In this issue:

Market Snapshot 

After two years of subdued market conditions, 2013 has given Melbourne property investors much to celebrate. During 2011 and 2012 auction clearance rates dropped to as low as 55 per cent, however 2013 has seen clearance rates consistently surpass 70 per cent. 

Throughout 2013 the pool of buyers has steadily increased and consequently prices have risen as the year has progressed. As is always the case properties in the quality segment have experienced far greater capital growth than those in other market segments. 

This year I have dealt with more investors ready and willing to enter the market. There has also been a lift in bidding intensity at auctions. 

The Reserve Bank of Australia cut interest rates to a record low of 2.5 per cent during its board meeting for the month of August. March quarter 2013 GDP figures showed that the Australian economy again grew by 0.6 per cent for the quarter. This equates to real growth of 2.6 per cent over the year. Victoria's unemployment rate remained steady at 5.7 per cent; this is in line with the national average. 

As for the foreseeable future, I believe it is onwards and upwards for the Melbourne market. The positive nature of recent economic indicators is assisting this resurgence. Typically, just prior to a federal election the property market has gone into hibernation. Once this is out of the way activity levels will substantially increase. 

However a word of warning: auction clearance rates are now approaching 80 per cent. I have witnessed this current scenario a number of times over the years and it could indicate the start of a boom and bust cycle. The next interest rate movement should be up; nobody benefits from a boom and bust cycle. 

Melbourne is a city with a growing population; the net number of dwellings is increasing at a steady rate. The difference in capital growth performance between properties can be substantial. Now more than ever astute property selection is crucial in order to achieve the optimum capital growth. 

The Murky World of Real Estate Investment Advice

The real estate industry has always been at the top of the tree when it comes to the bullshit index. The advent of the so-called property advisor has taken this to a new level. 

At the moment we have a whole band of unqualified ‘experts’ from your postman turned property advisor to your local accountant offering real estate investment advice. Some of these unlicensed operators openly advertise their real estate advice service in property and investment publications. Unlicensed operators giving real estate advice is in contravention of the Estate Agents Act. 

These unqualified spruikers are not privy to property transactions, don’t liaise with buyers and sellers, don’t go to auctions regularly and are therefore not aware of the segmented and variable capital growth performance of real property. 

The reality is that in most cases unqualified operators are advising their clients and the general public to purchase property based not on the attributes that constitute the optimum performing investment, but on the (unstated) fact that the advisor will be receiving a kick-back from a developer. 

The regulators idly watch as property investors who are attempting to self-fund their retirement are having their financial future seriously jeopardized by this self-serving and uninformed advice. 

This scenario has been accentuated further with the advent of the self-managed super fund (SMSF). There is substantial variance in capital growth performance between different properties; this is a reality that the regulators are not aware of. Unqualified advice in relation to property selection could lead to a disastrous outcome for retirees despite the potential tax savings associated with an SMSF. Those tax advantages will be minor if the property fails to appreciate. 

The key regulators of SMSFs are the Australian Investments and Securities Commission and the Australian Taxation Office. Their focus has been on warning consumers about correct set up and compliance with regard to SMSFs. However the equally important issue of obtaining proper advice in regards to asset selection has been neglected. 

When it comes time for investors to sell their asset and reap what should be their retirement savings the cold hard reality will be that their investment has not performed. The retirement windfall they were expecting won’t eventuate. 

Unqualified real estate advisors are able to pull off these scams because the asset they recommend usually won’t be sold for many years and the exceptionally poor capital growth performance of their selection won’t be revealed until then. 

Currently the real estate investment advice industry is dominated by buyers’ advocates. On the surface this may seem to be an astute way for investors to seek expert advice. Unfortunately, engaging a buyers’ advocate does not guarantee the optimum outcome for investors. The buyers’ advocacy industry is also seriously flawed. 

