S2E16 - The Dark Side Of Investing: How A One-Stop Property Shop Lost Our Client $350,000 Of Equity (Part 2)

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[00:00:00] Imti: Today's episode is part two of Julia's story. If you haven't listened to part one, we walk through Julia, who is one of Pete's clients, who has a really amazing story. She migrated from overseas, basically worked from the ground up to build a property portfolio, and has built up $350,000 worth of equity between two properties.

The other side of that story though, and why we wanted to share it with everyone, is that she's now ended up in a situation that may cost her everything that she's worked so hard to build. Today, we're slowing it right down. Part one, we gave you the story in the high level. Today, we're diving down into the actual red flags in the process, one by one, not just what they were, but why they can look completely reasonable in the moment, and what the real risks are, and how, if you're listening to this, you can spot them when you're looking at buying your first investment property.

Because this happened to someone who's been through the purchase journey twice, so it's something that can catch anyone out Most of these things didn't feel dangerous at the time. They felt helpful, they felt professional, and everything about the transaction felt good to Julia. Flagging one of these things potentially would've made her pull out of the whole deal.

There's 10 risks we wanna walk you through today. So let's start at the start.

[00:01:16] Referral fees and scaling commissions

[00:01:16] Imti: The first one we wanted to talk about is referral fees, and a second part of that being scaling commissions. Pete, can you explain what a referral fee is, how it fit into the picture, especially in regards to Julia's situation?

[00:01:30] Pete: So the accountant in this situation referred Julia to the developer. And Julia came on board as a client with the developer, and because of that relationship between the developer and the accountant, the accountant gets a referral fee. Now, the amount of money does depend, but in these situations they can be quite significant from the developer, but that's how that works.

And then in terms of the scaling, the way that one works is the more and more people that the accountant refers to the developer, the higher the referral fee gets over time.

[00:02:00] Imti: So if we were to put that into an example, what it would look like is the accountant refers one Julia to the developer, and the accountant might make $10,000.

But then if the accountant refers four Julias, for every person after that, they might make $40,000 per every referral, right? Yeah. Is that essentially how it works?

[00:02:20] Pete: Yeah. That's it. That's the scaling model, yeah.

[00:02:21] Imti: Mm-hmm. And Skye, is this something that you see regularly, paid referral fees and scaling commissions in the industry?

[00:02:29] Skye: To be honest, I've not heard of the scaling one until just now. Mm-hmm. So, no but the referral fees, yes and I've been approached by people offering me referral fees, to sell various house and land packages, which we've spoken about before. I've politely declined.

[00:02:43] Imti: Mm-hmm.

[00:02:45] Skye: It's not part of what we do in that sense, but it is definitely, it's definitely out there.

[00:02:47] Imti: Mm-hmm, and I think the thing that's really important to highlight there is that you're an industry vet, and scaling commissions is something that you haven't come across yet, which means for someone who's going to do their first property-

[00:03:00] Skye: Hmm, they wouldn't know ...

[00:03:02] Imti: they'd have zero expectation, right? In terms of it being a problem, I mean, very straightforward with this example that the problem is that the accountant is getting compensated for essentially selling the property, right?

Pre-selling the client on it being a good opportunity, and the accountant's in a position of trust. And as we touched on in part one, because the accountant was a referral from Julia's community, there was no reason for Julia to doubt this at all. In this situation, Pete, how would Julia have actually perceived the relationship between the accountant and the developer at the time?

[00:03:38] Pete: She would've thought it was normal. When she explained this to me, she didn't see an issue with it. And I think most people would be in the same boat.

[00:03:45] Imti: Yeah, because it's just a transference of trust, right?

[00:03:48] Pete: Yeah.

[00:03:48] Imti: It's someone that you trust, who is successful, has connected you with what you feel is a great opportunity in the moment.

[00:03:55] Pete: Yeah.

[00:03:55] Imti: And so it would've felt completely normal.

[00:03:57] Pete: Yep.

[00:03:57] Imti: With referral fees, now they're very common in our industry, right? Finance, property, sales, building, developing, the whole ecosystem, accounting, tax. It's all tied together. Is there a version of referral relationships, paid and unpaid, that can be okay, Pete?

[00:04:15] Pete: Best interest principle, I think. If you are referring to someone, and you think they're gonna operate in their best interest, then yeah. And at the end of the day, it is business too. So from our point of view, if you're referring to somebody to get a client, and this is business side of things now, you gotta pay marketing fees to get that client. That is an element there where people would, or business owners are happy to pay a referral fee, because they see it as a marketing expense, but the crux of it though is it needs to be in the best interest of the client.

That's when I think it's okay.

[00:04:45] Imti: Yep. Skye, what do you think?

[00:04:46] Skye: Yeah, I was just wondering that because we all individually refer to each other, and we don't pay referral fees because we're sending clients to each other because that person is the right fit for that client. But that said, I do pay referral fees to sales agents who introduce landlords to me, and happy to do so because it would be a marketing expense to gain that client otherwise. I would happily disclose that-

[00:05:08] Imti: Hmm ...

[00:05:09] Skye: to a client. I'm not hiding that fact.

[00:05:11] Imti: Yeah, that's the key thing that you've brought up, right? It's not hiding that fact. And to Pete's point around the marketing expense side of things, as business owners between the three of us, we do have marketing expenses, right? And so it's okay, do we pay Google for someone that we have no idea about, or do we reward someone-

[00:05:30] Skye: Hmm

[00:05:30] Imti: ... in our network who's supporting our business and might be introducing a better client and the client gets a better experience?

[00:05:36] Skye: Yeah. I just wanted to go back to that very quickly, though.

[00:05:38] Imti: Hmm.

[00:05:39] Skye: It's very standard in my space-

[00:05:42] Imti: Hmm ...

[00:05:42] Skye: that we would pay, say, a week's rent to a sales agent.

[00:05:46] Imti: Yeah.

[00:05:46] Skye: That's standard. If I was suddenly offering two weeks, well, then suddenly that's a lot more appealing for the sales agent, right? Yeah. But it's actually standard that they all offer the same.

[00:05:54] Imti: That's a great point into the next part of this, referral relationships when they're unpaid, they're easier to vet. Everyone in our industry has some level of disclosure that they need to have around referral agreements. For example, for me, I need to put it in black and white for clients that X, Y, Z businesses might get financially incentivised.

The part of it that is harder to vet is when there's paid referrals going between people, right? And Skye brought up a terrific point where- if it's disproportionate-

[00:06:22] Skye: Mm.

[00:06:23] Imti: That's probably one of the red flags-

[00:06:24] Skye: That's the flag

[00:06:25] Imti: ... to look out for, right?

[00:06:26] Skye: Yeah.

[00:06:26] Imti: What would you say to someone listening around vetting paid referrals?

How can they actually make sure that they avoid this situation?

[00:06:36] Skye: So asking, A, how much? And is that standard?

[00:06:40] Pete: Try to get an understanding what the industry standard is.

[00:06:42] Skye: Mm-hmm. What's normal.

[00:06:42] Pete: Yeah, yeah.

[00:06:43] Skye: Yeah.

[00:06:43] Pete: And comparing it back to that,

[00:06:44] Skye: Even what I do disclose to all of my landlords, we recommend landlords insurance, right?

[00:06:48] Imti: Mm.

[00:06:48] Skye: All three-

[00:06:49] Pete: Mm ...

[00:06:50] Skye: specialist insurers provide the same referral fee. So actually the one that I'm recommending, it's nothing to do with the referral fee.

[00:06:56] Imti: Yeah.

[00:06:56] Skye: That's- Irrelevant.

