Download Two tier marketing

Two tier
real estate markets
in Queensland
Report on an investigation conducted for
the Queensland Office of Fair Trading.
Two tier report 5/13/2017 Page 1
Two tier
Real Estate Markets
in Queensland
EXECUTIVE SUMMARY .......................................................................................................................... 3
THIS REPORT ............................................................................................................................................. 4
WHAT IS TWO TIER PROPERTY MARKETING ................................................................................ 4
HOW ARE THE PREMIUMS OVER MARKET PRICES ACHIEVED? ............................................. 8
THE FOOD CHAIN ....................................................................................................................................11
HOW PREVALENT IS TWO TIER MARKETING ...............................................................................12
HOW MUCH PUFF ....................................................................................................................................13
WHAT THE PROPERTY MARKETERS SAY.......................................................................................14
WHAT PROBLEMS ARE THERE WITH TWO TIER MARKETING? .............................................16
WORKING PARTY CONSIDERATION OF TWO TIER MARKETING PROBLEMS ...................18
MISREPRESENTATIONS ........................................................................................................................19
VALUATIONS ............................................................................................................................................21
THE ROLE OF FINANCIAL INSTITUTIONS.......................................................................................25
ECONOMIC IMPLICATIONS .................................................................................................................27
SOCIAL IMPLICATIONS .........................................................................................................................30
IS IT LEGAL? .............................................................................................................................................31
WHY HASN’T SOMETHING BEEN DONE BEFORE NOW?.............................................................33
APPENDIX ONE – COMPARISON OF TWO PRICE LISTS ..............................................................35
APPENDIX TWO – THIRD TIER MARKETING DATA .....................................................................36
Two tier report 5/13/2017 Page 2
Executive Summary
Two tier markets can be defined as those where the one property can at the same time
have two wildly divergent values, depending on how and to whom property is sold.
What are referred to as two tier markets have a high price tier which is achieved when
specialist organisations and techniques are used to market properties to persons
normally residing somewhere remote from the market.
The argument that valuers are responsible for the fiction of a two tier market is
disproved by the so called third tier market – where investors who dispose of their
properties must do so at a loss in the normal market while marketing organisations
retain the ability to remarket those same properties at the high second tier of pricing.
Central to the marketing techniques are the recruitment of a large pool of potential
purchasers, an emphasis on negative gearing as the key to successful property
investment, the provision of all facilities and services for rapidly concluding the
purchase process, and closeting of potential purchasers from independent sources of
local knowledge and professional advice.
Marketers claim that they provide valuable services to the consumer and also to the
development industry and local economies. The alternative view is that negative
gearing marketing organisations and techniques systematically and cynically exploit
vulnerable and naïve consumers and are doing or will do great damage to the
reputable real estate industry and local economies.
Puff, a term in use within the industry, may be defined as the difference between
marketed prices and the fair market value of properties. In 1998, the amount of puff
in the Gold Coast market was estimated as averaging between $40,000 and $54,000
per property and $110-$150 million overall. This is roughly equivalent to the gross
return of the organisations employing marketing techniques and also to the immediate
capital loss sustained by investors.
In what has collectively become known as “the foodchain” a range of professionals
performing services within the marketing system may be systematically ignoring
professional obligations and overcharging for their services. There are concerns also
in relation to undisclosed payments and secret commissions between parties to
marketing transactions and third parties
The existence of two widely separated price tiers introduces a fundamental flaw into
the projections of capital appreciation shown to potential purchasers by marketing
organisations which means that very few investors can expect a positive growth in the
value of their investment even over extended time periods.
The success of negative gearing marketing techniques has meant that much new
development product is being built specifically for this market. This may build
significant distortions into real estate markets, worsening boom-bust cycles and
increasing recovery periods. There is a need also for more research into the potential
social consequences of excess construction of rental housing stock, often in unsuitable
locations.
Two tier report 5/13/2017 Page 3
This report
This report was prepared as a result of a study of two tier property marketing
conducted by an independent consultant, Mr Phil Dickie, for the Queensland Office of
Fair Trading. It draws on and was prepared in conjunction with:
Research into two tier markets which involved:
A review of departmental files
Interviews with participants in two tier markets, property buyers and
others with specialist expertise
Reviews and analysis of property sales data
Submissions to and the proceedings of a stakeholder working party set up to
examine consumer concerns associated with property marketing and possible
strategies to deal with them
A report by legal consultant Professor Bill Duncan on State legislative options
for regulation of property marketeering activities.
This report gives an overview of the property marketing industry, using the Gold
Coast as the principal area of study. It was not the purpose of the study, and nor was
it possible given the time and resources available, to fully resolve many of the
allegations made during the course of the investigation.
The consultant acknowledges the assistance of property purchasers, staff of the Office
of Fair Trading and the Department of Natural Resources, individual and institutional
members of the Working Party on Property Marketing in Queensland, Mr Rex Davis
and Dr Scott Baum of the Australian Housing and Urban Research Institute and Mr
Bruce Moon of the School of Planning, Landscape Architecture and Surveying at the
Queensland University of Technology.
Views expressed are not necessarily those of the Office of Fair Trading.
What is two tier property marketing
As far as can be determined, the term two tier property marketing was coined in the
early 1990s within the valuation fraternity to describe the marketing of property,
particularly new development product, at levels well above fair market value. A
single property can at the one time have two wildly disparate prices, as is shown by
the following comparison of prices issued in the same short time frame and
presumably for two quite different groups of buyers for units in a Gold Coast high rise
apartment building.
Two tier report 5/13/2017 Page 4
TWO TIERS OF PRICING?
Comparison of two price lists for off the plan sales
Gold Coast high rise apartment block, 1998
Unit
number
1
Manager
12
48
51
53
56
57
59
65
66
71
Price List A
Price List B
$311,000
$2,300,000
$336,000
$422,000
$432,000
$405,000
$415,000
$446,000
$424,000
$444,000
$476,000
$464,000
$285,000
$1,800,000
$289,000
$370,000
$373,000
$358,000
$361,000
$379,000
$364,000
$370,000
$388,000
$376,000
The full list of units and prices is at Appendix ..
The existence of two distinct levels of prices suggests that two quite distinct real
estate markets are in operation in some areas – a local or normal market and a
separate market for buyers from elsewhere sometimes known as the investment or
seminar market.
The growth of the second market is commonly attributed to the emergence of
specialist property marketing companies aggressively promoting negative gearing
investment strategies. However, some or all of the methods used or pioneered by
such companies, including telemarketing, direct marketing , negative gearing
investment seminars and free or low cost flights to the property locality for potential
buyers are also used by other players in the market - notably development companies
and some real estate agencies and individual agents, as well as unlicensed individuals
and companies.
Two competing views exist of the marketing industry. The first is that poorly
informed couples with savings or equity are being snared into buying overpriced
property by misleading and high pressure sales campaigns. The alternative view is
that marketing is enabling middle Australia to secure its future through property
investment and contributing substantially to employment and wellbeing in the
communities in which it operates. It is sometimes conceded that marketed property
prices may initially be a little higher because of the necessity to include the higher
marketing costs, but providing the property is held for a reasonable period this will
make little difference to its investment value.
Some proponents of the latter view go so far as to deny the existence of two distinct
tiers of pricing. Valuers have also been accused of improperly marking down the
Two tier report 5/13/2017 Page 5
value of a property, solely on the basis that it is being sold by a marketing company
rather than by a real estate agent in the traditional way. However, this is a minority
view.
“. . . there is not a two tiered market relating to investment properties. It is
more appropriate to say that there are two different valuations for the same
property, depending on its age, or alternativelly, depending on whether the
valuation is required for mortgage security purposes.”.
