Desperate developers dangle insane commissions

An interesting article out yesterday revealed the largesse local developers are now showering on brokers and real estate “advisers” to help move unsold stock from upcoming off the plan apartment developments:

Commission payments of up to15 per cent, free tickets to Adele concerts and luxury holidays to Greece are on offer to mortgage brokers and financial advisers to recommend, sell and advertise property or consider mortgage products.

That means up to $90,000 for selling a $600,000 apartment, can be pocketed by the adviser, rebated to the buyer, or split between the adviser and client.

Taylor Dow, director of Taylor Dow Property Group, which last year sold $2 billion of Australian property to buyers in seven countries, including China and the US, said commissions range from 5 per cent and 15 per cent.

15%! – when a commission number like that gets bandied around you know there is going to be trouble.

Armed with these new developments, I’ll draw attention to one of the favored tools used when closing the deal and scoring a big commission, the Limited Recourse Borrowing Arrangement within a Self Managed Super Fund.

Here’s a graph highlighting the increase in the use of borrowed funds from last year’s ATO SMSF report:

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Blind freddy can see a trend developing.

Thankfully there has been some changes in legislation that may have some impact on the ability for the less scrupulous to guide unsuspecting property punters into their own slice of sky – namely the recently repealed ‘accountants exemption’ to provide advice around setting up an SMSF.

Let’s be clear here, I’m not pointing the finger at accountants. More to the point, by forcing anyone who provides advice on the creation of an SMSF for a client to either be licensed to give that advice, or find someone that can, it is slowly removing avenues for property spruikers to access the super system in return for these exorbitant commissions.

I should point out here that LRBA’s can be an effective tool in SMSF’s, particularly in small business where the family shop / warehouse is brought into the fund and back rented to the company. For suitable situations, it’s a terrific strategy.

However, for everyone else, it’s obvious that the marked growth in LRBAs (particularly for the $200k – $500k segment) would be a concern to a regulator already concerned with the height of real property prices currently.

Once again, it’s easy to see that a 20% pullback in apartment prices (possible with 15% commissions built in? – you be the judge) in even a moderately geared investment would wipe out a couples collective retirement savings over 10 years or more.

I am sure I’m not the only one waiting to see whether the mid July report from the ATO yields a drop in LRBA’s, or you can be sure more regulation is on the way.

Tim Fuller is Head of Operations at the MB Fund launching in May 2017. Register your interest now (if you haven’t already):

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Tim Fuller

Head of Operations at Nucleus Wealth
Financial adviser seeking to make quality investment solutions more accessible to everyday Australians.
Tim Fuller

Comments

  1. That is insane. It is not like there will be stop in building either. In Victoria, there is 32,500 uncompleted high rise apartments to hit the market. So there will be a crash in the market whilst more supply is coming on. This will be uglier than most people think!

    • “So there will be a crash in the market whilst more supply is coming on.”
      lol, that ‘s what they said 3yrs ago.
      Then the Victorian population grew by 300,000 extra residents
      Melbourne has a VR of 2%
      The lowest Mel Jan VR in 5yrs
      Melbourne rents are at all time record highs
      Melbourne prices are at all time record highs
      Long live the population ponzi

      • Except the population growth was not only a result of new migrations. There were over 220,000 births in that time.
        Plus the net growth in dwellings in that time was around about 150,000.

      • nearly 13% depreciation in CNYAUD over 12 months. so in CNY terms Sydney property is up around 33%, +4% extra stamp duty. Melbourne units OTOH only up around 3%, probably still look like relative value cf Sydney, but the lack of any big gains suggests supply is at least matching demand.

      • Melbourne unit prices are up 6.6%yoy
        Melbourne SOM has fallen to its lowest level in 6yrs
        So much for the Melbourne glut

      • If that is the case then why are they getting all desperate with the incentives. These new micro dog boxes must be selling themselves given your comment.

    • I don’t know what to believe. MB says we’re adding an entire ‘Canberra’ every year to Australia’s population, and that isnt expected to stop happening for a long time yet. So plenty of potential renters out there.

  2. Wait a minute. That’s 15% over the true(?) price. I thought that ‘free’ markets were supposed to deliver the most efficient pricing? I guess they didn’t factor in bribery. Lol.

    • When you look at the land component, it isn’t free. It is highly regulated by insiders.

