Buyers beware of SMSF property schemes
OVER the past few weeks, I have had several people come to me seeking urgent help to extract themselves from property deals with some or all of the following characteristics:
> New residential apartment purchased off-the-plan or under construction in South East Queensland or other high-risk market;
> Via a Self Managed Super Fund established by the promoters or their agents for substantial fees using all of the client's super savings as a deposit;
> Financed with a "pre-approved" loan arranged by a broker introduced by the promoters with high fees and interest rates;
> Return/rental guarantees not worth the paper they are printed on;
> Developer, selling agent, mortgage broker and financial adviser acting in concert to promote the "package".
Sound familiar? If it does, I strongly suggest you reconsider and seek independent financial advice.
Unfortunately, as we reach the top of the property cycle, promoters of these schemes are becoming more aggressive as they seek to clear stock. Much like high-risk investment funds promoted themselves prior the GFC, these schemes pray on people's fear of missing out. We have had a reasonable period of property price growth and some exceptional numbers in Sydney grabbing headlines. However, property remains a risky asset class where it is always a case of "buyer beware".
In each case, the investors thought they were doing the right thing by using their super to invest in property "because it's safe" and the promoters guaranteed the returns. Further, it was easy because the promoters arranged everything and it was using super, so it didn't feel so much like their money anyway.
However, such schemes are bad on so many levels, it's difficult to know where to start. Nevertheless, allow me to point out a few of the more obvious flaws:
> Lack of independence and conflicts of interest among those promoting and advising on the scheme;
> Little, if any, due diligence on the property or the promoters (some investors had not even bothered to visit the property!)
> High fees gouged out of each component of the transaction, reducing returns from the outset;
> The "fine print" of return guarantees typically renders them worthless;
> Lack of recourse, as counterparties are often "special purpose" companies of little substance;
> No objective investment advice to consider the appropriateness, cost and risk of the investment strategy versus alternatives.
That is not to say that using a SMSF to invest in property cannot be a sound investment strategy. However, it is a technical area and the risks need to be carefully weighed against the benefits. So I suggest you approach with caution anyone promoting such a strategy as easy and low risk.