[00:06:57] Imti: Yeah. And if I was to put a number to it, I'll use mortgage brokers as a perfect example, right?

We have to disclose our commission that we get upfront from the lender and the trail commission for the loan component of the work. I would say that if the referral fee probably exceeds 30% of the income that the person's gonna make, it's potentially a red flag because they could potentially be invested in the other side of the transaction.

[00:07:20] Skye: Mm.

[00:07:20] Imti: The other red flag that I would encourage anyone to look into is if someone does have paid referral relationships, and, openly we all do. You know, it's not a secret and we're not trying to hide from that fact Them having multiple options for a client and telling a client that they're more than welcome to recruit their own help.

[00:07:39] Skye: Mm.

[00:07:39] Imti: For me, for example, I might have three to five buyer's agents that I work with on a regular basis, and I might have whatever I have organised with them. It might be nothing, it might be something, but it's all disclosed and it's all written down, and the client gets a copy. Same thing for property managers, same thing for accountants.

At the end of the day, my role is to connect my client with the right fit for them and to have multiple relationships around me. If the person who's referring you to someone else only says, " Use this one person", and doesn't give you the option or encourages you to pick your own option, that's probably the biggest red flag and that's where you would go, "Okay, I don't feel comfortable anymore."

[00:08:18] Skye: Mm.

[00:08:18] Imti: "Do I need to walk away?"

[00:08:19] Pete: I think locking the other service as well. Yeah. Mm.

[00:08:22] Skye: That's maybe the flag, yeah.

[00:08:22] Pete: Yeah, talk to a buyer's agent, and in order to get access to their broker, you have to pay the buyer's agent retainer.

[00:08:27] Imti: Mm.

[00:08:28] Pete: That would be a flag, yeah.

[00:08:29] Skye: Well, Is it even just offering only one choice? Yes. Yeah, yeah. Like, I'm a buyer's agent-

[00:08:33] Pete: That too, yes.

[00:08:34] Skye: Yeah ... and this is the only broker you can go to. Well, what if they don't like that broker?

[00:08:38] Pete: Correct, yeah.

[00:08:38] Skye: What if there's a personality clash?

[00:08:39] Imti: Too bad, you have to.

[00:08:41] Skye: Mm.

[00:08:41] Imti: That's the situation where you go, "Okay, this feels a bit fishy to me."

[00:08:43] Pete: Yeah.

[00:08:43] Skye: Yeah.

[00:08:43] Imti: "I'm gonna walk away."

[00:08:44] The seminar

[00:08:44] Imti: And we are gonna cover one-stop shops later, so I'll pause it there and move us into the second point, which is the education seminar or just education in general. And for a lot of people, they'll think why is education a red flag?

I don't wanna be dramatic, but there's education and now very common in our space, it's almost weaponised education that's designed to sell you things instead of teach you things That is what it's doing in practice in this situation, is that if the education's driving you towards making a sales decision in a very short period of time, it's probably not there to educate you, it's actually there to sell you.

And there's a whole bunch of complex neuroscience and behavioral psychology stuff baked in all of these things. These seminars aren't by luck. Julia went to a seminar, walked out of it feeling really, really confident, really educated, and made a purchasing decision.

[00:09:37] Pete: Two purchasing decisions.

[00:09:38] Imti: Yes. Two purchasing decisions, and that is all by design. But I wanna dive into that in a little bit more detail. Pete, when you were speaking to Julia about this, she felt really positive and probably even empowered about the whole educational journey though, right?

[00:09:54] Pete: Yeah, definitely. So when you go to these seminars, yeah, they sell the perceived outcome, right? The dream outcome of buying these properties which are low maintenance, brand new, depreciation, all the tax benefits, and that all property across Australia doubles in 7 to 10 years. So essentially she walked into that seminar, walked out and bought the two properties. Felt super empowered that she was taking control of her financial future. Even though she was in full control of her future, they made her feel like she wasn't, which she didn't really realise was happening at the time because she walked out of there feeling quite, just ready. Ready to go out and buy these properties and take control of her financial future, which essentially she already had that but didn't realise it.

[00:10:33] Skye: Do you think it was a level of FOMO though? That like- Yeah ... if you don't do this now-

[00:10:36] Pete: Yeah, yeah. Definitely, yep ...

[00:10:37] Skye: you're gonna miss your opportunity.

[00:10:39] Pete: Yep.

[00:10:39] Imti: It's high pressure.

[00:10:40] Pete: Yep.

[00:10:40] Imti: There's,

[00:10:41] Skye: Mm

[00:10:41] Imti: ... a magical window of time-

[00:10:42] Pete: Mm

[00:10:43] Imti: ... to take action.

[00:10:43] Skye: Yeah. And if you don't do now, it'll never come back.

[00:10:46] Imti: Mm.

[00:10:47] Pete: But they feel like they're making the decision on their own. Yeah.

[00:10:49] Skye: Mm.

[00:10:50] Imti: And I think some of the little micro red flags for people to look at when they're going through an educational seminar or a presentation or whatever it may be, is there's a lot of numbers and statistics thrown at you, and graphs and pretty visuals, and they're all there to tell a story But the data can get manipulated to make you believe in their story.

And what I mean by that-

[00:11:13] Pete: Yeah

[00:11:14] Imti: ... as an example is, Pete, you said property doubling every seven to 10 years, right? They would've pulled up a graph that actually showed housing prices over time, and that would've been the authority figure, and that graph would've been quoted from CoreLogic-

[00:11:29] Pete: Yeah

[00:11:29] Imti: ... or PropTrack, or someone in the industry with a lot of status. And the number's not wrong, but the number doesn't tell the story that sits beneath it, that 30% of this growth happened in this one pocket of Perth, and the other 70% of Perth stalled, went backwards, and didn't do anything.

[00:11:47] Pete: Yeah. Yep. Agree, and it's all at that high level as well. Like, on average, Australia has, yeah, doubled.

[00:11:52] Imti: Hmm.

[00:11:52] Pete: But in these new micro markets that they're creating with what I call-

[00:11:55] Skye: Development

[00:11:55] Pete: ... the dead zones or developments-

[00:11:57] Imti: Hmm

[00:11:57] Pete: ... they're not gonna do those kinds of numbers. But that's not the stuff that they're showing. So a good point to emphasise is I said via text actually on the Saturday morning, I said, "These are terrible." I didn't know that they'd signed the contracts. She asked me why, and I rolled off a few reasons. Like, vacancy rates are sitting at, like, 90%.

Property prices in these areas have actually gone backwards for the last three to five years. The supply coming in is absolutely ridiculous because I think the building approvals were sitting at over 100%.

And she goes, "Where are you getting all this information from?" So that's the stuff that's not actually provided. It's like what you said.

[00:12:26] Skye: Mm-hmm.

[00:12:26] Pete: It's all that high level stuff from authority figures, but it actually doesn't apply to the situation at all.

[00:12:32] Imti: Yeah. There's no conflicting data.

[00:12:34] Pete: No. None.

[00:12:34] Imti: It's just all graphs, statistics that drive one point of view, right?

[00:12:40] Pete: Yeah, which is probably price growth, cash flow, depreciation. I reckon they would be the three that would be presented in these types of seminars

[00:12:46] Imti: We're very pro-education though. We run a property education podcast.

[00:12:50] Skye: Yeah, we're not selling anything.

[00:12:51] Imti: On that point, when can education actually be useful and legitimate? When is it a good thing?

[00:12:58] Pete: When you can go out and act on it on your own. I think in these seminars they just present what it could be, not necessarily how to do it.

[00:13:04] Skye: Yeah, the seminars aren't teaching them how to do it themselves, it's just, " This is the only way you can do it, by buying our product."