      It harks back to the pandering of business, particularly big business.

      We have created a “pro-business” environment, rather than a “pro-market”.

      A market considers both sides of the equation, i.e. include the consumer as the counter party of the provider.

      Dampen workers rights, suppress wages, adulate C-class people and enhance return to capital, or in other words, reward people who don’t work.

      The result, our business can’t compete because they don’t have to. They get their endeavour handed to them on a platter and then feel they must reward themselves accordingly.

      The land bubble is the ultimate expression of extraordinary gains for non-competitive, non-productive activity.

  3. The more marginal the development the more they have to offer large incentive.

    What I would like to know if how much of this stuff is related to off the plan purchases within SMSF. There are shops who exploit the hell out of ppl selling overpriced off the plan stuff… When the bank values come in there are huge gaps.

    The banks are very strict with LRBA so the chances are, that any loan approved and funded, is done on a conservative basis.

    Buying existing properties using LRBA is not a cause for alarm. The cause for alarm is paying a deposit from an SMSF for an overpriced off the plan property on the understanding (or hope) that a bank will fully fund the rest on completion.

    • Yes.

      I’ve had BBQ chats with people who lost big money on apartment investments through their super. It was only after they paid an inflated price, then realised a year later that the true value of the apartment was a lot lower, then went back and read the paperwork, and realised they had paid a massive commission to the advisor who brokered the deal with the property developer.

      • Exactly Gral. These shops have it locked down. They introduce the legal team, the broker, etc. The parties appear arms length but they’re not. I’ve heard some of these place actually work in a 15% cut to settlement valuation into their behind the scenes numbers so when the bank ultimately asks for more money at settlement there is a loose plan to be able to meet that.

    • What I also love (sarcasm) is how developers can just cancel off-the-plan contracts so easily. Typically they’ll write a clause into the contract that permits cancellation, but that can never be fulfilled, hence providing a guaranteed out should they decide to take it. For example, cancelling the entire project if they don’t sell X% of the apartments in the complex, then deliberately keeping 100 – X% off the market until a late stage. This process can take a long time, during which they have the buyers’ deposits locked up.

      Meanwhile, if a buyer is dumb enough to sign, don’t imagine for a second that they can wriggle out with anything remotely close to the ease with which the developer can. Some of the contracts I’ve read are so astoundingly one-sided that it’s hard to believe they’re even legal. It seems to me that buyers get the itch, get excited, feel the greed and simply don’t read what they’re signing into with a critical eye.

  4. “Let’s be clear here, I’m not pointing the finger at accountants.”
    I am pointing all of my fingers at accountants. Our firm has some ex-clients who were “advised” by their accountants to take out all of their super and pension to purchase properties. We warned them beforehand but apparently accountants are more trustworthy. You want to take a guess how those “investments” turned out? Hint: I live in WA.

    • If they’re taking money out of super, that advice has nothing to do with the accountants exemption though.

    • I love it when financial planners have a go at accountants….an industry “owned” and controlled by the banks is such a reputable industry?

      • Sure bank financial planners only push the banks’s own products, but unfortunately accounts as financial planners doesn’t even know about diversification, they just give advice copied from their day job – reduce taxes, which means most of their advise is negative gear into property.

      • Bank FP’s yes. They push product. Go to NAB, you will get an MLC super fund (pieces of sh*t btw), MLC Insurance (also inferior), and MLC investment funds. You should look for an adviser who works at a firm where they have their own license. This means they can put you into any product they want.

  5. I don’t suppose it is surprising seeing as those commissions are being offered from the same guy selling ‘weight loss’ tea a few years ago… Whatever it takes to make a sale, mug punters are just there to be relieved of their money.

    • They can’t drop prices without the entire ponzi crashing down around them. Banks would have to cut valuations and raise LVRs on other units, other unit owners might find themselves in negative equity etc. Developers might then have balance sheet problems of their own, be forced to dump stock on market further suppressing the price etc etc. Its coming anyway eventually but will do whatever they can to postpone it.

  6. I think the situation might be even worse than that plot makes out.

    The plot shows the % of each SMSF bracket in LRBA but this masks any change in the net assets in SMSFs over time. If the number of SMSFs in each bracket has been growing (ie, net AUM per bracket) AND the % has been growing then it’s even worse than it looks.