Firstly, most buyers’ advocates have had little or no training. The academic course that buyers’ advocates complete in order to attain a real estate licence has been specifically designed for selling agents. This is ridiculous as the role and skill-set required of a selling agent and buyers’ advocate are totally different. 

Buyers’ advocates have now been operating for over 20 years in Australia and yet the regulators have failed to implement a licence course that specifically addresses the skills required to become a competent buyers’ advocate. A large portion of the role of a buyers’ advocate is to provide property investment advice yet the current real estate licence course does not provide any training in this area. 

Further, the academic requirement to obtain a real estate licence in Victoria has become an embarrassing farce. As it stands at the moment the academic requirement for a full licence can be fulfilled with just five days of study. 

Equally concerning is the fact that an agent’s representative can also advise a client on property selection provided they are operating under the authority of a fully licensed entity. A person can obtain an agents representatives accreditation with only six weeks of part-time study. 

To muddy the waters further, the Corporations Act doesn’t consider real property a financial product and therefore a financial services licence is not required to give real estate investment advice. This is in contradiction to its own definition of a financial product: “a facility through which, or through the acquisition of which, a person ... makes a financial investment”. Clearly real property can be a financial product. 

The investment of choice for many Australians is residential property. Most people feel comfortable with property and it is therefore the cornerstone of their retirement strategy. There is currently around 80 billion dollars of real property invested in SMSFs alone. How can such a significant asset remain unregulated? 

The government’s failure to regulate and control unqualified operators and implement a proper licensing process will have a disastrous impact on the lives of retirees and on our economy. Investors who become victims of bad advice will have to rely on government handouts to survive in retirement. This will put enormous pressure on the public purse. Ultimately it will be the tax payer who has to prop up the victims of sub-standard advice. 

The real estate advice industry requires a total overhaul and the responsible authority to initiate reform is Consumer Affairs Victoria. To date they have failed to implement any meaningful changes. Unfortunately they have been asleep at the wheel. 

Firstly, the academic licensing requirements of buyers’ advocates should be completely revamped. A course that specifically addresses the skill set needed to be a buyers’ advocate should be introduced. This course should focus on and address the recognized and accepted principles of providing property investment advice. 

Secondly, there should be a crackdown on all unlicensed providers of real estate advice. This should include any unlicensed person who directly or indirectly makes representations as to the capital growth performance of real property. Only a properly trained and qualified buyer’s advocate should be allowed to advise on property investment. 

This reform needs to be implemented straight away. The current situation of unqualified and inadequately trained people offering advice on assets that can be worth millions of dollars is not acceptable. The implications of bad advice both on the quality of life of the individual in retirement and the overall impact on public finances require immediate action. 

New Service: Finding and Screening a Suitable Builder 

I have always been amazed at the number of times building and renovating projects end in dispute between the builder and the property owner. In recent times I have met several owners who have suffered this fate. Most people are not aware of the complicated process involved in building works. 

For this reason I am now offering a new consultation service focused on finding and screening a competent builder. The correct choice of builder is the most crucial appointment in a construction project. 

Undertaking a building and renovating project is one of the most important financial decisions a person can make. Building and renovating invariably requires a large financial outlay by the owner. The consequences of falling out with the builder can be horrific. 

Building disputes can cause much heartache for the building owner resulting in budget blowouts, time delays and sometimes even costly litigation; things can really turn ugly for all concerned. The owner is in the most vulnerable position as the builder can walk away leaving a project in limbo. 

I am a registered building practitioner and I have also engaged the services of builders. This has given me firsthand experience in understanding the complexities and pitfalls involved in construction projects. I am also a member of the Housing Industry Association; they provide up-to-date information and specialist advice when required. 

I have developed a checklist which is the result of my 25 years of experience in both the building and real estate industries. As part of my consultation I will provide this checklist to clients. 

As well as assisting clients with sourcing a competent builder, just as importantly I will also advise on how to effectively screen potential candidates. I will guide clients in regards to the relevant questions to ask candidates. I will also provide tips and advice about the planning and construction stages of the project. 

