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Two tier

real estate markets in Queensland

Report on an investigation conducted forthe Queensland Office of Fair Trading.

Two tier report 5/21/2023

Two tier

Real Estate Marketsin Queensland

EXECUTIVE SUMMARY......................................................................................................................3

THIS REPORT........................................................................................................................................4

WHAT IS TWO TIER PROPERTY MARKETING...........................................................................4

HOW ARE THE PREMIUMS OVER MARKET PRICES ACHIEVED?........................................8

THE FOOD CHAIN..............................................................................................................................11

HOW PREVALENT IS TWO TIER MARKETING.........................................................................12

HOW MUCH PUFF...............................................................................................................................13

WHAT THE PROPERTY MARKETERS SAY.................................................................................14

WHAT PROBLEMS ARE THERE WITH TWO TIER MARKETING?.......................................16

WORKING PARTY CONSIDERATION OF TWO TIER MARKETING PROBLEMS.............18

MISREPRESENTATIONS...................................................................................................................19

VALUATIONS.......................................................................................................................................21

THE ROLE OF FINANCIAL INSTITUTIONS.................................................................................25

ECONOMIC IMPLICATIONS............................................................................................................27

SOCIAL IMPLICATIONS...................................................................................................................30

IS IT LEGAL?........................................................................................................................................31

WHY HASN’T SOMETHING BEEN DONE BEFORE NOW?.......................................................33

APPENDIX ONE – COMPARISON OF TWO PRICE LISTS........................................................35

APPENDIX TWO – THIRD TIER MARKETING DATA...............................................................36


Executive Summary

Two tier markets can be defined as those where the one property can at the same time have two wildly divergent values, depending on how and to whom property is sold. What are referred to as two tier markets have a high price tier which is achieved when specialist organisations and techniques are used to market properties to persons normally residing somewhere remote from the market.

The argument that valuers are responsible for the fiction of a two tier market is disproved by the so called third tier market – where investors who dispose of their properties must do so at a loss in the normal market while marketing organisations retain the ability to remarket those same properties at the high second tier of pricing.

Central to the marketing techniques are the recruitment of a large pool of potential purchasers, an emphasis on negative gearing as the key to successful property investment, the provision of all facilities and services for rapidly concluding the purchase process, and closeting of potential purchasers from independent sources of local knowledge and professional advice.

Marketers claim that they provide valuable services to the consumer and also to the development industry and local economies. The alternative view is that negative gearing marketing organisations and techniques systematically and cynically exploit vulnerable and naïve consumers and are doing or will do great damage to the reputable real estate industry and local economies.

Puff, a term in use within the industry, may be defined as the difference between marketed prices and the fair market value of properties. In 1998, the amount of puff in the Gold Coast market was estimated as averaging between $40,000 and $54,000 per property and $110-$150 million overall. This is roughly equivalent to the gross return of the organisations employing marketing techniques and also to the immediate capital loss sustained by investors.

In what has collectively become known as “the foodchain” a range of professionals performing services within the marketing system may be systematically ignoring professional obligations and overcharging for their services. There are concerns also in relation to undisclosed payments and secret commissions between parties to marketing transactions and third parties

The existence of two widely separated price tiers introduces a fundamental flaw into the projections of capital appreciation shown to potential purchasers by marketing organisations which means that very few investors can expect a positive growth in the value of their investment even over extended time periods.

The success of negative gearing marketing techniques has meant that much new development product is being built specifically for this market. This may build significant distortions into real estate markets, worsening boom-bust cycles and increasing recovery periods. There is a need also for more research into the potential


social consequences of excess construction of rental housing stock, often in unsuitable locations.


This report

This report was prepared as a result of a study of two tier property marketing conducted by an independent consultant, Mr Phil Dickie, for the Queensland Office of Fair Trading. It draws on and was prepared in conjunction with:

Research into two tier markets which involved:

A review of departmental files

Interviews with participants in two tier markets, property buyers and others with specialist expertise

Reviews and analysis of property sales data

Submissions to and the proceedings of a stakeholder working party set up to examine consumer concerns associated with property marketing and possible strategies to deal with them

A report by legal consultant Professor Bill Duncan on State legislative options for regulation of property marketeering activities.

This report gives an overview of the property marketing industry, using the Gold Coast as the principal area of study. It was not the purpose of the study, and nor was it possible given the time and resources available, to fully resolve many of the allegations made during the course of the investigation.

The consultant acknowledges the assistance of property purchasers, staff of the Office of Fair Trading and the Department of Natural Resources, individual and institutional members of the Working Party on Property Marketing in Queensland, Mr Rex Davis and Dr Scott Baum of the Australian Housing and Urban Research Institute and Mr Bruce Moon of the School of Planning, Landscape Architecture and Surveying at the Queensland University of Technology.

Views expressed are not necessarily those of the Office of Fair Trading.

What is two tier property marketing

As far as can be determined, the term two tier property marketing was coined in the early 1990s within the valuation fraternity to describe the marketing of property, particularly new development product, at levels well above fair market value. A single property can at the one time have two wildly disparate prices, as is shown by the following comparison of prices issued in the same short time frame and presumably for two quite different groups of buyers for units in a Gold Coast high rise apartment building.


TWO TIERS OF PRICING?Comparison of two price lists for off the plan sales

Gold Coast high rise apartment block, 1998

Unit number

Price List A Price List B

1 $311,000 $285,000Manager $2,300,000 $1,800,00012 $336,000 $289,00048 $422,000 $370,00051 $432,000 $373,00053 $405,000 $358,00056 $415,000 $361,00057 $446,000 $379,00059 $424,000 $364,00065 $444,000 $370,00066 $476,000 $388,00071 $464,000 $376,000

The full list of units and prices is at Appendix ..

The existence of two distinct levels of prices suggests that two quite distinct real estate markets are in operation in some areas – a local or normal market and a separate market for buyers from elsewhere sometimes known as the investment or seminar market.

The growth of the second market is commonly attributed to the emergence of specialist property marketing companies aggressively promoting negative gearing investment strategies. However, some or all of the methods used or pioneered by such companies, including telemarketing, direct marketing , negative gearing investment seminars and free or low cost flights to the property locality for potential buyers are also used by other players in the market - notably development companies and some real estate agencies and individual agents, as well as unlicensed individuals and companies.

Two competing views exist of the marketing industry. The first is that poorly informed couples with savings or equity are being snared into buying overpriced property by misleading and high pressure sales campaigns. The alternative view is that marketing is enabling middle Australia to secure its future through property investment and contributing substantially to employment and wellbeing in the communities in which it operates. It is sometimes conceded that marketed property prices may initially be a little higher because of the necessity to include the higher marketing costs, but providing the property is held for a reasonable period this will make little difference to its investment value.

Some proponents of the latter view go so far as to deny the existence of two distinct tiers of pricing. Valuers have also been accused of improperly marking down the


value of a property, solely on the basis that it is being sold by a marketing company rather than by a real estate agent in the traditional way. However, this is a minority view.

A survey of Gold Coast valuers found that 90 percent believed that a “submarket” existed for mostly non local buyers who were paying “slightly or significantly more” than market value for property. Of these, 39 percent believed non local buyers were paying 20 percent more than market price, 32 percent believed they were paying 25 percent or more and five percent believed they were paying more than 50 percent over market value.i

More evidence for the existence of two widely separated bands of pricing is shown by what happens when marketed properties are resold in the open market. In nearly every case coming to the notice of this study, the properties could only be sold at the lower normal market level, leaving the original investors to wear a large capital loss. That this has nothing to do with general market trends is shown by the ability of marketers who have acquired such properties to resell them at the higher level, sometimes within days.