    It would be good to see a complementary plot showing net assets under management, per bracket over time, assigned to LRBA. Ie, show both relative and absolute numbers.

    • Mediocritas, I don’t believe that settled LRBAs (if financed through the banks) is a problem. They are restrictive in what they will approve, require a buffer in the SMSF and also have personal guarantees. It’s the yet to be funded stuff (off the plan and not yet completed) that raises problems. That said reductions in the amounts able to be contributed to super may complicate some peoples negatively geared properties if rates rise.

      • My understanding is that the rest of an SMSFs is shielded from claims following a default from within the LRBA component of the fund. SMSF trustees have a much easier course to just walk away than the typical borrower does. This should place a greater incentive on lenders to exercise more caution, agreed, but I simply don’t trust them! (Just my opinion).

        Here’s the ATO:

        Arrangements entered into on or after 24 September 2007 and before 7 July 2010

        any recourse the lender has under the arrangement against the SMSF trustee is limited to rights relating to the asset acquired (or, if applicable, the replacement asset). For example, the lender can have the right to recover outstanding amounts where there is a default on the borrowing by repossessing or disposing of the asset being acquired under the arrangement, but cannot have the right to recover such amounts through recourse to the fund’s other assets.
        Any investment returns earned from the asset go to the SMSF trustee.

        Arrangements entered into on or after 7 July 2010

        any recourse that the lender, or any other person, has under the arrangement against the SMSF trustee is limited to rights relating to the acquirable asset. This limitation applies to rights directly or indirectly relating to a default on the borrowing and related charges or directly or indirectly relating to the SMSF trustee’s rights in respect of the acquirable asset (for example, rights to income from the asset)

  7. If they really want to move stock, have they thought about maybe … I dunno … knocking 15% off the asking price?

    • Would effect the banks values and LVRs, and maybe debt facilities of the developer. Also piss off existing buyers

    • TailorTrashMEMBER

      You don’t understand …..prices of real estate in Straya don’t go down …..not by 15% .not by 10% ,not by anything ……ever !

      What we are dealing with here is a religion and there is only one true God and that is the lord god of real estate ………heretics are taken to the stake promptly ..
      …..young man / woman/non gender specific person please go back to your bible and read chapter 7 verse two of the book of Domain …………and surely Ye shall repent and cleanse thyself of those blasphemous thoughts .

  8. The ATO link shows the following LRBA percentages for each smsf group. How are the much higher figures in the chart above obtained?
    Limited recourse borrowing arrangements
    0.05%
    0.17%
    0.36%
    0.88%
    0.70%
    0.50%
    0.40%
    0.57%
    1.41%
    And, why borrow when your net assets exceed $1.6m?

  9. You’d think the lowest I.Q. pedestrian would question the long term value of an “investment” that is flogged on such exorbitant commissions and incentives. Then those spivvy bullshit merchants try to tell ya we have a “housing shortage”.
    But then, as Buffett once said; a market is a place where wealth is transferred from fools to the rich!

  10. The ATO link shows the following LRBA percentages for each smsf group.
    Limited recourse borrowing arrangements
    1-50k 50-100k 100-200k 200-500k 500k-1m 1-$2m $2-5m 5-10m >$10m Groups>$2m
    2012 0.05% 0.17% 0.36% 0.88% 0.70% 0.50% 0.40% 0.57% 1.41% 2.38%
    2013 0.11% 0.33% 0.68% 3.36% 2.81% 1.50% 1.14% 1.41% 3.11% 5.66%
    2014 0.34% 0.75% 1.20% 5.60% 4.74% 2.42% 1.68% 2.02% 4.24% 7.94%
    2015 0.24% 0.72% 1.39% 7.14% 6.01% 2.91% 1.90% 2.19% 4.19% 8.28%
    Why borrow when your net assets exceed $1.6m?

  11. Dale SmithMEMBER

    As someone that used to be in this game, and yes had to offer extra incentives to move houses when the market slowed up, if the size of these commissions is true, then the burning smell you Aussies can sell, ain’t bush fires, your property ponzi is now toast – badly burnt toast.

  12. Drop the price 40 percent, then I’m interested. Note to myself, ensure you find out exactly what commissions are being paid to whom. Run the other way if it is excessive.