Mr Chris Bilborough,
Director, The Epic Group
July 1999
A survey of Gold Coast valuers found that 90 percent believed that a “submarket”
existed for mostly non local buyers who were paying “slightly or significantly more”
than market value for property. Of these, 39 percent believed non local buyers were
paying 20 percent more than market price, 32 percent believed they were paying 25
percent or more and five percent believed they were paying more than 50 percent over
market value.i
More evidence for the existence of two widely separated bands of pricing is shown by
what happens when marketed properties are resold in the open market. In nearly every
case coming to the notice of this study, the properties could only be sold at the lower
normal market level, leaving the original investors to wear a large capital loss. That
this has nothing to do with general market trends is shown by the ability of marketers
who have acquired such properties to resell them at the higher level, sometimes within
days.
Indeed, a number of companies seem to specialise in the quick turnaround of such
properties, a practice known as third or even fourth, or fifth tier marketing (although
this is a misnomer as the properties are simply being bounced back and forth between
the two price bands).
The following table illustrates this “third tier” market, using an analysis of the 1998
property transactions of two prominent and related Gold Coast “re-marketing”
companies Electus Pty Ltd and Citra 2000 Pty Ltd. All of the sales where detailed
analysis was undertaken involved one marketing agency, Applied Investment
Research (Aust), which in turn called on the services of a single finance brokerage
and a single Gold Coast solicitor. The table shows the large losses being sustained by
original purchasers, often after a considerable period holding the property.
Two tier report 5/13/2017 Page 6
Some 1998 “third tier” Gold Coast property sales by
Applied Investment Research (Aust) on behalf of
Electus Pty Ltd and Citra 2000 Pty Ltd
Original sale
(Year)
Electus/Citra
acquisition
price
$78,000
Electus/Citra
Sale price
Electus/Citra
Gross profit
$126,750
$137,500
$59,500 over 7
(1994)
days
$100,000
$70,000
$129,000
$59,000 over
(1990)
77 days
$122,000
$100,000
$166,000
$66,000 over
(1988)
15 days
$124,900
$72,500
$139,500
$67,000 over 2
(1993)
days
$103,900
$65,000
$128,000
$63,000 over
(1992)
60 days
$117,900
$80,000
$139,000
$59,000 over
(1993)
35 days
$200,000
$138,000
$189,000
$51,000 over
(1995)
66 days
$150,000
$117,000
$179,000
$62,000 over
(1989)
126 days
$112,000
$75,000
$137,000
$62,000 over
(1989)
65 days
$190,000
$138,000
$220,000
$82,000 over
(1995)
46 days
Full details of discovered Citra/Electus sales are at Appendix 2.
As far as could be determined Electus Pty Ltd and Citra Australia 2000 Pty Ltd were
involved in the purchase and remarketing of 38 properties in 1998. (The full summary
is contained at appendix 2) The average difference between the purchase price paid
by the company and the sale price achieved by Applied Investment Research (Aust)
was $54,000, which represented a 52 percent margin on the average purchase price.
The gross profit shared by parties to these transactions was in excess of $2 million
with the properties being held for a median period of 46 days. In all probability, the
companies achieved much better results as:
it is unlikely that the full purchase price would have had to be advanced in the
case of back to back sales, giving a very high rate of return on the capital
actually employed.
it is highly likely that there were additional sales either traversing the study
period or not picked up because of delays in registering sales data.
It may be fair comment that third or fourth tier marketing resembles some of the worst
practices of the franchising industry. In that industry the word “churning” is used to
describe a process which can be described as:
Two tier report 5/13/2017 Page 7
A franchising organisation uses wildly optimistic business projections to sell a
franchise.
The business often fails and indeed the allegation often is that failure is built
into it.
When the franchisee is at last gasp, the franchisor emerges as the only buyer
and reacquires the franchise at a fire sale price.
The franchisor then sets about, in the words of the game, finding another
sucker.
The analysis of resales data shows that, despite the protestations of some in the
industry, two tier markets with widely separated price tiers are a reality in many real
estate markets. .
How are the premiums over market prices achieved?
Second tier marketing generally has all or several of the following characteristics:
Property is marketed by agreement between a marketing organisation and a
developer or by a developer within an internal marketing arm, largely
bypassing the traditional real estate industry.
Potential purchasers are largely recruited – methods include telemaketing,
prospects being accosted on the street and through the holding of investment
seminars.
The recruitment effort is focussed on potential purchasers from outside the
area where the property is located, often in provincial or rural areas, interstate
and overseas.
During initial contacts, the fact that property purchase is involved is often not
raised.
A negative gearing investment strategy is the central element of the sales
pitch.
Prospects are often offered free or subsidised flights to the locality where the
property is being marketed.
Prospects are usually “qualified” for loans and then shown a selection of
properties to meet a negative gearing investment strategy and – usually on the
same day – encouraged to sign a contract with all legal, financial and other
services provided by or through arrangements established by the marketing
organisation.
Two tier report 5/13/2017 Page 8
The property offered is usually part of a bulk development, is usually new to
the market and is in the low to middle range of pricing.
Rental guarantees of one to two years may form a part of the purchase
contract.
Property is more likely to be offered at a fixed price, in contrast to the
traditional practice of making and accepting of offers as a way of settling a
price acceptable to both buyer and seller.
One explanation for the achievement of sales prices that are dramatically above
market values are that buyers naive to local conditions and with their focus on an
investment strategy rather than a property purchase are subjected to a hard sell by
organisations providing a one stop shop offering future wealth and security.
Technically, there is nothing to prevent purchasers declining to make an immediate
decision on purchasing a proffered property and nothing to prevent them insisting on
an opportunity to seek independent advice on their financial situation, contracts or
local market conditions. Some purchasers presumably do take such steps and some
may go on to make a purchase. But many are swept along by the process and easily
talked out of consulting professionals outside the circle of those made immediately
available by the marketing organisation.
Another critical difference with traditional sales practice is the linkage of
professionals to the marketing organisation. Traditionally, purchasers engage their
own solicitor to review the property and contracts, arrange their own finance with
financial institutions and arrange their own insurance. Although their services are
available to all, valuers traditionally worked mainly for financial institutions.
Marketing organisations now commonly broker both finance and insurance packages,
provide contracts and, on occasion, proffer valuations. Some stress the
“independence” of such professional advice, often in cases where independence
would seem at best highly questionable. The department is also aware of cases where
the professional qualifications of service providers have been questionable. One case
allegedly involved valuation “certificates” prepared by an employee of a marketing
organisation who had been a valuer but no longer had the appropriate registration or
professional qualifications.
Valuers and solicitors may also be on panels appointed by the developer or marketing
organisation and may be referred considerable volumes of work as a result. Solicitors
may also do other legal work unrelated to sales for developer and marketing
organisations, also bringing in to question their ability to adequately and
independently represent the interests of an out of town purchaser introduced to them
by a marketing organisation with which they have continuous contact and contractural
or other relationships.
Figure 1 below shows how traditional relationships between buyers, sellers and
service providers have changed under the two tier marketing system.
Two tier report 5/13/2017 Page 9
Figure 1: Comparison of second tier marketing and traditional property sales
Second tier marketing – relationships and money flows
Property Developers
Insurers
Joint venture
fee/ percentage
Commission
Valuer
ABC
Development
Advice
ABC
Marketing
Group
Panel
membership
ABC
Insurance
Services
ABC
Financial
Services
Solicitors
Commission
Banks
Fee
Commission
Fee
Loan
Fee
Payment
Buyer
Bank
Fee
Fee
Fee
Fee
Solicitor
Loan
Real Estate
Agent/s
Valuer
Payment
Commission
Owner
Builder
Developer
Fee
Solicitor
Fee
Traditional marketing – money flows and relationships
Two tier report 5/13/2017 Page 10
The Food Chain
“The food chain” is a term used to describe those now making a living from two tier
property marketing enterprises. The term is now in quite common usage in the
industry, with its origins seeming to lie within the property marketing industry rather
than with its detractors . . . as in with invitations being issued to outsiders to “join the
food chain” or with warnings being issued to government that undue attention will
“create a significant negative ripple effect that will send a financial shiver down the
property development foodchain”.