Indeed, a number of companies seem to specialise in the quick turnaround of such properties, a practice known as third or even fourth, or fifth tier marketing (although this is a misnomer as the properties are simply being bounced back and forth between the two price bands).

The following table illustrates this “third tier” market, using an analysis of the 1998 property transactions of two prominent and related Gold Coast “re-marketing” companies Electus Pty Ltd and Citra 2000 Pty Ltd. All of the sales where detailed analysis was undertaken involved one marketing agency, Applied Investment Research (Aust), which in turn called on the services of a single finance brokerage and a single Gold Coast solicitor. The table shows the large losses being sustained by original purchasers, often after a considerable period holding the property.

i Gary MacDonald, Two tier markets in Australian Property Journal Vol 35 No6 pp 516-23


“. . . there is not a two tiered market relating to investment properties. It is more appropriate to say that there are two different valuations for the same property, depending on its age, or alternativelly, depending on whether the

valuation is required for mortgage security purposes.”.Mr Chris Bilborough,

Director, The Epic GroupJuly 1999

Some 1998 “third tier” Gold Coast property sales by Applied Investment Research (Aust) on behalf of

Electus Pty Ltd and Citra 2000 Pty Ltd

Original sale(Year)

Electus/Citraacquisition

price

Electus/CitraSale price

Electus/Citra Gross profit

$126,750(1994)

$78,000 $137,500 $59,500 over 7 days

$100,000(1990)

$70,000 $129,000 $59,000 over 77 days

$122,000(1988)

$100,000 $166,000 $66,000 over 15 days

$124,900(1993)

$72,500 $139,500 $67,000 over 2 days

$103,900(1992)

$65,000 $128,000 $63,000 over 60 days

$117,900(1993)

$80,000 $139,000 $59,000 over 35 days

$200,000(1995)

$138,000 $189,000 $51,000 over 66 days

$150,000(1989)

$117,000 $179,000 $62,000 over 126 days

$112,000(1989)

$75,000 $137,000 $62,000 over 65 days

$190,000(1995)

$138,000 $220,000 $82,000 over 46 days

Full details of discovered Citra/Electus sales are at Appendix 2.

As far as could be determined Electus Pty Ltd and Citra Australia 2000 Pty Ltd were involved in the purchase and remarketing of 38 properties in 1998. (The full summary is contained at appendix 2) The average difference between the purchase price paid by the company and the sale price achieved by Applied Investment Research (Aust) was $54,000, which represented a 52 percent margin on the average purchase price. The gross profit shared by parties to these transactions was in excess of $2 million with the properties being held for a median period of 46 days. In all probability, the companies achieved much better results as:

it is unlikely that the full purchase price would have had to be advanced in the case of back to back sales, giving a very high rate of return on the capital actually employed.

it is highly likely that there were additional sales either traversing the study period or not picked up because of delays in registering sales data.


It may be fair comment that third or fourth tier marketing resembles some of the worst practices of the franchising industry. In that industry the word “churning” is used to describe a process which can be described as:

A franchising organisation uses wildly optimistic business projections to sell a franchise.

The business often fails and indeed the allegation often is that failure is built into it.

When the franchisee is at last gasp, the franchisor emerges as the only buyer and reacquires the franchise at a fire sale price.

The franchisor then sets about, in the words of the game, finding another sucker.

The analysis of resales data shows that, despite the protestations of some in the industry, two tier markets with widely separated price tiers are a reality in many real estate markets. .

How are the premiums over market prices achieved?

Second tier marketing generally has all or several of the following characteristics:

Property is marketed by agreement between a marketing organisation and a developer or by a developer within an internal marketing arm, largely bypassing the traditional real estate industry.

Potential purchasers are largely recruited – methods include telemaketing, prospects being accosted on the street and through the holding of investment seminars.

The recruitment effort is focussed on potential purchasers from outside the area where the property is located, often in provincial or rural areas, interstate and overseas. During initial contacts, the fact that property purchase is involved is often not raised.

A negative gearing investment strategy is the central element of the sales pitch.

Prospects are often offered free or subsidised flights to the locality where the property is being marketed.

Prospects are usually “qualified” for loans and then shown a selection of properties to meet a negative gearing investment strategy and – usually on the


same day – encouraged to sign a contract with all legal, financial and other services provided by or through arrangements established by the marketing organisation.

The property offered is usually part of a bulk development, is usually new to the market and is in the low to middle range of pricing.

Rental guarantees of one to two years may form a part of the purchase contract.

Property is more likely to be offered at a fixed price, in contrast to the traditional practice of making and accepting of offers as a way of settling a price acceptable to both buyer and seller.

One explanation for the achievement of sales prices that are dramatically above market values are that buyers naive to local conditions and with their focus on an investment strategy rather than a property purchase are subjected to a hard sell by organisations providing a one stop shop offering future wealth and security.

Technically, there is nothing to prevent purchasers declining to make an immediate decision on purchasing a proffered property and nothing to prevent them insisting on an opportunity to seek independent advice on their financial situation, contracts or local market conditions. Some purchasers presumably do take such steps and some may go on to make a purchase. But many are swept along by the process and easily talked out of consulting professionals outside the circle of those made immediately available by the marketing organisation.

Another critical difference with traditional sales practice is the linkage of professionals to the marketing organisation. Traditionally, purchasers engage their own solicitor to review the property and contracts, arrange their own finance with financial institutions and arrange their own insurance. Although their services are available to all, valuers traditionally worked mainly for financial institutions.

Marketing organisations now commonly broker both finance and insurance packages, provide contracts and, on occasion, proffer valuations. Some stress the “independence” of such professional advice, often in cases where independence would seem at best highly questionable. The department is also aware of cases where the professional qualifications of service providers have been questionable. One case allegedly involved valuation “certificates” prepared by an employee of a marketing organisation who had been a valuer but no longer had the appropriate registration or professional qualifications.

Valuers and solicitors may also be on panels appointed by the developer or marketing organisation and may be referred considerable volumes of work as a result. Solicitors may also do other legal work unrelated to sales for developer and marketing organisations, also bringing in to question their ability to adequately and independently represent the interests of an out of town purchaser introduced to them by a marketing organisation with which they have continuous contact and contractural or other relationships.


Figure 1 below shows how traditional relationships between buyers, sellers and service providers have changed under the two tier marketing system.Figure 1: Comparison of second tier marketing and traditional property sales

Second tier marketing – relationships and money flows

Traditional marketing – money flows and relationships


Property Developers

ABCMarketing

GroupABCDevelopment

Advice ABCFinancialServices

ABCInsuranceServices

Banks

Insurers

Solicitors

CommissionFee

fee/ percentageJoint venture

Payment

Commission

Commission

Panel membership

FeeLoan

Bank

Buyer

OwnerBuilder

Developer

Solicitor

Solicitor

Real EstateAgent/s

Fee

CommissionPayment

Valuer

Fee Fee

Loan

Valuer

The Food Chain

“The food chain” is a term used to describe those now making a living from two tier property marketing enterprises. The term is now in quite common usage in the industry, with its origins seeming to lie within the property marketing industry rather than with its detractors . . . as in with invitations being issued to outsiders to “join the food chain” or with warnings being issued to government that undue attention will “create a significant negative ripple effect that will send a financial shiver down the property development foodchain”.