[00:13:11] Pete: Yeah.

[00:13:11] Skye: And I don't know if you've heard the saying, but those who can't do, teach. So I've always been a little nervous about any of that, because if you made that much money out of property, why are you doing this?

[00:13:21] Imti: Yeah.

[00:13:21] Skye: Just do more property.

[00:13:22] Imti: Well, it's 'cause you can make more money selling property to more people-

[00:13:25] Skye: Selling a

[00:13:25] Imti: as opposed to building your own portfolio, right?

[00:13:28] Skye: Lie!

[00:13:28] Imti: Skye, you touched on time pressure before-

[00:13:31] Skye: Mm ...

[00:13:31] Imti: in regards to these seminars and making them feel like they're a can't miss opportunity.

[00:13:35] Skye: Mm.

[00:13:36] Imti: How can someone tell when they're being educated to, legitimately, or guided towards a sale? How do they identify that difference?

[00:13:45] Skye: I don't know if it's this basic, it's like what's in it for them? Why are they freely sharing this useful information? And someone could probably ask all of us that particular question with the podcast, but I've been to these seminars back when I started investing in property. You would've too?

[00:13:59] Pete: No. I stayed clear. But again, I-

[00:14:01] Skye: I didn't do anything.

[00:14:02] Pete: Yeah, yeah.

[00:14:02] Imti: Mm.

[00:14:02] Skye: But I went to them.

[00:14:03] Pete: Yep.

[00:14:04] Skye: And yeah, something wasn't quite sitting right. It's that well, if it was that easy, why isn't everyone doing this? Why have you got the secret that no one else has got?

[00:14:11] Imti: Well, it's not seminars now, it's webinars, right?

[00:14:14] Skye: Yeah.

[00:14:14] Imti: Yeah. It's pay down your home loan-

[00:14:16] Skye: It's a funnel

[00:14:17] Imti: in seven to 10 years with our secret methodology.

[00:14:19] Skye: Mm-hmm.

[00:14:20] Pete: 10-minute training.

[00:14:20] Imti: Right?

[00:14:21] Skye: Yeah. That leads you into the high-ticket item.

[00:14:23] Imti: Mm. And-

[00:14:24] Pete: Which

just-

[00:14:24] Skye: Which is a buying in a trust in an SMSF.

[00:14:28] Pete: Which I guess is part of what happens.

[00:14:30] Skye: Mm.

[00:14:30] Pete: But if it's in your best interest, it can work. It's just that's how people are operating businesses, right?

[00:14:35] Skye: Mm.

[00:14:35] Pete: But yeah, you just gotta be very careful.

[00:14:37] Imti: Yep.

[00:14:37] Pete: Yeah.

[00:14:38] Skye: And not make a decision in a week.

[00:14:39] Imti: Yes.

[00:14:39] Pete: Yeah, that's right. Sit on it.

[00:14:41] Imti: Yeah. Mm. Take your time. And if it's a can't-miss opportunity, it's can't miss for them.

[00:14:45] Skye: Then miss it.

[00:14:46] Imti: It's not can't miss for you.

[00:14:46] Skye: Yeah.

[00:14:47] Pete: Can I just add to that point too? When you jump on calls with these people they'll try and sell you on the call.

[00:14:52] Imti: Mm.

[00:14:52] Pete: That's a big flag. "Give us five grand by the end of the call"-

[00:14:55] Skye: Yep

[00:14:55] Pete: and we can get started.

[00:14:55] Skye: And that, that locks in your pricing- Yeah. ... or you get all these benefits for committing today.

[00:14:59] Imti: Mm-hmm.

[00:15:00] Skye: That's absolutely a flag.

[00:15:01] Pete: They throw in the lines like, "We only work with people who are making decisions quickly and whatnot." Yeah. "And if you don't sign up on this call, it's gonna cost you more after the call," so.

[00:15:09] Skye: 'Cause you would have these discovery calls, right? Not everyone's gonna sign up then and there.

[00:15:11] Pete: Yeah.

[00:15:12] Skye: So your follow-up process would be later on, right?

[00:15:15] Pete: Yeah, like over a week, yeah.

[00:15:16] Imti: Mm.

[00:15:16] Skye: Yeah.

[00:15:17] Pete: If that sometimes. I'm terrible, I gotta be honest.

[00:15:19] Skye: Depending on how busy you are. Yeah.

[00:15:20] Pete: There is no follow-up. But yeah, there's no time pressure though.

[00:15:22] Skye: Yeah.

[00:15:23] Pete: Yeah. I've had people come back to me a year later.

[00:15:24] Skye: Either they come with ...

[00:15:25] Pete: Yeah.

[00:15:25] Skye: Yeah. Either they come to work with you or they don't.

[00:15:26] Pete: Yep.

[00:15:26] Skye: And that's fine.

[00:15:27] Pete: Yeah.

[00:15:27] Imti: Mm. So to summarise, the time pressure piece and the sales pressure piece are two things to definitely look out for

[00:15:34] Skye: mm.

[00:15:35] Imti: The only other thing that I would probably add to that red flag you may wanna walk away situation is if they don't explain the other side of the equation, the risks, the consequences involved.

[00:15:50] Skye: Mm.

[00:15:50] Imti: Because if someone's actually educating you and they're running a business, they're trying to make money, everyone's allowed to build their lifestyle and follow their passions, and part of that is education because that builds trust. But when you're speaking to them, are they actually explaining what can go wrong and empowering you to make a balanced decision instead of just educating you on all the upside and none of the downside?

[00:16:13] Skye: Hmm. That for me would be the trigger for someone listening to be like, " Oh, I'm gonna walk away," ' cause this educational person that I listen to all the time only talks about the positives.

[00:16:24] Pete: Yeah, the good things.

[00:16:24] Imti: Yeah. And oh, by some miracle, they also sell the product.

[00:16:28] Skye: Yeah.

[00:16:28] Imti: But they never talk about the downside.

[00:16:30] Skye: Yeah. Let's just have it on record that we're actually explaining what can go wrong right now.

[00:16:35] Imti: Yes. very meta.

[00:16:37] A pre-selected team

[00:16:37] Imti: Number three Pre-selected broker slash pre-selected conveyancer. So this happened in Julia's situation where she had the contract put in front of her, and we'll get to the contract, and the broker had already been chosen and the conveyancer had already been chosen ' cause the agent just said, "This is the people who are gonna organise it.

Pete, why is that a risk in the sense that for a client, they might feel like it's terrific service, that this agent is just looking after me and making sure that my transaction is smooth as possible so I can buy the property that I wanna buy. Why is it actually a real risk having that team of professionals just given to you?

[00:17:16] Pete: Well, they haven't actually assessed your scenario.. Simple as that really. They're not gonna be operating in your best interest. So in this scenario here, contract's been signed Julia had never spoken to the mortgage broker, never spoke to the conveyancer.

Who knows if they can even afford these properties.

[00:17:30] Skye: Mm.

[00:17:30] Imti: Mm-hmm.

[00:17:30] Pete: Who knows if they can get finance for these properties. There's essentially none of that advice there at all. That's the real risk, and essentially when you sign these contracts, and we'll go through the unconditional contract side of things a bit later, you're putting yourself at massive risk. Risk to lose your deposit, risk to get sued as well by the vendor if the property doesn't sell for the contract price that you signed up for. You're just exposing yourself to life-changing risks really. I don't know how much more blunt I could put it.

[00:17:54] Imti: Shoe on the other foot, though.

[00:17:55] Pete: Yeah.

[00:17:56] Imti: Julia at the time, she would've felt like it was really helpful, right?