Transactions in the upper price tier must finance telemarketers, investment seminars,
flights for investors to the property locality, in house professionals such as solicitors
or arrangements with external professionals, one to two years of rent payments or
supplements, finance and possibly insurance brokerages. Other overheads such as the
requirement for shopfront or office space might also be at much higher levels than
with traditional selling.
Figure 1 above compares traditional marketing through a real estate agent with a well
developed upper tier marketing system – this shows clearly the increased number of
participants and the complexity of relationships between them. This increased
complexity and sophistication comes at a cost.
The majority of the funding required by the marketing system must come from
purchasers. Some allowance, however, should be made for the higher volume of sales
achieved by the marketers – a higher throughput enables a more sophisticated sales
structure without necessarily increasing the level of impost on any individual
customer. And some of the funding requirement is met through payments for referred
business from other organisations. Major sources of such funding are commissions
and trailers from banks and insurance companies, although mention was also made
during the course of the investigation to more or less secret commissions from
furniture outlets and property managers. However, it should be noted that there is
some evidence that some of this third party commission income may also be available
to real estate agents marketing property in the traditional way.
It became apparent during the course of the investigation that commissions and fees
of all varieties are, as a general rule, set at much higher levels for marketed properties
than applies to traditional selling. A leading marketing company would not or could
not disclose exact levels of direct commission on sales, saying they varied from case
to case. Commission also may not be the right description in any case, as marketing
companies often receive the difference between the developer’s return and the sale
price, less expenses. This figure is rarely known in any precise sense, however it can
safely be said to be orders of magnitude greater than standard real estate commissions.
Documentation provided with complaints lodged with the Office of Fair Trading
shows that associated solicitors may charge twice to three times the normal level of
conveyancing fees, and that a premium fee can be attached to finance provided by
brokers or the brokerage arms of finance companies. It is not possible to say that this
level of charging is general in the property marketing industry. But, equally, there is
no evidence to indicate that such high charges are not routine.
Two tier report 5/13/2017 Page 11
The amount of money washing around some marketing systems would seem to be
enough to enable impromptu decisions to enlist other persons into “the food chain”.
A valuer recounted how one marketing company made an explicit offer of enrolment
in “the food chain” with premiums over normal fees to be paid for valuations. A
newspaper personal investment columnist detailed how the same marketing
organisation offered a commission of $2000 a sale almost at the point of first contact.
“In researching this column, I was offered a commission of $2000 a
sale by one such organisation. The offer was unsolicited and was made
after referral to a manager and within five minutes of my first phone
call.”
David Bryant, The Weekend Australian
April 18-19, 1998
How prevalent is two tier marketing
The best estimate of the prevalence of two tier marketing available is a study
conducted over the Gold Coast city area for the year 1998 by the valuation firm
Herriots Pty Ltd. The study has some limitations – the study covers strata title sales
only, two tier sales are not always identifiable and sales are not always registered
immediately.
The Herriots methodology was to identify the two tier sales on the basis that:
-
the vendor was a known two tier operator and the property a known two tier
development
the property was identified by Herriots as a two tier product in the course of
their valuation work
the property was sold for well above the range of fair market value established
for similar products in the direct locality
a two tier marketing company was known to be involved
the purchaser and vendor and/or marketing firm share the same address
one vendor handles the entire development
the majority of purchasers live outside the Gold Coast area, in particular when
accumulations of purchasers come from the one country town, interstate area
and so on.
On the basis of this study Herriots estimated that the two tier sales comprised 42.6
percent of the 6476 settled unit sales on the Gold Coast in 1998. The monthly low was
34.6 percent and the high 83.3 percent, although both these figure were recorded in
Two tier report 5/13/2017 Page 12
the period when the lag in recording sales could be expected to have the most effect.
A more normal range is between 35 and 50 percent of sales.
Statewide the position is less certain. Herriots estimates that about a third of non-rural
strata title sales could be considered two tier, with a marketing presence also in house
and land packages.
Gold Coast based marketer The Epic Group has laid some claim to being considered
the largest specialist investment property marketer in South East Queensland and is a
foundation member of the Australian Federation of Property Developers and
Marketers Ltd. This one marketer claims to have “sold some 2065 properties on
behalf of 83 developers such as Sunland and Villa World in the $120,000 to $222,000
price bracket. We believe that we account for approximately 60 percent of the
investment (townhouse) market and 30 percent of the entire market.”ii
Epic maintained that “42 percent of all new properties sold in south east Queensland
are now sold through a marketing organisation”.
While the exact figures can remain the subject of argument and further study, there is
no doubt that in certain markets negatively geared investment marketing is highly
significant.
How much puff
Puff is another term encountered in the investigation of this industry, and it indicates
the difference between prices at the second tier of pricing and what a property might
fetch in the normal market.
Herriots estimates the average “puff” is about $40,000 per sale. On the Gold Coast
unit/apartment market where two tier marketing has been most studied, this translates
to more than $110 million in 1998.
The study of so called “third tier transactions”, which might be expected to yield a
lower figure for “puff” on the grounds that it is second hand rather than new product
which is being marketed, yields a puff value averaging $54,000 a sale. In the Gold
Coast strata title market, this would yield a figure of around $148 million in 1998.
These are considerable sums. Depending on which end of the transactions is being
analysed, this $110-$150 million range roughly equates to:
The gross income of property marketing organisations.
The immediate capital loss suffered by investors.
The evidence, both from theoretical calculations and what market evidence exists,
suggests that even over extended time frames the majority of investors will not
overcome the immediate capital loss they sustain on their purchase.
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What the property marketers say
Property marketers say they are performing a valuable service to both the
development industry and consumers. They also say, with some justification, that
their marketing methods are not new and that they are not confined only to specialist
marketing companies, also being employed at least in part by:
Real estate agents and franchises
Developers acting on their own behalf
Investment advisors
Banks and other investment institutions
The marketers commonly hold that the selling of real estate is incidental to their
primary activity, which is to offer consumers a package whereby they can take
advantage of the tax advantages of negative gearing to secure their financial future.
While real estate is the package offered, the package could, conceivably, encompass
other investments such as equity. Although the investigation did not come across any
marketing organisation offering any vehicle of investment other than real estate, one
organisation was taking steps to acquire the status of a licenced equity trader.
The marketers also stress their role in simplifying the acquisition and holding of
property through the co-ordination of professionals providing investment, legal and
financial advice and through the provision of services such as property management.
A common point was that the ordinary marketing practices of the real estate industry
were now inadequate for the needs of developers, particularly for the interstate and
overseas marketing of new developments. Agents were not equipped to deal with the
increased sophistication and cost of marketing, and ordinary commission structures
could not provide the basis for funding the level of marketing required.
The marketers maintained that in relation to the volume of transactions, the level of
complaint was low and many complaints were based on unreasonable expectations of
capital growth over unreasonably short time periods.
Marketers did accept that the reputation of their industry had been damaged by the
actions of a few marketers. It was hoped that the formation of the Australian
Federation of Property Developers and Marketers and the development of industry
codes of ethics would internally address such issues. Requests for membership details
of the AFPDM were still being processed when this report was completed, but
membership was summarised as “including substantial developers, both on the Gold
Coast and in Brisbane, a small number of marketers apart from EPIC, one of the
major trading banks, and a small number of finance brokers”.
Two tier report 5/13/2017 Page 14
The Epic Group and the Australian Federation of Property Developers and Marketers
also participated in the Working Party set up by the Minister for Equity and Fair
Trading to address marketing issues and in that context were supportive of the main
recommendations of licensing for those involved in property transactions, greater
levels of disclosure, mandatory and enforceable codes of ethics and improved
enforcement levels. The Epic Group and the AFPDM also proposed higher standards
of training for those involved in the property marketing industry and the general deregulation of agents commissions.
What we say to our clients
(a) We emphasise to our clients on a number of occasions that real
estate ownership and/or investment is a long term issue, and we
specifically mention a recommended holding period of 7-10
years.
(b) We provide to our clients certain historical information in relation
to inflation and capital growth, and give an indication of income
projections and depreciation allowances based on these factors.
