It matters, it matters a lot, and over the years I have seen literally hundreds of investors who think they are being sold a strategy when they are being sold an overpriced property disguised as a strategy.
The saddest part of this is that often those trusted with giving the correct investment advice are getting kickbacks and advising on certain types of investment products.
This marketing process often creates what is known as a two-tier market. Generally, the way these systems work, is that investors are advised about how a newly constructed investment property of say $350,000 for example, will give them tax benefits to help offset their personal tax liabilities through negative gearing and depreciation allowances. To help the investor achieve these great tax benefits, they just happen to have a “suitable” development which may even come with a guaranteed rental for the first 12 months to 5 years, often in some distant new growth or untapped area (varies depending on the deal). The trusting investor takes the bait and goes ahead with the deal.
I have seen these schemes operate where buy-in values were over $1,000,000, and $150,000 over market. Usually the deal is brokered and valid excuses are given as to why the bank valuers don’t support the values on the new property such as “valuers are always conservative” or “the valuers haven’t used the correct comparable sales etc.” If the deal goes through and the market rises, the overpriced nature of the initial purchase may be covered up because the strategy is for long term hold. If circumstances change and the property has to be sold before the market has had a chance to hide the inflated price, then the investor quickly becomes aware, initially blames the valuers for being incompetent, until they then do their own research and realise they got ripped off.
I have seen very clever people that are making great incomes being sold into two-tier markets by “trusted” advisors.
Things to look out for to avoid the two-tier market schemes; are locals buying into the same development, same street or more importantly from the same builder? Who is guaranteeing the rent? And why are they guaranteeing the rent? Is the property worth what you are paying for it? If the bank valuations come in under the purchase price, get a copy of the valuation reports and read the comments. Ring local real estate agents not involved with the builder or development about their opinion of the sale prices and rental returns. With house and land packages, is the land value at market prices? Is the building contract competitive with local builders, what’s the quality of finishes like?
Not all new developments are sold on a two-tier marketing scheme and two-tier marketing schemes can sometimes involve second hand property.
Investment strategy is more important than an investment vehicle, keeping this in mind and the chances of purchasing the wrong property should be diminished.
Aspect Buyer's Agency | M: 0428 930 078 | www.aspectbuyers.com.au