[00:17:59] Pete: Yeah, yeah. I mean, it's all there. "Hey, just sign this contract here. We've got the broker, we've got the conveyancer, and in six weeks' time you're gonna have two properties worth 1.2 million bucks." That's essentially how it was sold.

[00:18:08] Imti: And happy days, right?

[00:18:09] Pete: Yeah, exactly. Yep. So I could see from her point of view why that all sounded good.

[00:18:12] Skye: I've got a question, though.

[00:18:14] Pete: Mm.

[00:18:14] Skye: On that. So she would've used a broker or something for the first one or two purchases?

[00:18:19] Pete: Yeah, and a really good broker, too. Yep.

[00:18:21] Skye: Why didn't she think to go there?

[00:18:23] Pete: It's the perceived trust of it all.

It was just, "Hey" '

[00:18:26] Skye: Cause it's connected to the-

[00:18:27] Pete: Yep

[00:18:27] Skye: ... accountant who had-

the highest level of trust.

[00:18:30] Pete: Yeah, and she had no clue that essentially this particular broker is now going to have to take all of her lending.

[00:18:36] Skye: Yeah.

[00:18:36] Pete: Yeah.

[00:18:37] Imti: A lot of downstream risks and consequences.

[00:18:39] Pete: Mm.

[00:18:39] Imti: Pete, I'm gonna put you on the spot. Because as a buyer's agent, you do connect your clients with conveyancers, with property managers, with mortgage brokers. What's the difference between you in this scenario and what Julia experienced?

[00:18:52] Pete: We go through all the requirements up front. We don't normally start the process until the mortgage broker has essentially got the preapproval or has looked at the financial situation and given us the advice that we need as well that, what they can afford.

[00:19:04] Skye: And the PM's only introduced after the sale's gone through, right? So that still leaves your client options to explore elsewhere. They're not locked into who you recommend.

[00:19:14] Pete: Yeah, exactly right. Yeah. They can go to anyone they want. Then from the conveyancer point of view, we don't sign no contracts until the conveyancer has reviewed it. And whether that takes a day or two, I mean, whatever it takes, they will review the contract-

[00:19:27] Skye: Mm

[00:19:27] Pete: ... and the disclosure documents-

[00:19:28] Imti: Mm

[00:19:29] Pete: ... before anything's signed. But we'll also make sure you got the basic clauses in there that you need, too.

[00:19:33] Skye: Mm.

[00:19:33] Imti: But here's the thing, right? Surely you would've heard that exact same response from the agent who was helping her through the process and the person doing the educational seminar, right?

[00:19:41] Pete: Yeah, yeah.

[00:19:41] Imti: 'Cause they wouldn't have-

[00:19:42] Pete: Yeah ...

[00:19:42] Imti: they wouldn't have put themself in the position to go, "Oh, we're not gonna help you."

[00:19:45] Pete: Mm.

[00:19:45] Imti: They're gonna go-

[00:19:46] Pete: We'll make it work ...

[00:19:46] Imti: we'll go, we'll make it work, yeah. We'll connect you with all these people. We make sure that it gets done all in the right order. And the reason why I'm asking that is not to make you seem like you're horrible, but for the listener to understand that you can hear all the right things from someone who is leading you in the wrong direction.

And for me, the biggest standout in this situation and how to avoid it with a preselected team is who's preselecting the team for you and how are they getting paid?

[00:20:13] Pete: Hmm.

[00:20:13] Imti: Right?

[00:20:14] Skye: Mm.

[00:20:14] Imti: Pete,- you get paid by the client, and so you're financially incentivised to make sure the client gets the best result. You aren't connected to what property they pick, where they buy, any of those sorts of things. You're incentivised to get the best possible result for the client. In this situation, the real estate agent, who are they paid by?

[00:20:31] Pete: Hmm. Vendor

[00:20:32] Imti: The vendor, right?

[00:20:33] Skye: Mm.

[00:20:34] Imti: So whose interests are they representing?

[00:20:35] Skye: It's incentivised to get a good result for them.

[00:20:38] Imti: And Skye, you being in that world, that's what you're paid to do, right?

[00:20:41] Skye: Yeah, but I like to sleep at night, so this would not be me, but yeah.

[00:20:45] Imti: 100%

[00:20:45] Skye: Yeah, at the end of the day when people are like, "Oh, real estate agents are the worst, they're just screwing people", yeah, a lot of them are, but ultimately if you were the vendor in that situation, you would want maximum price.

[00:20:56] Imti: 100%, but you wouldn't put someone who's giving you an offer in a position to go, " Hey, use all of these people," and, "Hey, sign this dotted line-

[00:21:05] Skye: No

[00:21:05] Imti: ... and don't have any options in anything that you do."

[00:21:07] Skye: No, and that's why I got really mad before that they, took away their conditions knowing that that's not a good scenario for anyone. But even if I do make recommendations, there's usually multiple, so they always say like, "Who am I using for building and pest?" "Well, here's three."

[00:21:20] Imti: Mm-hmm.

[00:21:21] Skye: I'm not guiding that 'cause that exposes me to risk. But I did make a note on that, that the fact that they didn't have building and pest included in their little one-stop shop was essentially their undoing, right?

[00:21:32] Pete: Well-

[00:21:32] Skye: Cause that's what it's flagged to you.

[00:21:33] Imti: Mm-hmm.

[00:21:34] Pete: Now that you say that, we did find out that...

[00:21:36] Imti: Hmm.

[00:21:37] Pete: What did you tell me before?

[00:21:38] Imti: That the broker who is involved in the whole operation said that he would get his pest and building person to look into it, and if there was any issues, he would advocate with the vendor to try terminate the contract.

[00:21:51] Pete: Even though I provided a reputable building and pest inspector that I use in Melbourne-

[00:21:57] Skye: Yeah ...

[00:21:57] Pete: who I trust fully, they've gone down that direction because they're so locked in now though. I feel sorry for 'em. They can't get out.

[00:22:03] Skye: Mm.

[00:22:04] Pete: There is no way they can get out, and they said it to me the other day, they're pretty much just gonna go along with it because they still wanna get a good outcome out of this and essen-

[00:22:11] Skye: So they're still believe in a good outcome?

[00:22:13] Pete: Well, you know, you hold a property for 10, 15 years, the outcome's there

[00:22:16] Imti: The graph says that it'll be okay. And that's the thing, right? In this situation, even if they want a way out, the broker who's in the transaction, he appears as the person who can actually unravel it,

[00:22:28] Pete: but he won't.

[00:22:29] Imti: He won't. We know that. But putting yourself in the client's shoes, if they're looking at it and going, "Oh, how do I figure out a way out? Oh, this person has said that they can try and help me get a way out," and they're connected to the transaction You're gonna put a lot of weight into that, that they do have that influence.

[00:22:44] Skye: Mm.

[00:22:44] Pre-filled & unconditional contracts

[00:22:44] Imti: The next two, we're gonna push them together. So pre-filled contract and an unconditional contract. Pete, can you explain simply what a pre-filled contract is, and then what an unconditional contract is in that context?

[00:23:00] Pete: Yeah. So a pre-filled contract would essentially be, as it sounds, everything's populated for you, including the conditions.

So you've had no say on the conditions, probably no say on the deposit amount, and probably no say on the actual offer amount either. They've just pretty much slapped the contract in front of you to sign. It's like signing a blank check, essentially. Here's the price, sign here.

[00:23:20] Imti: Mm-hmm.

[00:23:21] Pete: In terms of unconditional, so when you sign a sales contract, you normally have conditions, unless you're buying under auction, but we'll park that for another day. We've talked about it in the past.