All of this information has been carefully checked by our external
accountants who have certified as to its authenticity.
(c) Those clients who need finance to complete that purchase include
a finance clause in their contract, giving them up to 28 days ( and
sometimes longer if they wish) to seek a finance approval which
is satisfactory to them. All of our developer sellers are prepared
to allow a contract to fall over if satisfactory finance is not
available.
Mr Chris Bilborough, Director, The Epic Group
July 1999
In correspondence to the consultant, Mr Bilborough of the Epic Group also made the
following points:
“The “high commissions” charged are usually no different to the “all up”
marketing, advertising, brochure and other such expenses which will be
incurred if sold through an existing registered agency.
So far as the operations of EPIC are concerned we have for some time only
been involved in marketing those properties which are in accordance with an
existing valuation report, or in some cases, at a sale price not less than 91
percent of such valuation. We allow a maximum “tolerance” of 9 percent to
take into account the different interpretations to assessing the value of a
property taken by valuers.
Two tier report 5/13/2017 Page 15
However, what we find most objectable is the practice by a limited number of
valuation firms who will assess a certain value on a particular property, but
when advised that the property is anticipated to be marketed by our group,
discount their original valuation by between $20,000 and $30,000.”
It should be noted that some of the material in the possession of the Office of Fair
Trading and mentioned in media reports on The Epic Group and its variously named
predecessors appears to be at some variance with these statements on practice.
Several requests were made to The Epic Group for copies of material supplied to
potential investors and for the information on which projections were based. The
only such material supplied was a copy of a book, Building Wealth in Changing
Times by Jan Somers. This book and others by the same author, which appear to be
published by Somerset Financial Services, are promoted by a number of property
marketing companies. Apart from a brief discourse on the advantages of median
priced property, this book does not dwell on the notion that obtaining value for money
might be one of the fundamentals of investment.
No other material was supplied although in further correspondence more detail was
given on the external certification of material used in presentations:
“A senior accountant has been to two different presentations made by
representatives of the EPIC Group for the purposes of reviewing the
information passed on to potential purchasers, and concentrating on
the taxation consequences of same. This happened as recently as
April this year. . ; . I am now seeking a written certification from
these accountants and will forward same to you immediately it is
available.”
National Asset Planning Corporation, a company associated with The Epic Group, is
known to have used capital appreciation multipliers of between 7.5 percent and 9
percent on worksheets supplied to clients. These, while at the lower end of the range
of multipliers used by marketing companies, are well above any sustained rates of
capital appreciation achieved in any recent period in the markets where the properties
were located.
What problems are there with two tier marketing?
At the time of the change of the Queensland Government in June 1998, property
marketing practices were generating a significant level of complaint to government
bodies, both from aggrieved consumers and others. Many of the other complaints,
naturally, were from those suffering or anticipating erosion of their market share to
the property marketers. However, complaints from professionals that professional
standards are being debauched on a widespread and increasing basis and allegations
of institutional misconduct are claims that need to be taken seriously.
Two tier report 5/13/2017 Page 16
Although the media has run isolated articles on victims of pressure selling of
overpriced real estate for many years, recently the nature of coverage has changed.
This was not just a matter of more articles in more media outlets, but also of the
media beginning to explore the context of the marketing and the complicity of other
institutions, particularly financial institutions. This coverage, damaging to the State’s
reputation and potentially very damaging to its economy, is likely to continue, as:
-
the reservoir of victims is large and international and they have stories loaded
with personal tragedy and media appeal.
-
the element of courtroom drama is about to be added to the mix
-
little has yet been written on the social, environmental and further economic
effects of what has been built, how much has been built and where it has been
built.
The holding of a seminar on the Gold Coast, ministerial statements in State
Parliament and the convening of the working party effectively constitute a recognition
by the State government that significant problems exist, creating an expectation of
action. Some banks, also facing criticism of their role in facilitating two tier
transactions, have issued public statements conceding some problems and some have
announced changes to their operating procedures.
Although Queensland would appear to be the state where two tier marketing is most
prevalent, the practice is not unknown in other states and activity by marketers is
increasing in all active property markets. Moreover, a large proportion of the
marketing activity for Queensland property takes place interstate and many of the
self-proclaimed victims are located interstate. It is significant that it has been the
national rather than the local media which has taken the lead in detailing property
market abuses in Queensland.
Purchaser locations – third tier study
Gold Coast
4
Other SE Qld
Regional Qld
Sydney
NSW regional
Melbourne
Vic regional
ACT/NT
SA/WA/TAS
New Zealand
Asia
6
4
24
25
11
15
3
12
7
8
Not yet addressed in any forum in any significant way are the wider economic and
social implications of property markets with a high proportion of two tier sales.
Two tier report 5/13/2017 Page 17
Working Party consideration of two tier marketing problems
The Minister for Fair Trading, the Honorable Judy Spence MLA convened a forum on
property marketing issues on the Gold Coast in March 1999 as a result of considerable
levels of complaint from the real estate industry to her office.
Participants in this forum were invited to add their names to a list for further
consultation. This list and representatives invited from various stakeholder groups in
real estate, finance, development and property marketing formed the basis of a
reference group on the issue. In May 1999, a working party was formed from the
reference group to consider consumer concerns arising from property marketing
practices and suggest possible remedies.
The working party was specifically asked to:
Identify the issues of concern to consumers who have purchased
properties sold through marketers.
Identify the conduct, behaviour, business practices or other aspects of
the role of the marketer which is of concern to consumers.
Some or all of the members of the working party identified the following major
concerns with property marketing practices:
Property being sold at well above its market value
The means by which potential purchasers were captured, in particular
the use of “investment seminars” as a means of selling property.
Excessive commissions being charged.
Excessive charging and a lack of disclosure on contracts with third
parties to, for instance, supply furniture and manage properties as well
as with body corporate arrangements on properties.
Non-disclosure of associations property marketers have with
developers, valuers, solicitors and lenders and of payments made by
marketers to others.
The limited opportunities given to purchasers to seek independent
legal, property or investment advice.
Conflicts of interest, including the giving of investment and property
advice by the same entity.
The provision of rental guarantees.
Two tier report 5/13/2017 Page 18
Misrepresentations of market value, rental returns, historical and
prospective capital growth and of the degree of independence of
valuations and legal advice.
The giving of investment advice by unqualified persons.
Information not being provided in writing.
Other issues identified related to other professions and institutions other than property
marketing organisations. These included:
The quality and independence of legal advice given to prospective purchasers.
Purchasers not having access to independent valuations or valuations carried
out for finance providers.
Purchasers not obtaining independent valuations despite their ability to do so.
Lenders not carrying out valuations, not taking heed of valuations, and not
divulging valuations to clients.
Valuers, solicitors and lenders being caught in conflicts of interest.
Real estate sales being made by unlicenced persons.
Real estate sales staff not abiding by their code of conduct.
Current law governing real estate sales not being adequately enforced.
Developers being held to account for the misrepresentations of sales staff.
Marketing groups not contributing to the Auctioneers and Agents Fidelity
Guarantee Fund.
Legislation governing investment advice and property sales is complex and
spread over both Federal and State jurisdictions.
Misrepresentations
The Office of Fair Trading holds a large number of allegations of more or less
specific misrepresentations by property marketers and professionals involved in real
estate marketing. Misrepresentations have been alleged in relation to market value,
rental returns, historical and prospective capital growth and of the degree of
independence of property, financial and legal advice.
The question to be considered in this report is whether misrepresentation occurs
because of the opportunism or over-enthusiasm of individuals or organisations – the
Two tier report 5/13/2017 Page 19
few rotten apples theory - or whether misrepresentation is endemic or even intrinsic to
investment property marketing.
“They said that property on the Gold Coast appreciated at 14
percent a year . . . I couldn’t come at that, didn’t believe that at
all.”
“But you still bought that unit.”
“Well, the way they explained it, it still looked really good . . . “
.