Transactions in the upper price tier must finance telemarketers, investment seminars, flights for investors to the property locality, in house professionals such as solicitors or arrangements with external professionals, one to two years of rent payments or supplements, finance and possibly insurance brokerages. Other overheads such as the requirement for shopfront or office space might also be at much higher levels than with traditional selling.

Figure 1 above compares traditional marketing through a real estate agent with a well developed upper tier marketing system – this shows clearly the increased number of participants and the complexity of relationships between them. This increased complexity and sophistication comes at a cost. The majority of the funding required by the marketing system must come from purchasers. Some allowance, however, should be made for the higher volume of sales achieved by the marketers – a higher throughput enables a more sophisticated sales structure without necessarily increasing the level of impost on any individual customer. And some of the funding requirement is met through payments for referred business from other organisations. Major sources of such funding are commissions and trailers from banks and insurance companies, although mention was also made during the course of the investigation to more or less secret commissions from furniture outlets and property managers. However, it should be noted that there is some evidence that some of this third party commission income may also be available to real estate agents marketing property in the traditional way.

It became apparent during the course of the investigation that commissions and fees of all varieties are, as a general rule, set at much higher levels for marketed properties than applies to traditional selling. A leading marketing company would not or could not disclose exact levels of direct commission on sales, saying they varied from case to case. Commission also may not be the right description in any case, as marketing companies often receive the difference between the developer’s return and the sale price, less expenses. This figure is rarely known in any precise sense, however it can safely be said to be orders of magnitude greater than standard real estate commissions.

Documentation provided with complaints lodged with the Office of Fair Trading shows that associated solicitors may charge twice to three times the normal level of conveyancing fees, and that a premium fee can be attached to finance provided by


brokers or the brokerage arms of finance companies. It is not possible to say that this level of charging is general in the property marketing industry. But, equally, there is no evidence to indicate that such high charges are not routine.

The amount of money washing around some marketing systems would seem to be enough to enable impromptu decisions to enlist other persons into “the food chain”. A valuer recounted how one marketing company made an explicit offer of enrolment in “the food chain” with premiums over normal fees to be paid for valuations. A newspaper personal investment columnist detailed how the same marketing organisation offered a commission of $2000 a sale almost at the point of first contact.

How prevalent is two tier marketing

The best estimate of the prevalence of two tier marketing available is a study conducted over the Gold Coast city area for the year 1998 by the valuation firm Herriots Pty Ltd. The study has some limitations – the study covers strata title sales only, two tier sales are not always identifiable and sales are not always registered immediately.

The Herriots methodology was to identify the two tier sales on the basis that:

- the vendor was a known two tier operator and the property a known two tier development

- the property was identified by Herriots as a two tier product in the course of their valuation work

- the property was sold for well above the range of fair market value established for similar products in the direct locality

- a two tier marketing company was known to be involved- the purchaser and vendor and/or marketing firm share the same address- one vendor handles the entire development- the majority of purchasers live outside the Gold Coast area, in particular when

accumulations of purchasers come from the one country town, interstate area and so on.


“In researching this column, I was offered a commission of $2000 a sale by one such organisation. The offer was unsolicited and was made after referral to a manager and within five minutes of my first phone call.”

David Bryant, The Weekend AustralianApril 18-19, 1998

On the basis of this study Herriots estimated that the two tier sales comprised 42.6 percent of the 6476 settled unit sales on the Gold Coast in 1998. The monthly low was 34.6 percent and the high 83.3 percent, although both these figure were recorded in the period when the lag in recording sales could be expected to have the most effect. A more normal range is between 35 and 50 percent of sales.

Statewide the position is less certain. Herriots estimates that about a third of non-rural strata title sales could be considered two tier, with a marketing presence also in house and land packages.

Gold Coast based marketer The Epic Group has laid some claim to being considered the largest specialist investment property marketer in South East Queensland and is a foundation member of the Australian Federation of Property Developers and Marketers Ltd. This one marketer claims to have “sold some 2065 properties on behalf of 83 developers such as Sunland and Villa World in the $120,000 to $222,000 price bracket. We believe that we account for approximately 60 percent of the investment (townhouse) market and 30 percent of the entire market.”ii

Epic maintained that “42 percent of all new properties sold in south east Queensland are now sold through a marketing organisation”.

While the exact figures can remain the subject of argument and further study, there is no doubt that in certain markets negatively geared investment marketing is highly significant.

How much puff

Puff is another term encountered in the investigation of this industry, and it indicates the difference between prices at the second tier of pricing and what a property might fetch in the normal market.

Herriots estimates the average “puff” is about $40,000 per sale. On the Gold Coast unit/apartment market where two tier marketing has been most studied, this translates to more than $110 million in 1998.

The study of so called “third tier transactions”, which might be expected to yield a lower figure for “puff” on the grounds that it is second hand rather than new product which is being marketed, yields a puff value averaging $54,000 a sale. In the Gold Coast strata title market, this would yield a figure of around $148 million in 1998.

These are considerable sums. Depending on which end of the transactions is being analysed, this $110-$150 million range roughly equates to:

The gross income of property marketing organisations.

The immediate capital loss suffered by investors.


The evidence, both from theoretical calculations and what market evidence exists, suggests that even over extended time frames the majority of investors will not overcome the immediate capital loss they sustain on their purchase.

What the property marketers say

Property marketers say they are performing a valuable service to both the development industry and consumers. They also say, with some justification, that their marketing methods are not new and that they are not confined only to specialist marketing companies, also being employed at least in part by:

Real estate agents and franchises

Developers acting on their own behalf

Investment advisors

Banks and other investment institutions

The marketers commonly hold that the selling of real estate is incidental to their primary activity, which is to offer consumers a package whereby they can take advantage of the tax advantages of negative gearing to secure their financial future. While real estate is the package offered, the package could, conceivably, encompass other investments such as equity. Although the investigation did not come across any marketing organisation offering any vehicle of investment other than real estate, one organisation was taking steps to acquire the status of a licenced equity trader.

The marketers also stress their role in simplifying the acquisition and holding of property through the co-ordination of professionals providing investment, legal and financial advice and through the provision of services such as property management.

A common point was that the ordinary marketing practices of the real estate industry were now inadequate for the needs of developers, particularly for the interstate and overseas marketing of new developments. Agents were not equipped to deal with the increased sophistication and cost of marketing, and ordinary commission structures could not provide the basis for funding the level of marketing required.

The marketers maintained that in relation to the volume of transactions, the level of complaint was low and many complaints were based on unreasonable expectations of capital growth over unreasonably short time periods.

Marketers did accept that the reputation of their industry had been damaged by the actions of a few marketers. It was hoped that the formation of the Australian Federation of Property Developers and Marketers and the development of industry codes of ethics would internally address such issues. Requests for membership details of the AFPDM were still being processed when this report was completed, but


membership was summarised as “including substantial developers, both on the Gold Coast and in Brisbane, a small number of marketers apart from EPIC, one of the major trading banks, and a small number of finance brokers”.

The Epic Group and the Australian Federation of Property Developers and Marketers also participated in the Working Party set up by the Minister for Equity and Fair Trading to address marketing issues and in that context were supportive of the main recommendations of licensing for those involved in property transactions, greater levels of disclosure, mandatory and enforceable codes of ethics and improved enforcement levels. The Epic Group and the AFPDM also proposed higher standards of training for those involved in the property marketing industry and the general de-regulation of agents commissions.