I encourage anyone to contact me before carrying out any building or renovating works. 

Psychology of the Buyer 

The mindset of a buyer needs to be in touch with reality at all stages of a property transaction if there is going to be a successful result. 

Working closely with buyers has given me an insight into the emotional and psychological rollercoaster that buyers experience while making what is generally the largest financial outlay of their life. 

A buyer’s confidence level – which includes their perception of the state of the economy, the stability of their employment and their ability to repay a loan – will determine whether they take the plunge into the property market. 

It doesn’t matter if a person’s perception is accurate; a positive view about these factors – right or wrong – is required if they are going to make a purchase. 

Many people don’t follow through on their initial plan to purchase an investment property through fear of failure. It is easier to do nothing than make such a substantial outlay. No matter what the market conditions are there is always some form of negative sentiment, about the state of the economy or the real estate market in particular, to give people a reason not to act. 

Also, many people are psyched out by the high price of real estate. All those zeros can look pretty scary. The fact is, in regards to the purchase of an investment property, after taking into account rent payments and tax deductions, the actual out-of-pocket expenses aren’t so daunting. 

The psychology of buying also comes into play during the actual transaction. 

Firstly, buyers believe the selling agent is privy to in-depth knowledge about the property including the price the vendor may accept; this is rarely the case. Buyers are unduly influenced by the selling agent’s rhetoric about the property. 

Even if the selling agent is aware of what price the vendor will accept they will not accurately pass on this knowledge to buyers. This is especially the case during an auction campaign where the price of a property is invariably underquoted. It is up to the buyer to complete their own due diligence and draw their own conclusions or engage the services of a professional to assist them. 

Secondly, some buyers can become emotionally attached to a property; they literally fall in love with it. They block the negatives from their mind and can only see the property’s attributes. These people are in danger of paying too much and definitely require the services of a buyers’ advocate. 

Thirdly, the concept of the herd mentality certainly applies to real estate. I have seen properties remain on the market for months attracting little interest, and then all of a sudden several buyers are competing to buy that same property. The fact that there is a perception the property is in high demand tends to feed greater intensity into the negotiation. This is why some selling agents fabricate competition. 

After completing a property transaction some buyers suffer a condition known as buyer’s remorse. The symptoms of buyer’s remorse are irrational feelings of doubt about the validity of their purchase. For example some buyers believe they were tricked by the selling agent into paying too much or that their buyers’ advocate and the selling agent colluded to their detriment. 

This condition can last up to a few months after the purchase. It is unique to real estate mainly because of the substantial outlay of funds involved. 

My advice to buyers is to act on logic not emotion. I know this is difficult especially if the property is a potential home to live in. Discovering a home that a person believes will give them the perfect lifestyle elicits strong emotional responses that often clouds thinking. 

If you are an impulsive, emotional type person I would highly recommend the services of an independent buyers’ advocate. If you are intent on going it alone you may want to take heed of advice I give to my home buyer clients: your once-in-a-lifetime dream home will come onto the market approximately every four months. 

The Property Management Malaise 

The standard business model of property management departments isn’t functioning effectively and needs to be changed. 

Property Management has always been much maligned by all stakeholders. Many owners and tenants are not happy with their property manager. They are quick to point out their many deficiencies. Lack of communication, failure to return phone calls, not acting on requests, insufficient or inadequate routine inspections and basic administration errors are some of the more common complaints. 

Property managers themselves feel overworked, highly stressed, unappreciated and underpaid. I know – I’ve worked in this area and include it as part of my business. 

Most young real estate hopefuls begin their career in the property management department and if they display enough motivation and talent they then progress to the sales department. Property management has always been considered the less glamorous department in a real estate office. 

This is because property management is a continuous slog that revolves around the endless streams of paperwork that is now required. A key performance indicator of a property manager is how quickly and accurately they can execute document after document after document. 