Those most critical of investment property marketing characterise it as a deliberate
effort to recruit and then fleece naïve purchasers. Such an enterprise, it is argued, can
only be based upon deliberate and premeditated misrepresentation of values,
prospects and the real relationships of various parties to the transaction.
The investment property marketing industry has not, to date, convincingly refuted
such a description.
In every case reviewed during this investigation, calculations of capital appreciation
shown to potential purchasers proceeded on the basis of the purchase price (or upper
tier of pricing). However, capital appreciation, if any, accrues only on the market
value (or lower price tier). When the difference between the two price tiers is at all
significant, it can take many years of high – and often improbable - capital growth just
to bring resale values up to the level of the purchase price.
For instance, for a property worth $100,000 which is sold at $150,000 – a reasonably
typical scenario – the investor would need to enjoy a constant capital appreciation rate
of more than four percent just to reach parity with the purchase price over a 10 year
period. The following table compares the capital appreciation projections shown to
purchasers with the same assumptions applied to the market price, and also with a
projection based on the actual movements of average unit prices on the Gold Coast
over the past decade.
(It should be noted that the four percent assumption is very conservative in relation to
the multipliers used in worksheets shown to potential purchasers – in these, the lowest
figure known to have been used is 7.5 percent and the highest 14 percent, with the
most popular range being 8-11 percent)
Two tier report 5/13/2017 Page 20
Capital growth on hypothetical unit
($100,000 fair market value) marketed at $150,000
End of
Year
4% growth
scenario shown
to buyer
4 % assumption
worked on unit
value.
0
1
2
3
4
5
6
7
8
9
10
$150,000
$156,000
$162,240
$168,730
$175,479
$182,498
$189,798
$197,390
$205,285
$213,496
$222,036
$100,000
$104,000
$108,160
$112,486
$116,986
$121,665
$126,532
$131,593
$136,857
$142,331
$148,024
Actual scenario
(using av unit
prices 1988-98)
$100,000
$104,700
$93,183
$93,742
$90,929
$94,385
$103,823
$106,107
$106,107
$110,776
$105,016
Due to the relatively recent development of the marketing industry only a small
amount of property has come back on to the market. This study identified 47
marketed properties which had been resold after being held by the original investors
for periods greater than four years. Of these properties, seven only had shown some
capital appreciation, averaging $6,100 or an average 4.9 percent return on investment
over a 5.5 year period in gross terms (in net terms, this gain would be negligible due
to selling costs and agents commission). In general however, the evidence from
resales data supports the hypothesis that negatively geared property marketed in this
manner is fundamentally flawed as an investment.
Profit/Loss on resale of marketed units
Years
held
10
7-9
6
5
4
Average
Profit/loss
-$28,640
-$17,470
-$18,420
-$35,520
-$29,150
% capital
appreciation
-22.6%
-15.2%
-16.1%
-28.4%
-22.1%
Valuations
The role of valuations and valuers in two tier marketing was highly controversial in
meetings of the working group, arousing controversy from both marketers and
consumer representatives. Concerns raised included:
Two tier report 5/13/2017 Page 21
Some victims maintain that marketers showed them, or produced on request,
valuations which supported over-inflated purchase prices.
Some valuers were criticised for engaging in unethical practices or lending
support to unethical practices on behalf of the property marketing industry.
Marketing institutions and developers were critical of some valuers for
allegedly marking down the valuations of properties solely on the basis that
they were to be marketed.
Marketing institutions and developers were critical of valuers for the
unacceptable range of valuations produced for a single property.
Developers were concerned that valuations not be enshrined to the extent that
the market followed valuations.
Purchasers were criticised for not obtaining independent valuations.
Valuers were accused of professional negligence or worse for valuing
developments solely on the basis of initial sales in the development, with such
sales often being price setting sales to subsiduaries or other entities related to
the development company.
These issues were taken up with the Australian Property Institute, which as the
professional association of valuers issues the codes of ethics and conduct to which
valuers should adhere as well as providing detailed practice instructions.
The API stated it had received no official complaints and had not instituted
disciplinary action against any members in connection with two tier marketing
practices. The institute, and some of its members, also emphasised the pivotal role of
the profession in bringing some two tier marketing practices to public and official
notice.
“… what we find most objectionable is the practice by a limited
number of valuation firms who will assess a certain value on a
property, but when advised that the property is anticipated to be
marketed by our group, discount their original valuation by between
$20,000 and $30,000.”
Mr Chris Bilborough, Director, The Epic Group
July 1999
Two tier report 5/13/2017 Page 22
Current worksheets issued by the API do allow for valuers to note whether a property
is subject to a “Two or multi-tier market”, but there are as yet, no guidelines on the
use of any such notation.
Valuers also refute a common contention, raised by developers and marketers in
particular, that a single property can be subject to wildly varying valuations, in
conditions where all the valuations were carried out for similar purposes at a similar
time. The yardstick for valuations is “fair market value”, defined as:
“The estimated amount for which an asset should exchange on the date of
valuation between a willing buyer and a willing seller in an arms length
transaction, after proper marketing wherein the parties had each acted
knowledgeably, prudently and without compulsion”.
The point was also made that the contract price in a real estate transaction may
include elements that were not properly part of the price of the real estate, including:
Rental guarantees which may not reflect real market rentals
Furniture packages
Cash rebates and other inducements
Variations arising from vendor finance packages
Vendor purchaser relationships that were not “arm’s length”
Non-cash considerations such as swap deal, trade or barter dollars.
The institute argues that such factors, and sometimes the inflation in contract price
which is attributable solely to extravagant marketing outlays, can legitimately be
taken into account in assessing a fair market value. It is also worth noting that some
financial institutions require their panel valuers to appropriately discount valuations to
take such factors into account.
“We also instruct our valuers not to make any allowance in
their valuations for rental guarantees, furniture packages
etc. In other words, the estimated value of these “special
incentives” are netted out of the sale price for valuation
purposes”
Suncorp –Metway Ltd
March 1999
The position of the API is that valuations are the property of the person or entity
which commissions them and it is a matter for the valuation owner whether the
valuation is made known to any third party. For lending institutions, the API
advocates that the financial institution provide clients with a “market assessment”
noting the valuation amount and date.
Two tier report 5/13/2017 Page 23
For alleged abuses such as valuations being manipulated by developers engaging in
price setting with the first units to come to market being transferred between related
entities at inflated prices, the API maintains this could not occur where valuers were
working to professional practice guidelines which require consideration of outside
sales evidence.
Guidance Note 12: 5.2.2
Where the property to be valued is within a new subdivision or
development and is being purchased from the developer, re-sales or
sales from other comparable developments should also be provided
and considered.
Professional Practice 1999, Australian Property Institute
This investigation did see considerable evidence of transactions between development
companies and related entities. However it was not possible to say that the purpose of
such transactions was to set a price or that valuers were relying on such transactions
in performing valuations.
“We require our panel of external valuers to appraise values on
local conditions by comparing sales of similar quality properties
in the area, which are not subject to special marketing campaigns.
This means, for example, that valuers will not value a unit sold in
a “hot box marketed” development based on other sales in that
development”
Suncorp-Metway Ltd
March 1999
The difficulty faced by marketers who see valuers as the cause of many of their
difficulties is that the resales evidence overwhelmingly backs up the contention that
the contract price of much marketed property is well above any measure of market
value. Indeed, the differentials claimed by the valuation firm Herriots - $40,000 - are
less than those found in the study of so-called third tier sales - $54,000.
Two tier report 5/13/2017 Page 24
The role of financial institutions
As with valuations, the role of financial institutions in the two tier marketing system
was controversial. The principal criticisms are set out below:
Financial institutions were involved in lucrative kickbacks to marketing
groups and associated finance brokers.
Financial institutions were not alerting purchasers to valuations that showed
that property values were considerably less than sale prices.
Financial institutions were taking mortgages over the principal place of
residence of investors without explaining the full circumstances and inherent
risks involved.
Financial institutions were lending recklessly on real estate they knew was
over-valued.