In correspondence to the consultant, Mr Bilborough of the Epic Group also made the following points:

“The “high commissions” charged are usually no different to the “all up” marketing, advertising, brochure and other such expenses which will be incurred if sold through an existing registered agency.

So far as the operations of EPIC are concerned we have for some time only been involved in marketing those properties which are in accordance with an existing valuation report, or in some cases, at a sale price not less than 91 percent of such valuation. We allow a maximum “tolerance” of 9 percent to


What we say to our clients

(a) We emphasise to our clients on a number of occasions that real estate ownership and/or investment is a long term issue, and we specifically mention a recommended holding period of 7-10 years.

(b) We provide to our clients certain historical information in relation to inflation and capital growth, and give an indication of income projections and depreciation allowances based on these factors. All of this information has been carefully checked by our external accountants who have certified as to its authenticity.

(c) Those clients who need finance to complete that purchase include a finance clause in their contract, giving them up to 28 days ( and sometimes longer if they wish) to seek a finance approval which is satisfactory to them. All of our developer sellers are prepared to allow a contract to fall over if satisfactory finance is not available.

Mr Chris Bilborough, Director, The Epic GroupJuly 1999

take into account the different interpretations to assessing the value of a property taken by valuers.

However, what we find most objectable is the practice by a limited number of valuation firms who will assess a certain value on a particular property, but when advised that the property is anticipated to be marketed by our group, discount their original valuation by between $20,000 and $30,000.”

It should be noted that some of the material in the possession of the Office of Fair Trading and mentioned in media reports on The Epic Group and its variously named predecessors appears to be at some variance with these statements on practice.

Several requests were made to The Epic Group for copies of material supplied to potential investors and for the information on which projections were based. The only such material supplied was a copy of a book, Building Wealth in Changing Times by Jan Somers. This book and others by the same author, which appear to be published by Somerset Financial Services, are promoted by a number of property marketing companies. Apart from a brief discourse on the advantages of median priced property, this book does not dwell on the notion that obtaining value for money might be one of the fundamentals of investment.

No other material was supplied although in further correspondence more detail was given on the external certification of material used in presentations:

“A senior accountant has been to two different presentations made by representatives of the EPIC Group for the purposes of reviewing the information passed on to potential purchasers, and concentrating on the taxation consequences of same. This happened as recently as April this year. . ; . I am now seeking a written certification from these accountants and will forward same to you immediately it is available.”

National Asset Planning Corporation, a company associated with The Epic Group, is known to have used capital appreciation multipliers of between 7.5 percent and 9 percent on worksheets supplied to clients. These, while at the lower end of the range of multipliers used by marketing companies, are well above any sustained rates of capital appreciation achieved in any recent period in the markets where the properties were located.

What problems are there with two tier marketing?

At the time of the change of the Queensland Government in June 1998, property marketing practices were generating a significant level of complaint to government bodies, both from aggrieved consumers and others. Many of the other complaints, naturally, were from those suffering or anticipating erosion of their market share to the property marketers. However, complaints from professionals that professional


standards are being debauched on a widespread and increasing basis and allegations of institutional misconduct are claims that need to be taken seriously.

Although the media has run isolated articles on victims of pressure selling of overpriced real estate for many years, recently the nature of coverage has changed. This was not just a matter of more articles in more media outlets, but also of the media beginning to explore the context of the marketing and the complicity of other institutions, particularly financial institutions. This coverage, damaging to the State’s reputation and potentially very damaging to its economy, is likely to continue, as:

- the reservoir of victims is large and international and they have stories loaded with personal tragedy and media appeal.

- the element of courtroom drama is about to be added to the mix

- little has yet been written on the social, environmental and further economic effects of what has been built, how much has been built and where it has been built.

The holding of a seminar on the Gold Coast, ministerial statements in State Parliament and the convening of the working party effectively constitute a recognition by the State government that significant problems exist, creating an expectation of action. Some banks, also facing criticism of their role in facilitating two tier transactions, have issued public statements conceding some problems and some have announced changes to their operating procedures.

Although Queensland would appear to be the state where two tier marketing is most prevalent, the practice is not unknown in other states and activity by marketers is increasing in all active property markets. Moreover, a large proportion of the marketing activity for Queensland property takes place interstate and many of the self-proclaimed victims are located interstate. It is significant that it has been the national rather than the local media which has taken the lead in detailing property market abuses in Queensland.

Purchaser locations – third tier study

Gold Coast 4Other SE Qld 6Regional Qld 4Sydney 24NSW regional 25Melbourne 11Vic regional 15ACT/NT 3SA/WA/TAS 12New Zealand 7Asia 8


Not yet addressed in any forum in any significant way are the wider economic and social implications of property markets with a high proportion of two tier sales.

Working Party consideration of two tier marketing problems

The Minister for Fair Trading, the Honorable Judy Spence MLA convened a forum on property marketing issues on the Gold Coast in March 1999 as a result of considerable levels of complaint from the real estate industry to her office. Participants in this forum were invited to add their names to a list for further consultation. This list and representatives invited from various stakeholder groups in real estate, finance, development and property marketing formed the basis of a reference group on the issue. In May 1999, a working party was formed from the reference group to consider consumer concerns arising from property marketing practices and suggest possible remedies.

The working party was specifically asked to:

Identify the issues of concern to consumers who have purchased properties sold through marketers.

Identify the conduct, behaviour, business practices or other aspects of the role of the marketer which is of concern to consumers.

Some or all of the members of the working party identified the following major concerns with property marketing practices:

Property being sold at well above its market value

The means by which potential purchasers were captured, in particular the use of “investment seminars” as a means of selling property.

Excessive commissions being charged.

Excessive charging and a lack of disclosure on contracts with third parties to, for instance, supply furniture and manage properties as well as with body corporate arrangements on properties.

Non-disclosure of associations property marketers have with developers, valuers, solicitors and lenders and of payments made by marketers to others.

The limited opportunities given to purchasers to seek independent legal, property or investment advice.

Conflicts of interest, including the giving of investment and property advice by the same entity.


The provision of rental guarantees.

Misrepresentations of market value, rental returns, historical and prospective capital growth and of the degree of independence of valuations and legal advice.

The giving of investment advice by unqualified persons.

Information not being provided in writing.

Other issues identified related to other professions and institutions other than property marketing organisations. These included:

The quality and independence of legal advice given to prospective purchasers.

Purchasers not having access to independent valuations or valuations carried out for finance providers.

Purchasers not obtaining independent valuations despite their ability to do so.

Lenders not carrying out valuations, not taking heed of valuations, and not divulging valuations to clients.

Valuers, solicitors and lenders being caught in conflicts of interest.

Real estate sales being made by unlicenced persons.

Real estate sales staff not abiding by their code of conduct.

Current law governing real estate sales not being adequately enforced.

Developers being held to account for the misrepresentations of sales staff.

Marketing groups not contributing to the Auctioneers and Agents Fidelity Guarantee Fund.

Legislation governing investment advice and property sales is complex and spread over both Federal and State jurisdictions.

Misrepresentations

The Office of Fair Trading holds a large number of allegations of more or less specific misrepresentations by property marketers and professionals involved in real estate marketing. Misrepresentations have been alleged in relation to market value, rental returns, historical and prospective capital growth and of the degree of independence of property, financial and legal advice.


The question to be considered in this report is whether misrepresentation occurs because of the opportunism or over-enthusiasm of individuals or organisations – the few rotten apples theory - or whether misrepresentation is endemic or even intrinsic to investment property marketing.

