Tuesday, 18 November 2014

Trap #2 Trusting Everyone

If you do nothing but avoid this trap, you will be well on the way to protecting your life savings for retirement. This is what I call a “core trap”. It applies to everything you do when building wealth. So many other traps only exist because this trap was ignored by so many who have fallen into it. You must have the constant mindset of “trusting no one” when it comes to protecting your retirement savings. I have seen so many clients who have lost money because they were too trusting and believed everything they were told.

If you are using a financial advisor, make sure you get a Statement of Advice (SOA) that fully details the personal financial advice they are giving you about switching your super into an SMSF and the buying a property.

Be very wary when going to “property seminars”. Whilst advice given at these seminars is “general advice”, once you make an appointment with a financial advisor and they start to incorporate your personal financial information into their advice and deal with your personal financial situation then it ceases to be general advice and becomes personal advice. Under the ASIC law, they then MUST give you a Statement of Advice that details all costs and advice that they have given you. If things go wrong because of bad advice, you have no proof to get your fees back. Even verbal advice can be personal advice and must be written in an SOA, otherwise it’s your word against theirs.

Stick to your guns, insist that before you proceed or pay any fees, that you get a detailed SOA so you can fully consider all aspects of the arrangement. Ignore what the planner tells you about not needing to give you an SOA. If by their actions, opinions and discussions with you in meetings, on the phone and by mail or email, you reasonably conclude that they are influencing your decision to switch from your current superfund, into an SMSF, then this is personal advice about a financial product, which an SMSF is. They are breaking the law if they don’t give you an SOA. Go to the ASIC website and download “ASIC Regulatory Guide 175” that deals with this.

If here are some additional strategies you should adopt and not be too trusting:
  • Don’t sign any contracts or documents without reading every detail and then give to your lawyer to read and advise on.
  • Only sign a purchase contract last, at the end of the due diligence process, never at the beginning. I have seen too many clients waste time and money getting building and pest reports done, paying for legal fees and then having to pull out of a contract because the due diligence uncovered a problem. Do the due diligence first and only sign a contract once you are completely satisfied that this is the right property for your SMSF. You will have the added expense of re-doing the Bare Trust again as the property address and RP details are written into the Deed.
  • Ask the Financial Advisor, accountant, anyone involved in the property purchase to confirm and document any remuneration or financial benefit he will earn directly or indirectly from the property transaction. Get this in writing.
  • Get a comparable sales report for the property your are looking at so you can gauge for yourself the real market value of the property.
  • Walk around the location of the property. Look for other houses or units for sale and find out their price and how they compare.
  • Ask the agent for the RP data on the property so you can see what the vendor paid for it. Is the vendor being too greedy?
  • Be prepared to walk away from any deal. Emotions must not come in to it. Ignore completely people who pressure you or say “you’d better sign the contract today or you will miss out. You will not miss out. Take your time.
  • Get your accountant to prepare a full 12-month cash-flow on the property. Make sure he factors in the “bad times”, that is vacancy periods, rising interest rates and unexpected repairs.
  • Go around the property with the building inspector and make sure they are thorough and do their job. If you know someone who is a builder or renovator, better still. Take them with you.
  • Insist on getting the bank valuation when it is done. You have paid for it so ensure you get it. Make it a requirement in writing signed off by the finance broker or bank lending manager before you engage them.
  • Don’t believe what people tell you what the property should rent for. Get actual market rentals of comparable properties.
  • Visit the property at night. You would be surprised how the character of the neighbourhood can change in a bad way when the sun goes down.
  • Get a copy of the drainage plan for the property and investigate all sewer and storm-water points and pipes. Employ a plumber and drainage expert to do this if needed.
  • Don’t believe that every addition, extension or renovation made to the property is council approval. Call the City Council first and quote the Title and Plan of the property and get them to check their records. If in doubt, employ a Town Planner.

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  1. Very practical and sound advice. A very informative read for anyone thinking about buying a property in an SM SF.

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