Beware the two tiered property market
Author: Lou Leman - Date of publishing: 12/12/2004
The Latin saying "Caveat Emptor" still applies in many areas of commerce. It means: let the buyer beware.
The State Governments in Australia have been introducing consumer protection legislation in many areas but the risks to consumers are still very real in the property industry. With the two tiered property market, uninformed purchasers risk paying a price that is substantially above the fair market value on the local market.
The two-tiered property market is a colloquial term that has been adopted to refer to the practise of marketing property to purchasers who are likely to be unaware of the real value of the product. The properties are most likely to be promoted in areas that are a long way from the property being sold such as interstate or in another country, usually where property prices are relatively high.
Purchasers may be impressed with the beauty of a location or other features associated with properties being sold and consider the price to be good value without realising that the price is well above market value. As a consequence, the new property owner may have to face loss for reasons such as:
• Higher loan repayments
• Reduced investment return
• Reduced borrowing against the property
• Capital loss on resale
• Excessive loss in a market downturn
• Inability to sell on the local market
Most property in Australia is sold on the local market where the value is determined by the price that can be negotiated between a willing purchaser and vendor, with neither being over-anxious to enter into a contract of sale. In the short to medium term, the price may rise or fall subject to supply and demand like any other market. When a market slows and development costs have been rising, developers try to avoid a loss of profits. To do this, they have turned to marketeers to sell their property for a price that is higher than can be achieved on the local market, In some cases the developer may be able achieve a super profit by selling on the two tiered property market.
The presentation adopted in the two tiered property market has become very sophisticated and often will be made in prestige surroundings, supported by videos, movies and lavish brochures. It is sometimes presented in the form of an investment, or wealth creation seminar where the emphasis is on the tax benefits of negative gearing and capital growth. Schemes sometimes include free flights to inspect the properties.
However, the difference between the agents offering products at fair market value and the marketeers will be in the information that is not disclosed or may be misleading. If the properties being sold are a long way from where they are being promoted, or require air or water taxi to gain access, prospective purchasers may have difficulty enquiring about or verifying details such as:
• Fair market value
• Local demand for the property
• Sustainability of investment returns
• Enforceability of income guarantees
• Adverse publicity surrounding the property
• Proximity to noisy highways or rail lines
• Proximity to high voltage power lines
• Availability of services
• Remoteness of development
• Restrictions on future development
• Defective foundations
• Fire-ant infestation
• Restrictions on clearing for development
• Proximity to abattoirs or other noxious facilities
• The current stage of the local property market cycle
The cost of selling property by this method is expensive and the cost of promotion and broker and seller commissions is usually factored into the cost of the property without the knowledge of the purchaser.
The two-tiered market has been used to sell:
• Vacant residential land
• Single unit owner occupied houses
• Single unit investment houses
• Residential units for owner occupation
• Residential units for investment only
• Commercial and industrial units
The Government in Queensland has introduced legislation to prevent the sale of land inundated by the high tide. However, low-lying land that cannot be built on, is still being sold at well above market value.
Some schemes sell properties with a rental guarantee, typically factored into the purchase price. With others, the obligation for that guarantee was with an entity that was unable to honour those obligations. If the property happens to be an investment unit/apartment that cannot be owner occupied because it is not fully serviced or due to a management agreement, realistically, an owner may only be able to sell back to the operators.
The two-tiered market is often targeted at purchasers with a strong equity position, such as people owning their own home without debt or with superannuation payouts. People in this target market group may not require a bank valuation that could reveal that the purchase price is well above market. Also, many banks have not been prepared to lend against units/apartments leased back to an operator as they have been considered a high security risk. Whilst it may be possible to obtain finance, it is important for purchasers to fully understand the risk of their investment.
If a property has been purchased at well above market value, a loss may not occur unless the owner is forced to sell due to personal circumstances. Owners should eventually recover their money when the market rises. However, with vacant land, the owner must take account of recurring statutory rates charges and maintenance for minimization of the risk of fire or pest infestation.
Investment in real estate needs to be considered in a long-term context. Despite the massive growth of the residential market in the capital cities in the recent boom, some investment properties have been selling for about the same amount for which they were purchased in the 80's on the two-tiered market.
Fortunately, the majority of properties in Australia are not sold on the two-tiered market, but remember "caveat emptor", let the buyer beware.
Whilst it is obviously desirable for purchasers to personally inspect and make detailed enquires about properties they are considering buying, this is not always possible. Valuations by independent registered valuers accredited by the Australian Property Institute (API) or the Royal Institution of Chartered surveyors (RICS) can be obtained to assist purchasers make better informed decisions on their major property acquisitions.
Please Note: you must read our legal notice before continuing. Any material contained on this website is no substitute for professional advice. e-valuation queensland pty ltd makes no warranties or representations regarding the quality, accuracy, currency, completeness, merchantability or fitness for purpose of any material.