.

Those most critical of investment property marketing characterise it as a deliberate effort to recruit and then fleece naïve purchasers. Such an enterprise, it is argued, can only be based upon deliberate and premeditated misrepresentation of values, prospects and the real relationships of various parties to the transaction.

The investment property marketing industry has not, to date, convincingly refuted such a description.

In every case reviewed during this investigation, calculations of capital appreciation shown to potential purchasers proceeded on the basis of the purchase price (or upper tier of pricing). However, capital appreciation, if any, accrues only on the market value (or lower price tier). When the difference between the two price tiers is at all significant, it can take many years of high – and often improbable - capital growth just to bring resale values up to the level of the purchase price.

For instance, for a property worth $100,000 which is sold at $150,000 – a reasonably typical scenario – the investor would need to enjoy a constant capital appreciation rate of more than four percent just to reach parity with the purchase price over a 10 year period. The following table compares the capital appreciation projections shown to purchasers with the same assumptions applied to the market price, and also with a projection based on the actual movements of average unit prices on the Gold Coast over the past decade.

(It should be noted that the four percent assumption is very conservative in relation to the multipliers used in worksheets shown to potential purchasers – in these, the lowest figure known to have been used is 7.5 percent and the highest 14 percent, with the most popular range being 8-11 percent)


“They said that property on the Gold Coast appreciated at 14 percent a year . . . I couldn’t come at that, didn’t believe that at all.”

“But you still bought that unit.”

“Well, the way they explained it, it still looked really good . . . “

Capital growth on hypothetical unit($100,000 fair market value) marketed at $150,000

End ofYear

4% growth scenario shown to buyer

4 % assumption worked on unit value.

Actual scenario (using av unit prices 1988-98)

0 $150,000 $100,000 $100,0001 $156,000 $104,000 $104,7002 $162,240 $108,160 $93,1833 $168,730 $112,486 $93,7424 $175,479 $116,986 $90,9295 $182,498 $121,665 $94,3856 $189,798 $126,532 $103,8237 $197,390 $131,593 $106,1078 $205,285 $136,857 $106,1079 $213,496 $142,331 $110,77610 $222,036 $148,024 $105,016

Due to the relatively recent development of the marketing industry only a small amount of property has come back on to the market. This study identified 47 marketed properties which had been resold after being held by the original investors for periods greater than four years. Of these properties, seven only had shown some capital appreciation, averaging $6,100 or an average 4.9 percent return on investment over a 5.5 year period in gross terms (in net terms, this gain would be negligible due to selling costs and agents commission). In general however, the evidence from resales data supports the hypothesis that negatively geared property marketed in this manner is fundamentally flawed as an investment.

Profit/Loss on resale of marketed units

Years held

AverageProfit/loss

% capitalappreciation

10 -$28,640 -22.6%7-9 -$17,470 -15.2%

6 -$18,420 -16.1%5 -$35,520 -28.4%4 -$29,150 -22.1%

Valuations

The role of valuations and valuers in two tier marketing was highly controversial in meetings of the working group, arousing controversy from both marketers and consumer representatives. Concerns raised included:


Some victims maintain that marketers showed them, or produced on request, valuations which supported over-inflated purchase prices.

Some valuers were criticised for engaging in unethical practices or lending support to unethical practices on behalf of the property marketing industry.

Marketing institutions and developers were critical of some valuers for allegedly marking down the valuations of properties solely on the basis that they were to be marketed.

Marketing institutions and developers were critical of valuers for the unacceptable range of valuations produced for a single property.

Developers were concerned that valuations not be enshrined to the extent that the market followed valuations.

Purchasers were criticised for not obtaining independent valuations.

Valuers were accused of professional negligence or worse for valuing developments solely on the basis of initial sales in the development, with such sales often being price setting sales to subsiduaries or other entities related to the development company.

These issues were taken up with the Australian Property Institute, which as the professional association of valuers issues the codes of ethics and conduct to which valuers should adhere as well as providing detailed practice instructions.

The API stated it had received no official complaints and had not instituted disciplinary action against any members in connection with two tier marketing practices. The institute, and some of its members, also emphasised the pivotal role of the profession in bringing some two tier marketing practices to public and official notice.


“… what we find most objectionable is the practice by a limited number of valuation firms who will assess a certain value on a property, but when advised that the property is anticipated to be marketed by our group, discount their original valuation by between $20,000 and $30,000.”

Mr Chris Bilborough, Director, The Epic Group July 1999

Current worksheets issued by the API do allow for valuers to note whether a property is subject to a “Two or multi-tier market”, but there are as yet, no guidelines on the use of any such notation.

Valuers also refute a common contention, raised by developers and marketers in particular, that a single property can be subject to wildly varying valuations, in conditions where all the valuations were carried out for similar purposes at a similar time. The yardstick for valuations is “fair market value”, defined as:

“The estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arms length transaction, after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion”.

The point was also made that the contract price in a real estate transaction may include elements that were not properly part of the price of the real estate, including:

Rental guarantees which may not reflect real market rentalsFurniture packagesCash rebates and other inducementsVariations arising from vendor finance packagesVendor purchaser relationships that were not “arm’s length”Non-cash considerations such as swap deal, trade or barter dollars.

The institute argues that such factors, and sometimes the inflation in contract price which is attributable solely to extravagant marketing outlays, can legitimately be taken into account in assessing a fair market value. It is also worth noting that some financial institutions require their panel valuers to appropriately discount valuations to take such factors into account.

The position of the API is that valuations are the property of the person or entity which commissions them and it is a matter for the valuation owner whether the valuation is made known to any third party. For lending institutions, the API advocates that the financial institution provide clients with a “market assessment” noting the valuation amount and date.


“We also instruct our valuers not to make any allowance in their valuations for rental guarantees, furniture packages etc. In other words, the estimated value of these “special incentives” are netted out of the sale price for valuation purposes”

Suncorp –Metway Ltd March 1999

For alleged abuses such as valuations being manipulated by developers engaging in price setting with the first units to come to market being transferred between related entities at inflated prices, the API maintains this could not occur where valuers were working to professional practice guidelines which require consideration of outside sales evidence.

This investigation did see considerable evidence of transactions between development companies and related entities. However it was not possible to say that the purpose of such transactions was to set a price or that valuers were relying on such transactions in performing valuations.

The difficulty faced by marketers who see valuers as the cause of many of their difficulties is that the resales evidence overwhelmingly backs up the contention that the contract price of much marketed property is well above any measure of market value. Indeed, the differentials claimed by the valuation firm Herriots - $40,000 - are less than those found in the study of so-called third tier sales - $54,000.


Guidance Note 12: 5.2.2

Where the property to be valued is within a new subdivision or development and is being purchased from the developer, re-sales or sales from other comparable developments should also be provided and considered.

Professional Practice 1999, Australian Property Institute

“We require our panel of external valuers to appraise values on local conditions by comparing sales of similar quality properties in the area, which are not subject to special marketing campaigns. This means, for example, that valuers will not value a unit sold in a “hot box marketed” development based on other sales in that development”

Suncorp-Metway Ltd March 1999

The role of financial institutions

As with valuations, the role of financial institutions in the two tier marketing system was controversial. The principal criticisms are set out below:

Financial institutions were involved in lucrative kickbacks to marketing groups and associated finance brokers.

Financial institutions were not alerting purchasers to valuations that showed that property values were considerably less than sale prices.

Financial institutions were taking mortgages over the principal place of residence of investors without explaining the full circumstances and inherent risks involved.