Financial institutions were compromised through simultaneous involvement in
project finance and purchase finance.
Financial institutions were forcing developers to use marketers through
unreasonable presales requirements on project finance.
It should, at the outset, be noted that some financial institutions have little or no
exposure to the negative gearing investment market. For instance, of the four major
banks only one, both on its own account and through a subsiduary, accounts for the
majority of the major bank share of lending on this market in the Gold Coast study
area. Also, only a minority of the minor/regional banks are involved at any one time,
although there does appear to be a pattern of minor institutions being involved in the
market for a period and then retreating from it.
Of the non-bank lending institutions, credit unions and building societies are not
much involved and some face regulatory restrictions on lending to very high
proportions of property value preferred by some marketing organisations. Some
fringe financial institutions are involved but, apart from a degree of vendor or
developer finance, only at an extremely low level.
Some banks also decline to pay trailers and commissions on loans, which may have
the effect that finance brokerages within or associated with marketing groups and
developers do not refer loans to those institutions.
Negative publicity on two tier markets has led some financial institutions to reassess
their exposure to the market and, in some cases, to modify their lending practices. If
this trend continues, bank lending is likely to decrease and lending by fringe financial
institutions to increase. This may mean an overall reduction in the pool of finance
available for transactions in this market.
Two tier report 5/13/2017 Page 25
The Australian Bankers Association initially declined an invitation to nominate a
representative to the Property Marketing Working Party. At a late stage in the
proceedings, representatives of the National Australia Bank attended the meetings.
The National Australia Bank is not known to be heavily involved in the negative
gearing seminar investment market and its representatives stated that bank policy was
not to pay commissions and trailers on loans.
From a consumer viewpoint, there is an expressed concern that banks possess
information that these are imprudent investments and are not making this information
available to consumers or enabling them to get out of onerous contracts. The banks
reply, with some justification, that their involvement in the transaction is as a lender,
not as a financial advisor and they would be at some legal risk in assuming such a
role.
In any case, many reputable investment advisors recommend to their clients that they
invest in negatively geared investment property, sometimes taking out a second
mortgage on their principal place of residence to do so. Separating the soundly based
from the imprudent financial applications would present some practical difficulties
and may expose banks to liability from a number of directions. It is therefore
probably unreasonable of consumers to expect banks to undertake this task.
Bank statements on disclosure of valuations
National
Australia
Bank
Our internal estimates of value are carried out for security purposes, that is, on the
basis that properties would need to be sold quickly under any market conditions
prevailing at the time and that there are willing sellers and buyers. These
parameters can result in different views of properties’ worth (generally lower)
compared to the current market value . . . The National’s officers do not claim to
be qualified valuers and because the estimates carried out by our officers are for
the National’s own internal purposes, it is preferred that the valuations are not
openly disclosed as this can lead to confusion and misunderstandings. . . . Where a
qualified valuer undertakes a sworn valuation there is no reason why that
valuation cannot be communicated to customers.
Citibank
Where a valuation is greater than 10 % (the real estate industry norm) below the
purchase price we advise our customers accordingly regardless of property
locations. . . . we propose to go one step further, as we go forward, and today have
introduced a policy where these types of valuation anomalies are specifically
highlighted in the letter of mortgage offer to the customer.
Westpac
. . . we have served notice to several organisations that, in accordance with our
contractural arrangements, we will cease to accept finance requests following the
expiry of the notice period. In addition, we are working on how we may be able to
help investors make considered and informed investment decisions through
disclosing valuations obtained for mortgage security purposes.
Suncorp
Metway
If the valuation is 5% to 10% below the sale price, the policy is to advise the
borrower of the discrepancy and to ascertain if the loan is to proceed. If the
variation is greater than 10 %, we take the additional step of recommending to the
borrower that they obtain their own independent valuation of the property.
Two tier report 5/13/2017 Page 26
The main information possessed by banks, which some purchasers would like to
accesss, is of course the valuations performed for mortgage security purposes. Bank
policy on disclosure of valuations varies widely, as the following table shows.
Economic implications
In general terms, prices are held to be determined by the forces of supply and demand.
Many real estate markets, however, behave more erratically than predicted,
particularly over shorter time periods. Two reasons for this are:
The prevalence in some markets of speculative activity which reflect beliefs
about demand or future price movements which may have only a tenuous
relationship with actual factors underlying demand.
The considerable time lags involved in builders and developers bringing new
stock to market in response to market signals.
Consequently, many real estate markets have a boom-bust pattern of activity. The
Gold Coast, the area most focussed on in this study, has a long history of a boom-bust
real estate cycles.
The activities of two tier marketers may have the effect of further isolating the market
from normal forces of supply and demand. In economic terms, the price of a
significant amount of property in certain markets is being determined by the
marketing method, and not by normal market forces. Property is being built to meet
the requirements of marketers rather than the requirements of the market.
Due to the large supply of units constructed on the Gold Coast
and sold to “out of town” investors in recent years, there is an
oversupply of units on the local Gold Coast market. This has
resulted in depressed values for most forms of units on the
Gold Coast.
Herron Todd White, valuers
What is required by marketers is what can be sold to investors who are very largely
remote from the local market. It is a possibility that far too much of the wrong sort of
property may be constructed in the wrong locations.
Marketers and some developers are also further insulating the market from the reality
of supply and demand forces through the provision of rental guarantees. There may
Two tier report 5/13/2017 Page 27
be at least a tendency for these to be set at levels which are above any achievable
market rentals. Properties subject to a rental guarantee may well be vacant for much
of the term of the guarantee, but are counted as occupied in many of the vacancy
statistics relied upon by market participants.
Further problems arise because much if not all marketed property is over-valued and often grossly over-valued - in relation to the market as a whole. This in time
creates a considerable overhang of properties that can only be disposed of at a
considerable loss in the open market.
It is likely that the above factors will exacerbate the boom-bust cycle and make
recovery periods much longer than they otherwise would be. This is likely to cause
economic injury to the region as a whole, causing suffering to many who have no
direct connection to the property marketing industry or even the property industry
generally.
Recovery periods would also be considerably lengthened if a market acquires a
reputation as a location for property scams or gross over-valuation. There are some
indications that this is occurring in relation to the Gold Coast, with negative media
commentary on the activity of property marketing groups causing contract
cancellations and depressed sales generally.
Property marketers have warned that any crackdown on their activities could have
major economic ramifications for the property development industry and the general
community. This may well be the case, but would need to be balanced against the
very probably much greater economic damage resulting from:
The development and real estate industries acquiring a poor reputation
generally in areas where property marketers are active.
Exacerbated boom-bust cycles and longer recovery periods due to property
oversupply and over-valuation as a result of the activities of property
marketers.
The social and economic costs of inappropriate or inappropriately located
development.
The consequences of the financial hardship caused to families wearing large
capital losses and/or discovering that outlays on investment properties are
much greater than they were led to believe. Where significant numbers of
buyers are recruited from small communities, some economic damage to those
communities is also a possible outcome.
“The group as a whole has proudly assisted more than 3000 individuals
in considerably minimising their tax, saving EPIC clients more than
$12,000,000 tax in the 1997/98 year alone.”
www.theepicgroup.com.au
July 1999.
Two tier report 5/13/2017 Page 28
The availability of tax savings through negative gearing has always been one of the
mainstays of the investment market in real estate, although in normal circumstances it
ranks as a lesser consideration than the need to acquire the right asset at the right
price.
Most marketers turn this investment equation on its head – their pitch extols the
benefits of negative gearing to the virtual exclusion of other elements of successful or
even just prudent investment. However, the intensity and superficial attractiveness of
the marketing does have results, one of which is that individuals who would not
otherwise invest in real estate and claim tax deductions do so.
Because most, if not all, of the property marketed on the basis of negative gearing
spiels is grossly overpriced, the purchasers are usually disadvantaged by their
purchase – the benefits of their tax reductions are outweighed by the capital losses
they have incurred in purchasing an over-priced asset.