[00:23:30] Skye: Mm.

[00:23:30] Pete: The two main conditions that you should always have are subject to finance and subject to building and pest inspection.

Basically, the finance clause is what we call it, that will protect the buyer. So if for some reason they can't get finance within 21 days, they can pull out the contract and their deposit is not at risk. They can essentially just terminate the contract, no harm.

If there's problems,

[00:23:50] Skye: yeah.

[00:23:50] Pete: If there's problems. Building and pest inspection works very similar. If there's major defects, you can pull the contract in a similar manner.

[00:23:56] Imti: And so unconditional is the opposite of that, where they just can't pull out. They've committed to buying the thing.

[00:24:00] Pete: Yep. Yep. No matter what, you have to buy it.

[00:24:02] Imti: So Pete, something that ties into all of this, is usually a cooling off period.

Can you explain what cooling off is and whether it was applicable in this situation?

[00:24:13] Pete: Cooling off entitles the buyer to withdraw from the contract within a certain period. So if we just focus, actually we'll focus on- For no reason ... for no reason. Yeah. And, and let's focus on Victoria, 'cause this is where it was purchased.

So in Victoria you've got a three-day cooling off period, and essentially within that time period, after signing the contract, you can withdraw for any reason.

[00:24:32] Imti: Yep.

[00:24:32] Pete: Look, there is a small penalty in Victoria and other states that you have to pay. A certain percentage, I think 0.2% of the purchase price, but essentially you can withdraw for no reason outside of the conditions I just mentioned, so basically it's like a change of mind.

[00:24:44] Imti: For someone listening to this, unconditional is when there's no pest and building, there's no finance, none of that. But you can go unconditional and pull out during cooling off still?

[00:24:54] Pete: Yes, you'll still have that clause.

[00:24:55] Imti: Cool.

[00:24:56] Pete: Yeah.

[00:24:56] Imti: So that's how it works. In this situation, why wasn't there an opportunity for them to utilize the cooling off period?

[00:25:05] Pete: Within the pre-filled contract, the agent had crossed off the cooling off rights and said, "Under auction conditions."

[00:25:10] Imti: Which basically means as soon as you sign the dotted line, you're done.

[00:25:13] Pete: Yep. That's it. So under auction conditions, you don't get your cooling off.

[00:25:16] Imti: And Skye, when it comes to pre-filled contracts, 'cause everyone listening to this is probably like, " This all sounds really dodgy. Why would a contract ever be pre-filled?" When would pre-filling some of the contract actually make sense?

[00:25:27] Skye: The only time I've ever done that is pre-filling the information off of the offer. I don't see that a pre-filled contract would make sense.

[00:25:34] Pete: I think you're right though. It's the offer form.

[00:25:36] Skye: Yeah.

[00:25:36] Pete: So whatever they put on the offer form, then, and there's systems as well.

[00:25:38] Skye: Then we pre-fill it into the contract.

[00:25:38] Pete: Yeah.

[00:25:38] Skye: Yeah.

[00:25:38] Pete: Yeah, that's right.

[00:25:39] Skye: So, generally the way that I operate is I get the offer, I call to confirm the details 'cause a lot of the time people get it wrong.

[00:25:47] Imti: Mm-hmm.

[00:25:48] Skye: They're like, "Oh no, I didn't mean to select 30 days. I wanted 60-day settlement."

[00:25:51] Imti: Yeah.

[00:25:51] Skye: So we confirm. That then goes into the contract because an offer, as a lot of my buyers found out this week, doesn't actually mean anything.

The contract's the only thing that is worth anything..

[00:26:01] Imti: So really the only time it would make sense is if you're just pre-filling what they've told you anyway.

[00:26:06] Skye: Already. Yeah.

[00:26:07] Imti: Mm-hmm.

[00:26:07] Skye: It's got nothing to do with me.

[00:26:08] Imti: And that's pretty normal, right? The thing that I see pretty often in terms of pre-filling contracts is first time investors and first time buyers in general, they won't understand that they can negotiate deposit amounts, timing of deposits-

[00:26:23] Skye: Mm

[00:26:23] Imti: all of those sorts of things. And so the agent will default to putting in 20% in five days, for example.

[00:26:28] Skye: Mm.

[00:26:28] Imti: So they can get a massive deposit through the door. That's the big red flag that I see in pre-filled contracts, is that amount. ' Cause from the client's perspective, they're just like, "Yeah, we've got finance clause in there."

" Okay, when do you need to pay the deposit?" "Oh, five days." "How much is the deposit?" "20%." Like-

[00:26:43] Pete: Mm ...

[00:26:43] Imti: why are we doing that? Again, putting yourself in Julia's shoes, she's still feeling like she's securing a really good opportunity. They're helping her with the admin.

They're making sure that it's all just smooth and clear for her, When it comes down to unconditional offers, 'cause we've unpacked where it makes sense with a pre-filled contract, Pete, when would you recommend someone make an unconditional offer if they're not being supported by a buyer's agent?

[00:27:12] Pete: So I'd definitely be running it via the mortgage broker.

Mm-hmm. So before you do anything, get the mortgage broker to do a quick val. Run that past them, get the valuation, make sure that the mortgage broker is okay with it. Once you've done that, get the conveyancer to review the contract to make sure there's nothing in there that is a bit iffy or you need more clarity on, and then you can go ahead and sign. You could do all that within cooling off period, but I think save the headache, just get it all done beforehand.

And, and to be honest, there's a quick phone call to the mortgage broker and a conveyancer. A good conveyancer should be able to pick up the contract and the disclosure documents and review that within four hours.

[00:27:44] Imti: From a broker's perspective, I would never tell a client to put an unconditional offer down, and that's my own internal-

[00:27:50] Pete: Yeah, that's-

[00:27:51] Imti: risk tolerance.

[00:27:52] Skye: Mm.

[00:27:52] Imti: I can give them probability that it'll be okay.

[00:27:55] Skye: Mm.

[00:27:55] Imti: But me putting my tinfoil hat on, if the client's withheld information from me, for example, and then the bank picks it up, whether it's let's say fraudulent activity or something extreme, and then their finance gets pulled and they have in writing from me, "Yeah, go unconditional."

[00:28:10] Skye: Mm.

[00:28:11] Imti: That's my arse.

[00:28:12] Skye: Yeah, you can't advise them that.

[00:28:13] Imti: As much as I can be like, "Look, I'm confident that you'll be okay," same, same thing we go into auction, right?

[00:28:18] Skye: Mm. "

[00:28:18] Imti: I'm confident that you'll be good." Beyond that? Risky territory

[00:28:21] Pete: But if a client comes to you and says they want to do it, you'll do what you can- 100%

[00:28:25] Imti: to give them the

[00:28:25] Pete: confidence. That's what I'm saying. Yeah. Yeah,

[00:28:26] Imti: yeah. Yeah. Like, we'll facilitate it as best we can. Yeah. And we'll make sure that it's with the right lender, everything's where it needs to be.

[00:28:32] Pete: You'll have plan A, B, and C though, right? You won't just have one lender. You'll be like, "Well, if that falls back, we probably could go to this one or that one."

[00:28:38] Imti: Yeah.

[00:28:38] Pete: You wouldn't tell the client that 'cause you don't wanna give them-

[00:28:40] Imti: Yeah. Plan A would be- Yeah ... unconditional offer. If we can't get finance done during cooling off, we're killing the deal.

[00:28:46] Pete: Yeah, that's exactly right. Yeah.

[00:28:47] Imti: That's plan A.

[00:28:48] Skye: Yeah. Also though, correct me if I'm wrong, the only reason to go unconditional is because we've negotiated heavy on price.