Financial institutions were lending recklessly on real estate they knew was over-valued.

Financial institutions were compromised through simultaneous involvement in project finance and purchase finance.

Financial institutions were forcing developers to use marketers through unreasonable presales requirements on project finance.

It should, at the outset, be noted that some financial institutions have little or no exposure to the negative gearing investment market. For instance, of the four major banks only one, both on its own account and through a subsiduary, accounts for the majority of the major bank share of lending on this market in the Gold Coast study area. Also, only a minority of the minor/regional banks are involved at any one time, although there does appear to be a pattern of minor institutions being involved in the market for a period and then retreating from it.

Of the non-bank lending institutions, credit unions and building societies are not much involved and some face regulatory restrictions on lending to very high proportions of property value preferred by some marketing organisations. Some fringe financial institutions are involved but, apart from a degree of vendor or developer finance, only at an extremely low level.

Some banks also decline to pay trailers and commissions on loans, which may have the effect that finance brokerages within or associated with marketing groups and developers do not refer loans to those institutions.

Negative publicity on two tier markets has led some financial institutions to reassess their exposure to the market and, in some cases, to modify their lending practices. If this trend continues, bank lending is likely to decrease and lending by fringe financial institutions to increase. This may mean an overall reduction in the pool of finance available for transactions in this market.


The Australian Bankers Association initially declined an invitation to nominate a representative to the Property Marketing Working Party. At a late stage in the proceedings, representatives of the National Australia Bank attended the meetings. The National Australia Bank is not known to be heavily involved in the negative gearing seminar investment market and its representatives stated that bank policy was not to pay commissions and trailers on loans.

From a consumer viewpoint, there is an expressed concern that banks possess information that these are imprudent investments and are not making this information available to consumers or enabling them to get out of onerous contracts. The banks reply, with some justification, that their involvement in the transaction is as a lender, not as a financial advisor and they would be at some legal risk in assuming such a role.

In any case, many reputable investment advisors recommend to their clients that they invest in negatively geared investment property, sometimes taking out a second mortgage on their principal place of residence to do so. Separating the soundly based from the imprudent financial applications would present some practical difficulties and may expose banks to liability from a number of directions. It is therefore probably unreasonable of consumers to expect banks to undertake this task.

Bank statements on disclosure of valuations

National AustraliaBank

Our internal estimates of value are carried out for security purposes, that is, on the basis that properties would need to be sold quickly under any market conditions prevailing at the time and that there are willing sellers and buyers. These parameters can result in different views of properties’ worth (generally lower) compared to the current market value . . . The National’s officers do not claim to be qualified valuers and because the estimates carried out by our officers are for the National’s own internal purposes, it is preferred that the valuations are not openly disclosed as this can lead to confusion and misunderstandings. . . . Where a qualified valuer undertakes a sworn valuation there is no reason why that valuation cannot be communicated to customers.

Citibank Where a valuation is greater than 10 % (the real estate industry norm) below the purchase price we advise our customers accordingly regardless of property locations. . . . we propose to go one step further, as we go forward, and today have introduced a policy where these types of valuation anomalies are specifically highlighted in the letter of mortgage offer to the customer.

Westpac . . . we have served notice to several organisations that, in accordance with our contractural arrangements, we will cease to accept finance requests following the expiry of the notice period. In addition, we are working on how we may be able to help investors make considered and informed investment decisions through disclosing valuations obtained for mortgage security purposes.

SuncorpMetway

If the valuation is 5% to 10% below the sale price, the policy is to advise the borrower of the discrepancy and to ascertain if the loan is to proceed. If the variation is greater than 10 %, we take the additional step of recommending to the borrower that they obtain their own independent valuation of the property.


The main information possessed by banks, which some purchasers would like to accesss, is of course the valuations performed for mortgage security purposes. Bank policy on disclosure of valuations varies widely, as the following table shows.

Economic implications

In general terms, prices are held to be determined by the forces of supply and demand. Many real estate markets, however, behave more erratically than predicted, particularly over shorter time periods. Two reasons for this are:

The prevalence in some markets of speculative activity which reflect beliefs about demand or future price movements which may have only a tenuous relationship with actual factors underlying demand.

The considerable time lags involved in builders and developers bringing new stock to market in response to market signals.

Consequently, many real estate markets have a boom-bust pattern of activity. The Gold Coast, the area most focussed on in this study, has a long history of a boom-bust real estate cycles.

The activities of two tier marketers may have the effect of further isolating the market from normal forces of supply and demand. In economic terms, the price of a significant amount of property in certain markets is being determined by the marketing method, and not by normal market forces. Property is being built to meet the requirements of marketers rather than the requirements of the market.

What is required by marketers is what can be sold to investors who are very largely remote from the local market. It is a possibility that far too much of the wrong sort of property may be constructed in the wrong locations.

Marketers and some developers are also further insulating the market from the reality of supply and demand forces through the provision of rental guarantees. There may


Due to the large supply of units constructed on the Gold Coast and sold to “out of town” investors in recent years, there is an oversupply of units on the local Gold Coast market. This has resulted in depressed values for most forms of units on the Gold Coast.

Herron Todd White, valuers

be at least a tendency for these to be set at levels which are above any achievable market rentals. Properties subject to a rental guarantee may well be vacant for much of the term of the guarantee, but are counted as occupied in many of the vacancy statistics relied upon by market participants.

Further problems arise because much if not all marketed property is over-valued - and often grossly over-valued - in relation to the market as a whole. This in time creates a considerable overhang of properties that can only be disposed of at a considerable loss in the open market.

It is likely that the above factors will exacerbate the boom-bust cycle and make recovery periods much longer than they otherwise would be. This is likely to cause economic injury to the region as a whole, causing suffering to many who have no direct connection to the property marketing industry or even the property industry generally.

Recovery periods would also be considerably lengthened if a market acquires a reputation as a location for property scams or gross over-valuation. There are some indications that this is occurring in relation to the Gold Coast, with negative media commentary on the activity of property marketing groups causing contract cancellations and depressed sales generally.

Property marketers have warned that any crackdown on their activities could have major economic ramifications for the property development industry and the general community. This may well be the case, but would need to be balanced against the very probably much greater economic damage resulting from:

The development and real estate industries acquiring a poor reputation generally in areas where property marketers are active.

Exacerbated boom-bust cycles and longer recovery periods due to property oversupply and over-valuation as a result of the activities of property marketers.

The social and economic costs of inappropriate or inappropriately located development.

The consequences of the financial hardship caused to families wearing large capital losses and/or discovering that outlays on investment properties are much greater than they were led to believe. Where significant numbers of buyers are recruited from small communities, some economic damage to those communities is also a possible outcome.


“The group as a whole has proudly assisted more than 3000 individuals in considerably minimising their tax, saving EPIC clients more than $12,000,000 tax in the 1997/98 year alone.”

www.theepicgroup.com.auJuly 1999.

http://www.theepicgroup.com.au/

The availability of tax savings through negative gearing has always been one of the mainstays of the investment market in real estate, although in normal circumstances it ranks as a lesser consideration than the need to acquire the right asset at the right price.

Most marketers turn this investment equation on its head – their pitch extols the benefits of negative gearing to the virtual exclusion of other elements of successful or even just prudent investment. However, the intensity and superficial attractiveness of the marketing does have results, one of which is that individuals who would not otherwise invest in real estate and claim tax deductions do so.