One overall effect is a net transfer of funds from tax revenues to the pockets of
marketers and others involved in “the property development foodchain”. No doubt
there is some increase in tax revenues as a result of the increased incomes of those
involved in the foodchain, but it is highly likely that these would not offset the
revenue losses resulting from the deductions and the overpricing of assets. While it is
impossible to quantify these matters, one relevant considerations might be that those
receiving the additional income would have greater than average opportunities for tax
minimisation and greater than average access to tax minimisation advice and services.
One of the promises held out to prospective purchasers is that through property
investment they will be able to be self-supporting beyond their retirement. However,
the effect of the purchase of over-priced assets is that many people relatively close to
the end of their working lives are incurring large capital losses and assuming debts
that are putting their current and future financial security at risk. Such individuals are
likely to be rendered much less self-supporting in retirement, less likely to be paying
taxes and more likely to be receiving benefits at higher levels.
Perhaps the most drastic economic effect of the prevalence of property marketing
scams may be the damage it does to the reputation of the property and real estate
markets in the areas in which it is pervasive. There is no doubt that all developers and
all property marketers and all real estate agents risk being tarred with the brush of the
most irresponsible operators. Indeed, it is the legitimate industry that has been
making the most insistent calls on government for action, far more so than the
aggrieved consumers. On the Gold Coast, many would claim, much damage has
already been done to the reputation of the area generally with media headlines such as
“Scammers Paradise” being used on articles about property marketing and its victims.
Beyond the industry and the area, there is the potential for damage to the general
reputation of the State as a place to invest.
Economically, it is well accepted that a market which becomes characterised by
dishonesty will be a market that reduces in size.iii
Two tier report 5/13/2017 Page 29
Consider a market in which goods are sold honestly or dishonestly; quality
may be represented or it may be misrepresented. The purchaser’s problem,
of course, is to identify quality. The presence of people in the market who
are willing to offer inferior goods tends to drive the market out of existence
– for dishonest dealings tend to drive honest dealings out of the market.
There may be potential buyers of good quality products and there may be
potential sellers of such products in the appropriate price range: however,
the presence of people who wish to pawn bad wares as good wares tends to
drive out the legitimate business. The cost of dishonesty, therefore, lies not
only in the amount by which the purchaser is cheated; the cost also must
include the loss incurred from driving legitimate businesses out of existence.
George Akerlof The market for lemons:
Quality uncertainty and the market mechanism
Social implications
If one result of the success of property marketing industry is that too much of the
wrong sort of property is built in the wrong place, this may well have social impacts
and implications for government at all levels.
Some of the marketer driven development on the Gold Coast is locally described as
“one bedroom dogboxes”. While this is a perjorative term, it did seem that the rental
demand for much such property was limited, while construction continued on the
basis that such units could be sold to out-of-town investors regardless of any lack of a
need for them.
Additionally, in outer areas of the Gold Coast, it would seem that an oversupply of
townhouses has already been built or is being constructed in areas that were not
intended for large scale development for many years and for which there will be
considerable delays in the provision of many services.
Although vacancy statistics on the Gold Coast are fairly healthy, much of this
property, particularly that in fringe areas, appears to be unoccupied to a visual
inspection. Some observers fear that some such areas could become welfare ghettoes,
on the basis that:
Rents fall to very low levels in the effort to obtain tenants
Low rent, low amenity developments mainly attract low income, welfare
dependent or highly transient tenants
The predominance of such tenants further dissuades longer term financially
secure tenants to the development or area.
Elements of this dynamic can certainly be observed in some Gold Coast fringe area
developments where there has been some level of marketing to out of town investors.
Two tier report 5/13/2017 Page 30
However, it is probably more correct to say that property marketing is more a
contributing factor than a cause in such trends.
There is, in this area, a dearth of research. Much of the research also deals with
exurban communities where the majority of residential units are built for owner
buyers rather than with the specific purpose of producing tax advantages for distant
owners by being tenanted. Sociologists and planners looking at exurban developments
traditionally give little consideration to the workings of real estate markets and market
analysts are usually not concerned with the social and economic end results. The need
for research that links markets and development consequences has been referred to the
Australian Housing and Urban Research Institute for further consideration.
There is also a clear case for local authorities and State planning authorities to
develop machinery which can give timely consideration to the possible economic and
social legacies of trends in property markets.
Is it legal?
To a large extent, marketers appear to be acting in the crevices between a number of
State and Commonwealth Acts.
Superficially, it would appear that:
A person or entity selling real estate in Queensland should be licenced and be
subject to the limitations and obligations attached to such licences.
A person or entity giving investment advice should also be licensed and be
subject to certain statutory limitations and obligations.
That legal remedies would exist in relation to outrageous misrepresentations
on property value, property income or taxation benefits.
For residential real estate in Queensland, licensing implies certain disclosures,
prohibits false or misleading representations, sets out terms for any offers of finance
and sets out statutory rates of commission. It also details procedures for the holding
of funds and the making of contributions to a fidelity fund.
However, the requirements to be licensed to deal in real estate are less clear if
property is new to the market and if vendor and agent are. - or can be made to appear one and the same.
A number of gambits appear to be employed to insulate marketers from the
requirements of the Auctioneers and Agents Act:
Marketing groups are licensed or employ licensed real estate agents.
Mainly new property is sold.
Two tier report 5/13/2017 Page 31
Marketers enter joint venture agreements with developers.
Marketers maintain they are really in the business of selling an investment
product which just happens to be property.
Whether these gambits would be proof against any determined regulatory push
remains to be seen.
With the remarketing of second hand property, however, these flimsy devices would
offer little protection and marketing groups would seem to be in grave risk of being
found to have been acting illegally. Cases which came to the notice of this
investigation included:
An Epic Group associate or predecessor company entering into phony “joint
venture with developer” agreements to remarket properties for distressed
purchasers
The extensive “churning” or remarketing activities of the company Applied
Investment Reseach (Australia), with added misrepresentations that
secondhand properties were represented to purchasers as “new” or “builders’
stock”. The principal of Applied Investment Research (Australia) is not
recorded as a licensed real estate agent.
“If the present policy of licensing real estate agents and
auctioneers of land continues, generally in its present form, it is
difficult to argue why persons engaged in the attraction of
purchasers, negotiation of sale, preparation and execution of the
land contract should not be similarly licensed to carry out those
functions. It is hardly compelling for those unlicensed persons
currently undertaking these tasks to claim that the sale of land is
ancillary to the overall investment package that they offer. In
fact, as the law presently stands, the principals of the marketing
companies should be licensed (as working directors) and the
salespersons should be similarly registered.”
Professor Bill Duncan
“Marketeering:Regulatory Options
for Inclusion in Draft Legislation
July 1999
The argument that marketers should not be regulated as real estate agents on the
grounds that they are mainly in the business of investment advice can be, and has
been, turned on its head. Marketers have said that they should not be subject to the
regulations governing investment advisers because they are engaged only in selling
property.
Two tier report 5/13/2017 Page 32
Property investment advice is not covered under Commonwealth law regarding
investment advisers unless it falls under the so far restricted provisions of the
Managed Investments Act which, in relation to property investments, currently
applies only to serviced units or serviced apartments. This may change – the further
application of the Act to investment property transactions is currently under
consideration.
Although property marketing groups and many real estate agents are in the business
of offering investment and negative gearing advice, it would appear that most are
unlicensed and as the law currently stands, they may not need to be. Some may
employ or have arrangements with licensed investment advisers, but it is not certain
that the licensed individuals are responsible for all or even much of the investment
advice proffered over the telephone, in seminars in country towns, in the living rooms
of potential purchasers, or in the limousines touring the area of the prospective
properties.
Some provision against misrepresentation exists in a number of State and Federal
Acts with potential to regulate negative gearing investment transactions. However,
the provisions set out in the most directly applicable legislation, the Auctioneers and
Agents Act, are by far the weakest. The applicability of the Federal Trade Practices
Act, with perhaps the strongest provisions against misrepresentation, is currently
being considered in a number of court cases.