The constant stress due to work overload is leading to many leaving the industry. This high staff turnover and resulting loss of knowledge is affecting the overall quality of service as an incoming property manager knows nothing about the properties he or she is looking after, nor the individual circumstances of the owners and tenants. 

Property managers are the meat in the sandwich between owner and tenant. Owners would prefer not to spend money on maintenance items; tenants want quick action if something isn’t working. Tenants want to pay as little rent as possible; owners want as much rent as possible. 

Property managers have to endure the resulting barrage of negativity that results from these competing interests. 

What most of the general public are not aware of is the relentless pressure property managers have to endure on a daily basis. It is an industry standard that one property manager will be in charge of between 100 and 200 properties. To give you some perspective of this workload: I once assisted managing just 25 properties and at times felt like reaching for the whisky bottle to cope. 

There are several reasons why most property management departments don’t function effectively. The most obvious is that the number of properties a property manager is required to oversee is too high and therefore it is impossible to service them all effectively. This results in little or no follow up with regards to maintenance matters, paperwork etc. 

Secondly, most property managers receive little or no regular training. Property management requires skill and knowledge across a wide range of subjects. These include being an effective mediator and negotiator, having knowledge of real estate and building regulations, being able to identify and organise rectification of maintenance issues, and having an eye for detail in relation to the many forms and documents that need to be completed. 

Sadly most property managers just don’t have the necessary time or skills required to carry out their jobs effectively. The reality of this scenario is that property owners are required to be proactive in overseeing the management of their property. This is particularly the case in the areas of general and preventative maintenance. 

The blame for this property management malaise falls squarely on the shoulders of the directors of real estate businesses. A primary objective of most directors is to obtain a management listing – even if that means discounting heavily to obtain it. 

This strategy is implemented because if an owner decides to sell there is a higher probability they will engage the services of the real estate office that is currently managing the rental. The possibility of earning a substantial sales commission looms large. Also, each addition to the rent roll increases its value as an asset for sale. 

Real estate offices are primarily sales orientated. Most real estate directors operate in the sales department and therefore place a high priority on obtaining sales commissions. 

On the surface this strategy may appear sound however it is fundamentally flawed. In reality this penchant for charging low management fees in order to obtain rental listings has a negative impact on the entire business and is the reason why most real estate businesses struggle. 

The average management commission is around 7 per cent; some will even discount to 5 per cent. This equates to a meagre monthly commission of approximately $85 per property. Also, many property management departments perform work that is outside their responsibility and don’t charge for it. The implications of accepting such low management fees are that property managers are substantially underpaid. 

The average salary of a property manager is between $35,000 and $45,000 per year. This makes it difficult to attract quality applicants and it certainly doesn’t induce them to remain in the position taking into account the workload and demands. 

Low salaries attract inexperienced and unqualified property managers. This in turn results in sub- standard work that frustrates both owner and tenant. This is all bad news for the real estate business as the end result is a damaged reputation which affects the whole business including the sales department. 

When an owner is looking to sell or a tenant becomes a vendor in the future, they will not forget their bad experiences and are unlikely to engage the services of a real estate firm who failed to look after them well. Continued poor service can also result in a property owner taking their management business elsewhere. 

In a nutshell, the desired outcome of discounting management fees to obtain more properties and consequently more sales listings has backfired. 

The solution to the property management malaise is twofold. Firstly, fees should be increased so that staff are paid commensurate with the skills and responsibility required. This would help attract and retain a higher calibre of candidate who is able to effectively deliver a quality service. Secondly, regular training should be implemented to keep standards at a high level. 

The key to obtaining sales listings is an effective property management department. The ramifications of bad service in the property management department will impact the sales department; they are not mutually exclusive. 

Expecting untrained, inexperienced junior staff to manage properties that can be worth millions of dollars doesn’t make sense. This scenario will only damage the reputation of the entire business.