[00:28:55] Pete: Yes. That too.

[00:28:56] Imti: Mm.

[00:28:56] Pete: I've done that with clients. Yeah ...

[00:28:57] Skye: like, that's the only reason you would need to use it.

[00:29:00] Pete: Yeah. But we've got approval within cooling off.

[00:29:02] Imti: Mm-hmm.

[00:29:03] Skye: But, like, I was just thinking back to Julia's story.

[00:29:05] Pete: Well, I mean, the price was way over than what it was worth,

[00:29:07] Skye: Well-

[00:29:07] Pete: So, yeah ...

[00:29:08] Skye: and that's the thing, if you know you're getting a bargain and you've done your research.

[00:29:11] Imti: Mm,

[00:29:11] Skye: But you've gotta know that you're getting a good price for that, otherwise-

[00:29:14] Imti: Mm-hmm.

[00:29:15] Pete: Yeah, why risk it? Yeah.

[00:29:16] Skye: What's the point?

[00:29:16] Imti: Yeah. And we've talked about it before, we won't rehash old ground in too much detail, but an alternative to an unconditional offer is a shorter finance window.

[00:29:24] Skye: Mm.

[00:29:25] Imti: Yeah, it doesn't have to be an unconditional offer. Instead of 30 days finance, work with your broker to see if you can do a seven-day finance.

[00:29:31] Pete: Yeah.

[00:29:31] Imti: And then from a sales agent's perspective, that doesn't make much of a difference, right, Skye? If it's a seven-day finance and a 30-day finance, you're just gonna lean towards the seven-day finance.

[00:29:39] Skye: Yeah. Well, a lot of, this particular week, people defaulted to 14. I was like-

[00:29:43] Imti: Mm

[00:29:43] Skye: ... "Can you speak to your broker and make it seven?"

[00:29:45] Imti: Yeah.

[00:29:46] Skye: You'll have a stronger offer.

[00:29:47] Imti: Yeah. Without putting yourself at risk of an-

[00:29:49] Skye: Yeah

[00:29:49] Imti: ... unconditional offer.

[00:29:50] Skye: I'm not telling them to waive the finance clause.

[00:29:52] Imti: Or, or signing a-

[00:29:53] Skye: I'm saying can you shorten the finance dates?

[00:29:54] Imti: Hmm. Or signing a pre-filled contract.

[00:29:57] Skye: Mm.

[00:29:57] Imti: Um,

[00:29:58] Hacking the loan structure z

[00:29:58] Imti: let's roll into the structure of the loan. There were two red flags that we identified about Julia's deal, and if she was able to pick up on either of these and the consequences, she potentially would've been able to pull out of them. The first one, let's talk about the self-managed super fund.

So one of the purchases, she was encouraged purchase a property using her super. That's, in a very, very simple term, what SMSF property purchase is. Use your money in super to buy an investment property, and then you use your super contributions to borrow that money. So it's a great, quote-unquote, "hack" that finance gurus and property spruikers will talk about to maximise your borrowing capacity when you don't have any, because it's assessed differently. In this situation, what is the big red flag when it comes down to the fact that the purchase was being made in an SMSF, Pete?

[00:30:53] Pete: I just know they couldn't afford it. They probably did not have enough money in their super fund to fund the deposit required. Because when you're buying in your SMSF, you need a minimum 20%. Normally it's 30%, but it could be 20%, plus your stamp duty.

So if you don't have enough money in your super fund, it has to come from somewhere else.

[00:31:11] Imti: And how do you both feel about ... The SMSF idea would've come from the sales agent. It's also featured in marketing pretty heavily when you look at realestate.com, right?

[00:31:21] Skye: Mm.

[00:31:21] Imti: People putting in their, " Would be a great investment for SMSF super purchase".

[00:31:26] Pete: Yeah.

[00:31:26] Imti: Is that something that you would've flagged straight away, Skye? Or is that something that you would even suggest to someone in terms of how to buy the property, what structure to buy the property in?

[00:31:37] Skye: Oh, gosh. That is the flag that they're like, "Oh, yeah, use your super." That's such a complex environment that I don't think anyone should be making a week-long decision to use their super. I would be speaking to multiple people-

[00:31:49] Pete: Mm.

[00:31:49] Skye: - and trying to understand the complexities of that, rather than listen to one.

[00:31:53] Imti: There's this thing at the moment where everyone's being encouraged to maximise their borrowing capacity, right? How do you get unlimited borrowing capacity?

How do you increase your borrowing capacity? How do you purchase more and more and more property and accumulate more and more debt?

[00:32:06] Skye: Yeah.

[00:32:07] Imti: And for Julia, someone who had success in property in her personal name, knowing that she couldn't borrow any more money, and being presented a solution to allow her to buy another investment property-

[00:32:19] Skye: Mm.

[00:32:20] Imti: - that would've come across as helpful-

[00:32:22] Skye: That would've looked attractive

[00:32:22] Imti: ... and really positive, right?

[00:32:24] Pete: Yeah. Definitely. A way to get in.

[00:32:26] Imti: Mm. The accountant would've actually been solving a problem for her and helping her achieve her goals

[00:32:31] Pete: Yeah. I mean, in this instance though, they got it for two, so, it's crazy.

'Cause yeah, what you said makes a lot of sense where someone might wanna buy again, but they can't so they use SMSF. But yeah, in this situation here, they're doing a trust and an SMSF.

[00:32:42] Imti: Yeah. And this isn't me saying that SMSFs in general are bad. It's not me saying, "Don't buy property in SMSF."

[00:32:50] Skye: No. But it's complex, right?

[00:32:50] Imti: Very complex, and there's so many moving parts where you might need a financial advisor, you might need an independent accountant not linked to the development chain telling you to buy a property in SMSF. There's a whole bunch of other laws, et cetera, that are applicable to SMSF property that most people don't understand. They also don't understand that they need to manage and administer and audit the fund. All legal stuff that their super fund takes care of-

[00:33:18] Pete: Yeah

[00:33:18] Imti: which is at least a couple grand a year in terms of maintenance. It can work, and it can work really, really well, but it needs to be guided by a strong professional team.

If you've got under 2, 300 grand in your SMSF, it probably doesn't make sense. And the other times where it might make sense is you're close to retirement age and there's a whole tax architecture around that that we don't have the time to break down. Or if your financial advisor has given you a documented statement of advice telling you why it's a good idea, because then your financial advisor is actually liable for your investment decisions at that point.

[00:33:54] Pete: And can I just add one more point? If you get this wrong, like in their situation now, they still need to contribute as they would to super. Instead, they're gonna contribute their monthly super payments into this property, which is gonna go backwards in value.

[00:34:07] Imti: Mm.

[00:34:07] Pete: And it's gonna cost them a lot to own the property with the rents going backwards as well. So essentially now they're stuck with an underperforming property, and they're gonna have to continue to feed this property through their super payments for it to not grow.

[00:34:19] Imti: Completely agree with you. And if we were to give you, the simple numbers of it all, it'd be like if your super fund had 250 grand in it, and then tomorrow it had 150 grand in it.

[00:34:27] Pete: Just by signing a piece of paper.

[00:34:28] Imti: Just by signing a piece of paper.

[00:34:29] Pete: Yeah.

[00:34:29] Imti: And that was the impact of this decision. Now, I wanna bring us home quick and strong, so let's go through the last three.

[00:34:36] Cross-collateralisation of loans

[00:34:36] Imti: The cross-collateralisation of their home loans, There's a whole actual episode on loan structures, but I'll put this one simply.

Crossing loans is when multiple properties secure multiple loans, and they're all linked together. So if you've got property A and property B, and then you've got one loan that's attached to both, and they're both linked together. The issue here is that you don't have an independent loan for each property.