In summary, marketers generally operate in a legal grey area; however, a determined
regulatory push may well have found many of their activities to be illegal or, at the
very least, legally questionable
Why hasn’t something been done before now?
Queensland has, over many years, acquired something of a reputation for
questionable real estate dealings, many of which involved extensive marketing
interstate and overseas. In this light, the excesses of marketers promoting
negative gearing property investments continues a tradition that includes land
sales on Russell Island, the sale of unserviced bush blocks in relatively remote
rural areas and the timeshare industry.
It would also appear to be a reasonable observation that the regulatory
machinery designed to protect consumers from this sort of exploitation has
clearly been inadequate to either prevent or deal with such activities. In the
present case, many of the marketers activities would seem to be of, at
least,questionable legality.
One case involving a property marketer is before an appeal court after an
initially favorable decision was overturned. The Office of Fair Trading has
also negotiated a number of relatively favorable outcomes in negotiations with
marketers on behalf of individual property buyers seeking assistance to get out
Two tier report 5/13/2017 Page 33
of dubious contracts. Some consideration is also being given to whether
victims of marketeering have any recourse to claims on the Auctioneers and
Agents Fidelity Guarantee Fund.
However, it would appear that in the case of marketers, as in past property
marketing abuses, the response of authorities has been neither timely nor
particularly effective. There is little indication that enforcement at the usual
level is any deterrent to those contemplating, designing or executing schemes
to entice buyers into dubious property investments.
To an outside observer it would appear that historically:
Laws contain ambiguities, loopholes and evidentiary obstacles which
make them difficult to enforce.
Inadequate resources have been committed to enforcement and
available investigative resources are committed to areas that are too
broad, resulting in inadequate responses in relation to any one act or
industry.
Penalties are not sufficient to make difficult prosecutions seem to be
worth undertaking.
The skills and internal procedures of investigative agencies are
insufficient to the task of prosecuting well organised property
marketing abuses.
For instance, many of the provisions of the Auctioneers and Agents Act were
not framed for easy enforcement. Under this Act, there is no power for
Inspectors to obtain a search warrant. In relation to misrepresentations by an
auctioneer or agent both the misrepresentation and the liability for the
misrepresentation are difficult to establish. More updated provisions would
most probably reverse the onus of proof on misrepresentations and provide for
more specific categories of misrepresentation relating to property values,
previous transactions, rental returns and taxation benefits, if any.
Such reforms, it is pleasing to note, are under consideration. Beyond the
legislative response however, it may be worthwhile to consider the
establishment of more pro-active investigative machinery, charged with the
detection of questionable schemes in their emerging phase.
Swift and strong enforcement action in this early stage has the potential to
prevent fraudulent schemes from becoming established and would do much to
preserve the reputation of the ethical property marketing industry and the areas
in which it operates.
Two tier report 5/13/2017 Page 34
APPENDIX ONE – Comparison of two price lists
TWO TIERS OF PRICING?
Comparison of two price lists for off the plan sales
Gold Coast high rise apartment block, 1998
Unit
number
1
Manager
3
4
5
6
8
9
10
12
13
14
17
21
33
39
42
43
48
50
51
53
56
57
58
59
61
64
65
66
71
Price List A
Price List B
$311,000
$2,300,000
$356,000
$317,000
$278,000
$341,000
$327,000
$283,000
$351,000
$336,000
$288,000
$356,000
$293,000
$298,000
$383,000
$393,000
$398,000
$421,000
$422,000
$401,000
$432,000
$405,000
$415,000
$446,000
$466,000
$424,000
$476,000
$481,000
$444,000
$476,000
$464,000
$285,000
$1,800,000
$335,000
$283,000
$237,000
$315,000
$286,000
$239,000
$318,000
$289,000
$242,000
$321,000
$245,000
$248,000
$355,000
$361,000
$364,000
$425,000
$370,000
SOLD
$373,000
$358,000
$361,000
$379,000
$447,000
$364,000
$452,000
$457,000
$370,000
$388,000
$376,000
Actual
sale price
$280,000
$280,000
$280,000
$239,000
$280,000
$285,000
$242,000
$320,000
$245,000
$240,000
$370,000
$400,000
$379,000
$415,000
$416,000
$356,000
$415,000
$398,000
$366,000
$410,000
$460,000
$405,000
$474,000
$470,000
$416,000
$405,000
Two tier report 5/13/2017 Page 35
APPENDIX TWO – Third tier marketing data
1998 “third tier” Gold Coast property sales by
Applied Investment Research (Aust) on behalf of
Electus Pty Ltd and Citra 2000 Pty Ltd
Original sale
(Year)
$126,750
(1994)
$100,000
(1990)
$122,000
(1988)
$124,900
(1993)
$103,900
(1992)
$117,900
(1993)
$200,000
(1995)
$150,000
(1989)
$112,000
(1989)
$190,000
(1995)
$155,900
(1994)
$141,000
(1994)
$140,500
(1992)
$119,750
(1994)
$117,000
(1992)
$121,000
(1988)
$137,000
(1988)
$111,900
(1994)
Electus/Citra Electus/Citra
acquisition
Sale price
price
$78,000
$137,500
Electus/Citra
Gross Profit
$59,500 over 7 days
$70,000
$129,000
$59,000 over 77
days
$66,000 over 15
days
$67,000 over 2 days
$100,000
$166,000
$72,500
$139,500
$65,000
$128,000
$80,000
$139,000
$138,000
$189,000
$117,000
$179,000
$75,000
$137,000
$138,000
$220,000
$99,000
$159,000
$140,000
$183,000
$63,000 over 60
days
$59,000 over 35
days
$51,000 over 66
days
$62,000 over 126
days
$62,000 over 65
days
$82,000 over 46
days
$60,000 over 55
days
$43,000 over 2 days
$127,000
$185,000
$58,000 over 8 days
$160,000
$219,000
$65,000
$112,000
$70,000
$115,000
$105,000
$152,750
$95,000
$139,000
$80,000
$115,000
$59,000 over 94
days
$47,000 over 182
days
$45,000 over 37
days
$47,750 over 59
days
$44,000 over 22
days
$35,000 over 45
days
Two tier report 5/13/2017 Page 36
$129,000
(1988)
$107,900
(1994)
$231,500
(1995)
$151,000
(1994)
$151,900
(1995)
$150,900
(1994)
$151,900
(1994)
$116,500
(1993)
$100,000
(1990)
$245,800
(1993)
$110,900
(1994)
$138,000
(1994)
$131,000
(1988)
$105,000
$164,000
$80,000
$115,000
$113,750
$149,000
$113,750
$160,000
$113,750
$135,000
$160,000
$207,000
$102,500
$152,000
$103,000
$153,000
$100,000
$152,000
$101,000
$152,000
$160,000
$217,000
$160,000
$217,000
$100,000
$139,000
$88,000
$135,000
$70,000
$129,000
$73,000
$135,000
$80,000
$110,000
$85,000
$157,500
$90,000
$159,500
$59,000 over 55
days
$35,000 over 46
days
$35,250 over 43
days
$46,250 over 17
days
$46,250 over 8 days
$72,000 over 24
days
$49,500 over 48
days
$$50,000 over 6
days
$52,000 over 48
days
$51,000 over 75
days
$57,000 over 111
days
$57,000 over 111
days
$39,000 over 2 days
$42,000 over 28
days
$59,000 over 77
days
$62,000 over 46
days
$30,000 over 30
days
$72,500 over 78
days
$69,000 over 33
days
Two tier report 5/13/2017 Page 37
References:
i
Gary MacDonald, Two tier markets in Australian Property Journal Vol 35 No6 pp 516-23
ii
Correspondence to Minister from Open Door Consulting
George A Akerlof The market for lemons: Quality uncertainty and the market mechanism in Levine
and Lippman eds The Economics of Information: Voume ll, Elgar Reference Collection, International
Library of Critical Writings in Economics
iii
Two tier report 5/13/2017 Page 38