Because most, if not all, of the property marketed on the basis of negative gearing spiels is grossly overpriced, the purchasers are usually disadvantaged by their purchase – the benefits of their tax reductions are outweighed by the capital losses they have incurred in purchasing an over-priced asset.

One overall effect is a net transfer of funds from tax revenues to the pockets of marketers and others involved in “the property development foodchain”. No doubt there is some increase in tax revenues as a result of the increased incomes of those involved in the foodchain, but it is highly likely that these would not offset the revenue losses resulting from the deductions and the overpricing of assets. While it is impossible to quantify these matters, one relevant considerations might be that those receiving the additional income would have greater than average opportunities for tax minimisation and greater than average access to tax minimisation advice and services.

One of the promises held out to prospective purchasers is that through property investment they will be able to be self-supporting beyond their retirement. However, the effect of the purchase of over-priced assets is that many people relatively close to the end of their working lives are incurring large capital losses and assuming debts that are putting their current and future financial security at risk. Such individuals are likely to be rendered much less self-supporting in retirement, less likely to be paying taxes and more likely to be receiving benefits at higher levels.

Perhaps the most drastic economic effect of the prevalence of property marketing scams may be the damage it does to the reputation of the property and real estate markets in the areas in which it is pervasive. There is no doubt that all developers and all property marketers and all real estate agents risk being tarred with the brush of the most irresponsible operators. Indeed, it is the legitimate industry that has been making the most insistent calls on government for action, far more so than the aggrieved consumers. On the Gold Coast, many would claim, much damage has already been done to the reputation of the area generally with media headlines such as “Scammers Paradise” being used on articles about property marketing and its victims. Beyond the industry and the area, there is the potential for damage to the general reputation of the State as a place to invest.

Economically, it is well accepted that a market which becomes characterised by dishonesty will be a market that reduces in size.iii


Social implications

If one result of the success of property marketing industry is that too much of the wrong sort of property is built in the wrong place, this may well have social impacts and implications for government at all levels.

Some of the marketer driven development on the Gold Coast is locally described as “one bedroom dogboxes”. While this is a perjorative term, it did seem that the rental demand for much such property was limited, while construction continued on the basis that such units could be sold to out-of-town investors regardless of any lack of a need for them.

Additionally, in outer areas of the Gold Coast, it would seem that an oversupply of townhouses has already been built or is being constructed in areas that were not intended for large scale development for many years and for which there will be considerable delays in the provision of many services.

Although vacancy statistics on the Gold Coast are fairly healthy, much of this property, particularly that in fringe areas, appears to be unoccupied to a visual inspection. Some observers fear that some such areas could become welfare ghettoes, on the basis that:

Rents fall to very low levels in the effort to obtain tenants

Low rent, low amenity developments mainly attract low income, welfare dependent or highly transient tenants

The predominance of such tenants further dissuades longer term financially secure tenants to the development or area.

Elements of this dynamic can certainly be observed in some Gold Coast fringe area developments where there has been some level of marketing to out of town investors.


Consider a market in which goods are sold honestly or dishonestly; quality may be represented or it may be misrepresented. The purchaser’s problem, of course, is to identify quality. The presence of people in the market who are willing to offer inferior goods tends to drive the market out of existence – for dishonest dealings tend to drive honest dealings out of the market. There may be potential buyers of good quality products and there may be potential sellers of such products in the appropriate price range: however, the presence of people who wish to pawn bad wares as good wares tends to drive out the legitimate business. The cost of dishonesty, therefore, lies not only in the amount by which the purchaser is cheated; the cost also must include the loss incurred from driving legitimate businesses out of existence.

George Akerlof The market for lemons:

However, it is probably more correct to say that property marketing is more a contributing factor than a cause in such trends.

There is, in this area, a dearth of research. Much of the research also deals with exurban communities where the majority of residential units are built for owner buyers rather than with the specific purpose of producing tax advantages for distant owners by being tenanted. Sociologists and planners looking at exurban developments traditionally give little consideration to the workings of real estate markets and market analysts are usually not concerned with the social and economic end results. The need for research that links markets and development consequences has been referred to the Australian Housing and Urban Research Institute for further consideration.

There is also a clear case for local authorities and State planning authorities to develop machinery which can give timely consideration to the possible economic and social legacies of trends in property markets.

Is it legal?

To a large extent, marketers appear to be acting in the crevices between a number of State and Commonwealth Acts.

Superficially, it would appear that:

A person or entity selling real estate in Queensland should be licenced and be subject to the limitations and obligations attached to such licences.

A person or entity giving investment advice should also be licensed and be subject to certain statutory limitations and obligations.

That legal remedies would exist in relation to outrageous misrepresentations on property value, property income or taxation benefits.

For residential real estate in Queensland, licensing implies certain disclosures, prohibits false or misleading representations, sets out terms for any offers of finance and sets out statutory rates of commission. It also details procedures for the holding of funds and the making of contributions to a fidelity fund.

However, the requirements to be licensed to deal in real estate are less clear if property is new to the market and if vendor and agent are. - or can be made to appear - one and the same.

A number of gambits appear to be employed to insulate marketers from the requirements of the Auctioneers and Agents Act:

Marketing groups are licensed or employ licensed real estate agents.

Mainly new property is sold.


Marketers enter joint venture agreements with developers.

Marketers maintain they are really in the business of selling an investment product which just happens to be property.

Whether these gambits would be proof against any determined regulatory push remains to be seen.

With the remarketing of second hand property, however, these flimsy devices would offer little protection and marketing groups would seem to be in grave risk of being found to have been acting illegally. Cases which came to the notice of this investigation included:

An Epic Group associate or predecessor company entering into phony “joint venture with developer” agreements to remarket properties for distressed purchasers

The extensive “churning” or remarketing activities of the company Applied Investment Reseach (Australia), with added misrepresentations that secondhand properties were represented to purchasers as “new” or “builders’ stock”. The principal of Applied Investment Research (Australia) is not recorded as a licensed real estate agent.

The argument that marketers should not be regulated as real estate agents on the grounds that they are mainly in the business of investment advice can be, and has been, turned on its head. Marketers have said that they should not be subject to the regulations governing investment advisers because they are engaged only in selling property.


“If the present policy of licensing real estate agents and auctioneers of land continues, generally in its present form, it is difficult to argue why persons engaged in the attraction of purchasers, negotiation of sale, preparation and execution of the land contract should not be similarly licensed to carry out those functions. It is hardly compelling for those unlicensed persons currently undertaking these tasks to claim that the sale of land is ancillary to the overall investment package that they offer. In fact, as the law presently stands, the principals of the marketing companies should be licensed (as working directors) and the salespersons should be similarly registered.”

Professor Bill Duncan “Marketeering:Regulatory Options

for Inclusion in Draft Legislation July 1999

Property investment advice is not covered under Commonwealth law regarding investment advisers unless it falls under the so far restricted provisions of the Managed Investments Act which, in relation to property investments, currently applies only to serviced units or serviced apartments. This may change – the further application of the Act to investment property transactions is currently under consideration.

Although property marketing groups and many real estate agents are in the business of offering investment and negative gearing advice, it would appear that most are unlicensed and as the law currently stands, they may not need to be. Some may employ or have arrangements with licensed investment advisers, but it is not certain that the licensed individuals are responsible for all or even much of the investment advice proffered over the telephone, in seminars in country towns, in the living rooms of potential purchasers, or in the limousines touring the area of the prospective properties.