So if you sell a property, the bank actually dictates where the money goes first, before you see any of it. The second issue, and the most pressing part here for Julia, is that she was up $250,000 in her first investment property. Now, if there's a valuation shortfall on her purchase, which there was, we know that there's a $60,000 gap.

Now the loans need to be tied together, and so now her strong performing asset needs to be tied to her weak performing asset because there was no conditions in the contract. And so what'll end up happening is that when she sells the strong performing one, if the loan-to-value ratio of the weak performing property hasn't improved, the sales from the strong property will just go down towards paying the debt before she sees any of it In a nutshell, complex structuring decision.

And the simple question to ask to avoid it is, will my loan for this property only be secured to one property when you have more than one property?

[00:36:02] Pete: Mm.

[00:36:03] Imti: And it keeps a clear line of sight and avoids you being able to even purchase a property that is a negative asset from day one.

[00:36:10] Skye: Well, when would you not consider cross-collateralisation as a red flag?

[00:36:15] Imti: Great question. I think it's probably in less than 5% of cases, and the answer to it is when there's a clear exit strategy to uncross the properties. So what I mean by that is, clients of mine, we did this recently where we just uncrossed their properties.

For them to qualify with the right lender and borrow the right amount that they needed, we needed to move their whole structure. The only way we could do that was crossing the properties to get cash out for the investment. So the plan was always, we'll cross for 12 months, you guys need to make X amount of extra repayments for 12 months.

If the property grows at 5%, conservative estimate, at the end of 12 months we uncross the properties again. That's when it does make sense.

[00:36:57] Skye: Yeah.

[00:36:57] Imti: When it's entry and exit.

[00:36:59] Skye: Rather than leaving them.

[00:37:00] Imti: Yeah. Yeah. And there's a clear way out.

[00:37:02] Pete: And low LVR too, right?

[00:37:03] Imti: Mm-hmm. Yeah.

[00:37:04] Skye: Mm.

[00:37:04] Imti: Definitely. You don't wanna be overexposing yourself.

[00:37:06] Skye: Low LVR on both, you mean?

[00:37:08] Pete: Yeah. Like, you don't wanna be doing it at a 90% lend.

[00:37:10] Skye: Mm.

[00:37:11] Imti: Cause then it all gets tied together and you can't untie it.

[00:37:13] Pete: Yeah, it's impossible to untie.

[00:37:15] Skye: Yes.

[00:37:15] Rental guarantee amidst high vacancy rates

[00:37:15] Imti: Let's go to number eight out of the red flags. Skye, I'll throw this one your way, 'cause it's your expertise. High vacancy rates of the area that they were buying in, combined with a rental guarantee. Firstly can you explain what is a vacancy rate, and then what is a rental guarantee?

[00:37:33] Skye: So a rental guarantee is when the agent or the developer is guaranteeing the rent and the amount for a period of time. The vacancy rate, I'm gonna do a terrible job explaining this, but it's just how many properties are vacant at any given time.

[00:37:47] Imti: Expressed as a statistic, right?

[00:37:49] Skye: Yep.

[00:37:49] Imti: Yeah. Pete, what would be, a benchmark vacancy rate?

[00:37:51] Pete: Oh, anything under 2%-

[00:37:53] Imti: Mm

[00:37:53] Pete: ... is pretty solid. Yeah.

[00:37:54] Imti: So 100 properties in an area, two are vacant, that's 2% vacancy rate?

[00:37:57] Pete: Yep.

100 rental properties. Yeah.

[00:37:59] Imti: Cool.

[00:37:59] Skye: Mm.

[00:37:59] Imti: So in this situation we've got a rental guarantee and high vacancy.

[00:38:04] Pete: Very high.

[00:38:04] Imti: If those two are combined-

[00:38:06] Skye: How high?

[00:38:07] Pete: Over 90% according to some data sets, yeah.

[00:38:09] Skye: Ooh.

[00:38:09] Imti: Yeah.

[00:38:10] Skye: Ew.

[00:38:10] Pete: Yeah.

[00:38:11] Imti: 9 in every 10 properties, 'cause it's a fresh estate.

[00:38:13] Skye: Yeah.

[00:38:13] Imti: Currently looking for a tenant.

[00:38:14] Skye: Uh, yeah. Cool.

[00:38:15] Imti: How does a rental guarantee fall into that situation? Because Julia would've been like, "Oh, awesome, they're guaranteeing me rent. I don't have to worry about vacancies."

[00:38:23] Skye: Yeah, and that's where I think I was going.. with that. Most people won't know how to know what the vacancy rate is any given area, right?

[00:38:31] Pete: No.

[00:38:31] Skye: If you're not working with a buyer's agent, you wouldn't know.

[00:38:33] Imti: Mm-hmm.

[00:38:33] Skye: And I've said this before and I'll say it till I die, go online, see how many properties are available, how similar all those properties are, and you'll get a pretty clear indication of how tight or over-supplied an area is.

Because like you say, micro-market.

[00:38:48] Imti: Hmm.

[00:38:49] Skye: So if we're looking in this one suburb, and I'm a tenant, how many homes have I got to choose from?

[00:38:53] Imti: Even in that one street, right? If you're looking to buy a property and it's on realestate.com, have the property open in the map view in one window-

[00:38:59] Skye: Mm-hmm ...

[00:39:00] Imti: and then have the vacant rentals open in another.

[00:39:02] Pete: Yeah.

[00:39:02] Imti: You'll see straight away how many properties are actually on the market to be leased in your one-kilometer radius.

[00:39:09] Pete: I find the map view really good, so you see all the red dots.

[00:39:11] Imti: Mm-hmm.

[00:39:11] Skye: Mm-hmm.

[00:39:12] Pete: Yeah.

[00:39:12] Skye: Yeah, if you don't know any of this, start there, what is happening vacancy wise. I just don't see really many scenarios where a rental guarantee would not be a red flag in and of itself

[00:39:23] Imti: Mm-hmm

[00:39:24] Skye: 'Cause since 2020, there's no need for a rental guarantee in most areas

[00:39:28] Imti: Why are you guaranteeing rent if it's a good asset?

[00:39:30] Skye: Shouldn't need to

[00:39:31] Imti: Shouldn't it just rent straight away?

[00:39:32] Skye: Correct

[00:39:32] Imti: That's the number one thing that without diving into the data and all that sort of stuff, I'd just walk away if there was a rental guarantee

[00:39:40] Skye: Well, Defense used to do this a lot,

They'd have their people in there, and then they'd put it up as a rental guarantee

[00:39:46] Pete: Mm

[00:39:47] Skye: I don't know why they did that.

Do you?

[00:39:48] Pete: Doesn't it lock 'em in for long term?

[00:39:50] Skye: Mm

[00:39:50] Pete: That's not just a one-year guarantee

[00:39:52] Skye: I think that's like a five-year-

[00:39:52] Pete: Yeah

[00:39:53] Skye: ... guarantee

[00:39:53] Pete: Which is a bit different to this where it's just 12 months, but even then Julia was quite happy with that, but she was only thinking 12 months ahead of time. That's the problem in 12 months' time, that's her thought process

[00:40:01] Skye: Especially if all of these properties are being sold with a rental guarantee.

[00:40:04] Imti: Mm

[00:40:04] Skye: Even if that guarantee is then paid-

[00:40:06] Imti: Yeah,

[00:40:06] Pete: yeah

[00:40:06] Skye: ... okay, we're just throwing the can down the road. What happens in 12 months' time?

[00:40:09] Pete: Yeah.

