 percent of the purchase price, but borrowing money to pay fees and expenses. We are aware of lots and lots of cases where people have borrowed $20,000 or more than the purchase price of the property. They are very, very heavily gambling on a substantial increase in the price of the property.”

The advice, says Hindley, is always to use an independent valuer and your own lawyer and do some shopping around yourself. And beware, he says, “there are all kinds of ridiculous fees being charged simply for information which people can get much more cheaply. A lot of the information about mortgages and how they can be structured you can get from a mortgage broker or from a mortgage specialist at your bank at no upfront cost to yourself.

“There are some fantastic books about investing in property in New Zealand which explain a lot of the stuff which seminars are charging people thousands of dollars to get. One of the problems with the whole seminar thing is that, first of all, they’re just being promoted as information seminars. Sometimes you pay $70 or $80 – and then you find yourself stuck in a two-hour sales pitch for a two or three-day education programme.” That, he says, “is a bit of a rip-off.” Depending on what happens with the property market now, that’s a sentiment many could come to applaud. N