Some provision against misrepresentation exists in a number of State and Federal Acts with potential to regulate negative gearing investment transactions. However, the provisions set out in the most directly applicable legislation, the Auctioneers and Agents Act, are by far the weakest. The applicability of the Federal Trade Practices Act, with perhaps the strongest provisions against misrepresentation, is currently being considered in a number of court cases.

In summary, marketers generally operate in a legal grey area; however, a determined regulatory push may well have found many of their activities to be illegal or, at the very least, legally questionable

Why hasn’t something been done before now?

Queensland has, over many years, acquired something of a reputation for questionable real estate dealings, many of which involved extensive marketing interstate and overseas. In this light, the excesses of marketers promoting negative gearing property investments continues a tradition that includes land sales on Russell Island, the sale of unserviced bush blocks in relatively remote rural areas and the timeshare industry.

It would also appear to be a reasonable observation that the regulatory machinery designed to protect consumers from this sort of exploitation has clearly been inadequate to either prevent or deal with such activities. In the present case, many of the marketers activities would seem to be of, at least,questionable legality.

One case involving a property marketer is before an appeal court after an initially favorable decision was overturned. The Office of Fair Trading has also negotiated a number of relatively favorable outcomes in negotiations with marketers on behalf of individual property buyers seeking assistance to get out


of dubious contracts. Some consideration is also being given to whether victims of marketeering have any recourse to claims on the Auctioneers and Agents Fidelity Guarantee Fund.

However, it would appear that in the case of marketers, as in past property marketing abuses, the response of authorities has been neither timely nor particularly effective. There is little indication that enforcement at the usual level is any deterrent to those contemplating, designing or executing schemes to entice buyers into dubious property investments.

To an outside observer it would appear that historically:

Laws contain ambiguities, loopholes and evidentiary obstacles which make them difficult to enforce.

Inadequate resources have been committed to enforcement and available investigative resources are committed to areas that are too broad, resulting in inadequate responses in relation to any one act or industry.

Penalties are not sufficient to make difficult prosecutions seem to be worth undertaking.

The skills and internal procedures of investigative agencies are insufficient to the task of prosecuting well organised property marketing abuses.

For instance, many of the provisions of the Auctioneers and Agents Act were not framed for easy enforcement. Under this Act, there is no power for Inspectors to obtain a search warrant. In relation to misrepresentations by an auctioneer or agent both the misrepresentation and the liability for the misrepresentation are difficult to establish. More updated provisions would most probably reverse the onus of proof on misrepresentations and provide for more specific categories of misrepresentation relating to property values, previous transactions, rental returns and taxation benefits, if any.

Such reforms, it is pleasing to note, are under consideration. Beyond the legislative response however, it may be worthwhile to consider the establishment of more pro-active investigative machinery, charged with the detection of questionable schemes in their emerging phase.

Swift and strong enforcement action in this early stage has the potential to prevent fraudulent schemes from becoming established and would do much to preserve the reputation of the ethical property marketing industry and the areas in which it operates.


APPENDIX ONE – Comparison of two price lists

TWO TIERS OF PRICING?Comparison of two price lists for off the plan sales

Gold Coast high rise apartment block, 1998

Unit number

Price List A Price List B Actualsale price

1 $311,000 $285,000Manager $2,300,000 $1,800,0003 $356,000 $335,0004 $317,000 $283,000 $280,0005 $278,000 $237,0006 $341,000 $315,000 $280,0008 $327,000 $286,000 $280,0009 $283,000 $239,000 $239,00010 $351,000 $318,000 $280,00012 $336,000 $289,000 $285,00013 $288,000 $242,000 $242,00014 $356,000 $321,000 $320,00017 $293,000 $245,000 $245,00021 $298,000 $248,000 $240,00033 $383,000 $355,000 $370,00039 $393,000 $361,000 $400,00042 $398,000 $364,000 $379,00043 $421,000 $425,000 $415,00048 $422,000 $370,000 $416,00050 $401,000 SOLD $356,00051 $432,000 $373,000 $415,00053 $405,000 $358,000 $398,00056 $415,000 $361,000 $366,00057 $446,000 $379,000 $410,00058 $466,000 $447,000 $460,00059 $424,000 $364,000 $405,00061 $476,000 $452,000 $474,00064 $481,000 $457,000 $470,00065 $444,000 $370,000 $416,00066 $476,000 $388,000 $405,00071 $464,000 $376,000


APPENDIX TWO – Third tier marketing data

1998 “third tier” Gold Coast property sales by Applied Investment Research (Aust) on behalf of

Electus Pty Ltd and Citra 2000 Pty Ltd

Original sale(Year)

Electus/Citraacquisition

price

Electus/CitraSale price

Electus/Citra Gross Profit

$126,750(1994)

$78,000 $137,500 $59,500 over 7 days

$100,000(1990)

$70,000 $129,000 $59,000 over 77 days

$122,000(1988)

$100,000 $166,000 $66,000 over 15 days

$124,900(1993)

$72,500 $139,500 $67,000 over 2 days

$103,900(1992)

$65,000 $128,000 $63,000 over 60 days

$117,900(1993)

$80,000 $139,000 $59,000 over 35 days

$200,000(1995)

$138,000 $189,000 $51,000 over 66 days

$150,000(1989)

$117,000 $179,000 $62,000 over 126 days

$112,000(1989)

$75,000 $137,000 $62,000 over 65 days

$190,000(1995)

$138,000 $220,000 $82,000 over 46 days

$155,900(1994)

$99,000 $159,000 $60,000 over 55 days

$141,000(1994)

$140,000 $183,000 $43,000 over 2 days

$140,500(1992)

$127,000 $185,000 $58,000 over 8 days

$160,000 $219,000 $59,000 over 94 days

$119,750(1994)

$65,000 $112,000 $47,000 over 182 days

$117,000(1992)

$70,000 $115,000 $45,000 over 37 days

$121,000(1988)

$105,000 $152,750 $47,750 over 59 days

$137,000(1988)

$95,000 $139,000 $44,000 over 22 days

$111,900(1994)

$80,000 $115,000 $35,000 over 45 days


$129,000(1988)

$105,000 $164,000 $59,000 over 55 days

$107,900(1994)

$80,000 $115,000 $35,000 over 46 days

$113,750 $149,000 $35,250 over 43 days

$113,750 $160,000 $46,250 over 17 days

$113,750 $160,000 $46,250 over 8 days$231,500(1995)

$135,000 $207,000 $72,000 over 24 days

$151,000(1994)

$102,500 $152,000 $49,500 over 48 days

$151,900(1995)

$103,000 $153,000 $$50,000 over 6 days

$150,900(1994)

$100,000 $152,000 $52,000 over 48 days

$151,900(1994)

$101,000 $152,000 $51,000 over 75 days

$160,000 $217,000 $57,000 over 111 days

$160,000 $217,000 $57,000 over 111 days

$116,500(1993)

$100,000 $139,000 $39,000 over 2 days

$88,000 $135,000 $42,000 over 28 days

$100,000(1990)

$70,000 $129,000 $59,000 over 77 days

$245,800(1993)

$73,000 $135,000 $62,000 over 46 days

$110,900(1994)

$80,000 $110,000 $30,000 over 30 days

$138,000(1994)

$85,000 $157,500 $72,500 over 78 days

$131,000(1988)

$90,000 $159,500 $69,000 over 33 days

ii Correspondence to Minister from Open Door Consulting


References:


two tier marketing - phil dickie tier mar… · web viewtwo tier real estate markets in queensland...

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