Tuesday, 25 November 2014

Trap #3: Not Doing Your Due Diligence

Let’s face it, other than buying your own home, your first investment property will be the second biggest outlay you will make. You can’t afford and your retirement future can’t afford to get it wrong. You must master your own due diligence.

Be thorough and do your own research and due diligence. Don’t rely solely on the opinions of others who are making money off you when buying the property. The biggest trap I see people making is outsourcing responsibility completely to so-called "experts" without checking thoroughly the advice they are getting. Don’t rely on comments like; “this is a great investment” or “you should sign the contract now otherwise you will miss out”. Take your time, don’t rush and don’t get pressured or pushed into something by these hard-sell tactics. Get the hard facts and figures and consider everything.

Here are some tips to avoid this trap:

·       Read everything you are given and sign nothing until you fully understand the financial arrangement you are getting into. If you don’t understand something, then don’t proceed until your accountant or solicitor has read and has explained it fully to you.

·       Get legal advice if needed. Don’t skimp on this and don’t be cheap, it will cost you in the long run. I’ve seen one elderly couple lose $25,000 in fees because they didn’t read what they were signing. Anything that is being put in front of you by a financial advisor, bank or accountant to sign is a legal document, don’t let anyone tell you otherwise. Don’t fall into the trap of accepting the comment “this is just all standard stuff to sign”. Nothing is standard.

·       Don’t blindly accept disclaimers put in front of you to sign by advisors. Most advisors want to absolve themselves completely of any responsibility if their advice is wrong and you lose your money. Question everything about a disclaimer. After all, if the advice can’t be relied upon by you to make a financial decision, then why are you paying so much in fees for that advice?

·       Don’t sign anything or pay any fees to set-up an SMSF or purchase a property until you have received an SOA if this is part of financial advice you are getting. If a person wants an upfront, non-refundable payment, walk away. It’s unfair and is almost like stand-over tactics. If in-doubt, contact the Department of Consumer Affairs or ASIC. Someone who wants you to pay a non-refundable professional fee is basically “hand-cuffing” you to proceed. As a CPA I certainly don’t do it, so you need to ask yourself; what are they trying to hide? I had a client recently who had paid $12,000 upfront and non-refundable to an adviser in Cairns to find a property for them for their SMSF. The adviser claimed that he had a secret network of agents who gave him leads on unlisted properties at reduced prices that never went on the market so they could get first pick. Turns out he did nothing but show them properties that came out of the newspaper or had been listed for at least 6 months that anyone could have seen and bought. Hardly "insider" information.

·       Don’t believe all real estate agents and property spruikers. They all want to do sell you something so they will bend the truth to get their commission. Some flat-out just lie. Now I’m not saying all of these are shonks, I know some excellent, ethical, hard-working real estate agents, but they are few and far between.

·       Get a detailed Comparable Sales Report from the selling agent showing recent sales of similar, comparable properties to the one you are thinking of buying. This will give you a better idea of the market value of the property instead of you just relying on opinion. As a trustee of your SMSF, you must only acquire assets at market value. You don’t know this until you get such a report. Anything less is just guess work. If in doubt, get an independent property valuation done. I’ve seen too many people buy over-inflated properties in their SMSF based on the opinion of someone selling them the property because they wanted to get the commission. Find out if you are really getting value for money or is it just hype and overvalued so someone can get a fatter commission.

·       If an adviser is recommending a real estate agent, ask the adviser if they are getting a “kick-back” or a financial benefit from the real estate who is selling you the property. Get the answer in writing. It is not ethical nor independent if an adviser is pushing you towards his “mates” so he can get another cut of your cash.

·       Get proof of the market rent for the property. Too many people fall into the trap of relying on the selling agent telling them what the property will rent for. Do your own homework. Search on the Internet or look in the newspaper under “Properties for Rent’ and see what similar properties are renting for in the same location. 

·       Take a walk around the street, check out how many similar units are unrented in the building you are looking at buying a unit in. The last thing you want is after being told the property will rent for $500 per week finding out there is a better, newer, bigger unit or house up the road available for $450 per week. Believe me, potential tenants do their homework before they commit to a 12-month lease. Don’t fall into the trap of having to drop your advertised rent simply because you didn’t do your research before you bought the property.

·       When using a professional to set-up your SMSF structure, make sure they are using a reputable legal team. There are many cheap SMSF set-up companies out there in the market whose trust deeds are rubbish or they outsource it to places like India or the Philippines. You pay for what you get, cheaper will cost you in the long-run. I had a client who said we were too expense then they used an on-line provider to set-up their SMSF and Bare Trust Deeds. The bank then rejected the trust deeds because there were specific clauses that were missing or just wrong and refused them finance to purchase the property. It cost them an extra $2,000 in amendments and legal fees to fix. Don't use sub-standard service providers, it is a legal document and you want it to be water-tight. We use ACIS in Brisbane for all our SMSF set-ups. I trust the quality of the work they do and I speak to "real" people when I call them for their technical expertise. Check out their website if you want to: www.acis.net.au I certainly do not get any kick-backs from any of the professional support we use, I just want my clients to get the best work, don't take the risk.

If you want to avoid this trap, then you must make the effort to become a student of your financial future. Before you spend even one dollar on a property, spend the time and effort Mastering your Due Diligence. 

NEXT WEEK: TRAP #4 - If you don't want to miss out of this valuable weekly information then follow my blog via email. Use the link "Follow by Email" on the top right to register. You will automatically get delivered directly into your inbox each week each SMSF trap update.

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