[00:40:10] Imti: If we're guaranteeing $2,000 worth of rent to make 60 grand, I'd take that trade

[00:40:14] Skye: Mm.

[00:40:15] Imti: For the developer it's a no-brainer.

[00:40:16] Pete: Yeah

[00:40:17] Imti: To your point about looking at for example, defense housing guarantees and things like that, I think it's a little bit different when you're dealing with a big government backed organisation or mining company, for example. They own whole suburbs basically, and-

[00:40:31] Skye: Mm-hmm

[00:40:31] Imti: ... leases are rolled out to them. Very different when it's a third party giving the rental guarantee.

[00:40:37] Skye: Mm.

[00:40:38] Imti: When it's the person selling the property offering a rental guarantee, that's when I'd be like, "Let's walk away"

[00:40:43] Pete: Mm.

[00:40:43] Pre-selected builder

[00:40:43] Imti: Number nine, in the contract the builder was actually preselected.

So one of the properties that Julia signed up for was a house and land package. When Pete and I went diving around the contract, what we actually found out was that the builder had been preselected, and she got given no option in who the builder was. Now, I wanna speed run this one. So in this situation, when the builder's preselected, it creates a couple issues. First one is lenders wanna see that clients have a choice of the builder because it reduces the risk around the loan. There's a lot of lenders who'll look at a contract, and if there's no option to pick any other builder, and it's written in the land contract, the lender doesn't even want anything to do with it. So you struggle with finance approval, and this is where it brings us back to the previous point of cross-collateralising the properties, where Julia will need to use the equity in her good property to cover the gap in the land loan that the lender won't give her.

The second point of that is that if you looked at the builder who was in the land contract, the builder actually links back to the education company. So they own the building company as well, and they own it all end to end. And so that's where it would be extremely high risk to go down the route of a builder preselected. Where it might make sense is if it's a volume development, a Metricon type of situation, where they're a volume builder, it's very well known, there's demonstrated approvals across the board. That's a little bit lower risk. The other aspect of it is if you get a panel of builders provided to you, like you can use these five builders or whatever it is, again, lower risk. But if it ties you into one builder, I'd be making sure that a conveyancer and a mortgage broker both look at the contract before you sign it to make sure that you can even get finance and if there's a way out for you.

[00:42:37] Skye: Hmm.

[00:42:38] One-stop shops

[00:42:38] Imti: Now, bringing us all home, number 10, and I wanna do a full episode on this, so I'm just gonna give you the elevator version.

One-stop shops and integrated ecosystems. Pete, what is a one-stop shop?

[00:42:51] Pete: Essentially, you get everything you need from them. So you'll get your, quote-unquote, buyer's agency service from them. It'll get your mortgage brokering, conveyancing, developments, everything. Property management as well. They are the property managers, I'm pretty sure, for Julia too. So yeah, just everything that you can need in a transaction-

[00:43:06] Imti: Mm-hmm ...

[00:43:06] Pete: is provided to.

[00:43:07] Imti: Me being a client though, isn't that convenient?

[00:43:10] Pete: Oh, it's super convenient. I can definitely see the appeal. And look, I'm not against one-stop shops. There's some really good operators-

[00:43:16] Imti: Mm-hmm ...

[00:43:16] Pete: in the property space at the moment, but I think the differences are where they're not selling you a product from a, a development point of view. So there's some great operators who, mortgage broker and buyer's agents-

[00:43:27] Imti: Hmm

[00:43:27] Pete: accountants are probably tied into some of these, entities as well. They're good operators, but essentially they're not doing the development side of things. So I think it really depends on what, level of service they're providing.

[00:43:37] Imti: And it ties back into the previous conversation around the referral partner thing, right?

[00:43:40] Pete: Yeah.

[00:43:41] Imti: And even the education side of things, is that if they're walking you through the risks involved and the downside of the whole situation and not just telling you it's all gonna be sunshine and flowers, then you may not be as worried about them being a one-stop shop, right?

[00:43:55] Pete: Yeah.

[00:43:55] Imti: Whereas if they're trying to just sell you on every single product that they have, and tell you that you need every single service, would that be the moment where it'd be a really big red flag?

[00:44:07] Pete: 100%. In this instance, Julia didn't need the development. She could've just done a one-and-done deal with them that they had within their existing portfolio. It was already established. They could've just done that. So they would've just tapped into the sales arm and the property management arm.

[00:44:20] Imti: Yeah.

[00:44:20] Pete: Didn't need to be sold on to the mortgage broker. Didn't need to be sold on to the development side of things. So yeah, definitely.

[00:44:26] Imti: The common theme through this process is that customer service-wise, it would've felt incredible. It would've felt light touch, easy for the client. They're feeling empowered. Breaking it down step by step, it's easy in hindsight to go, " Oh, the loan structure would've been an issue. The SMSF might've been an issue. The one-stop shop, definitely an issue 'cause that's where it all started." And I'm keen on getting both of your takeaways on this 10-point list, my key takeaway from all of this is that- If the process is encouraging you to go fast and not slow down, that's the point where you put the brakes on something and you try and get a second opinion on things.

[00:45:06] Skye: Mm.

[00:45:07] Imti: Skye, what would you say is your one big takeaway out of these 10?

[00:45:10] Skye: Yeah, I think that's the flag for all of this, it was the speed. There was no need for it. There's never a need for it. You've said it before, Pete, that, you try and give your clients time when you present them a property, 'cause sometimes it can come up fast. You might have had a brief, and it might take you a month, or sometimes it just does fall in your lap the next day. It's not to say that speed's the issue, but it's the pressure and the speed.

[00:45:33] Imti: Yeah. Combination of the two, right?

[00:45:35] Skye: Mm. there's no deal that's that good that you can't-

[00:45:38] Imti: No

[00:45:39] Skye: take a minute to pause. Nothing's ever can't miss.

No.

[00:45:41] Imti: Pete, what would your one takeaway or one piece of advice be to someone who's listened to this?

[00:45:45] Pete: So it'd be the we'll-make-it-work mentality. Julia would have asked questions-

[00:45:50] Imti: Mm

[00:45:50] Pete: ... and she would've just been shut down pretty quick-

[00:45:52] Skye: Like, "How do I afford it?"

[00:45:53] Pete: Yeah, and I imagine it would've gone along the lines of, "We'll make it work. Don't worry."

[00:45:56] Skye: Mm.

[00:45:57] Imti: And I think on the point of making it work, Pete, for Julia's situation, where she's actually ended up is you looked at the contract, I've looked at the structures, and she doesn't actually have a way out of terminating the contracts or exiting the purchases. And so for her, the actual real of making it work is that she needs to take at least 100 grand of a loss in her super out the gate and hold onto the properties for the next 10, 15 years and hope that they make up for what she's lost.

And as unfortunate as that is, the alternative to that is that she forfeits her deposits and doesn't potentially have any upside. So the reason why I'm sharing that outcome is that at each of these 10 points, Julia felt like it was the right decision, and if she was just able to slow down a little bit, it potentially would've saved her and helped her step out. With the way her things are set up at the moment, fingers crossed the damage won't be too bad, but the reality of the situation is that unfortunately this episode doesn't really have a happy ending, it just has an ending. And that's why we wanted to break this down into two parts, to actually share the message behind it, because everyone gets excited about the good news stories, but you rarely hear about the bad news stories.

[00:47:13] Skye: Mm.

[00:47:13] Imti: And on that note, I'm gonna wrap us up. Thank you both. This has been really great unpacking this with the two of you. For anyone who's listened to this point, if you do have any questions, feel free to reach out, to us on socials. Our links are in the show notes, and we will hopefully see you next week.