Should property be regulated?

Property Sep 24, 2018

7 min read

The Royal Commission will finish up this month and with some of the scandals it has uncovered, I’m hoping it will clean up the finance industry for the better.  Some may argue it has gone too hard on certain things but in the end, it will mean that there will be better outcomes for the consumer. It got me wondering about property, which is normally the biggest investment people make in their lives. People love talking about property and we find a lot of our time as a broker is spent discussing the market, what we think will happen, growth areas, etc. It raised the question for me: should property be regulated as a financial product?


Should property be regulated?

Based on that, it may surprise people that to give advice on property purchases, you don’t actually need any qualifications and there is no regulatory body monitoring the outcomes for consumers.  A real estate agent completing a few weeks of education can advise on which property to purchase; an accountant, a financial planner, a mortgage broker or the local butcher can advise on property (and take a fee to do so!).

A previous business partner of mine was always very passionate about getting rid of the dodgyness in the property industry. The number of real estate agents or developers that came to him wanting to sell their various products to his clients was massive. He just said, “I’m not willing to sell my soul for something I don’t believe in”. That has stuck with me throughout my career.

But how is this possible? When Australia has become so rigorous on looking after the outcomes for its residents?  Basically, ASIC don’t consider property to be a financial product.  About the only other thing that isn’t governed by ASIC as a financial product is your savings in a piggy bank.


There’s big bucks in property

A developer can offer anywhere from 5-8% to sell an apartment (generally off-the-plan) as a referral fee to a third party (broker, planner, accountant) if the person they refer buys the property.

On an apartment worth $500,000 this works out to be a lump sum payment of $25,000 – $40,000 to the referrer.  To think that a normal real estate agent would earn around 2% on a sale. To earn this they hold opens for a property on multiple weekends, make a number of phone calls to their database and even auction the property for a third or quarter of this fee. Or they can refer a client to a developer and earn 2-4 times as much for doing virtually no work.

And what qualification does an accountant, financial planner or mortgage broker have to recommend this property? Numerous of these finance professionals who have clients looking for property or investments are approached by these developers being offered the same kickbacks. If any of your key advisors recommend a product which they don’t specialise in, I would be wary and ask them are if they are receiving a commission or financial reward for this.

The other issue I take with this, is if a property is sold at $500k and includes a 5-8% commission, then the property value is overstated from the get-go. It’s probably worth closer to $460k-$475k. From the day the client even steps foot into their new home, the property has already ‘fallen’ in value by that margin.


Get property advice from a property expert

Before the arrival of residential property being able to be purchased in SMSF, I don’t think accountants or financial planners were too keen on property as they weren’t able to derive an income stream from its recommendation. With this new referral product, it was another way they could earn a commission by recommending property through a structure that they can provide advice on.

If ever you are buying property, speak to a qualified and experienced Buyer’s Advocate.  This is hard, the whole point of this article is that there’s no governance in property.  An initiative that has come about recently is the introduction of the REBAA which is the governing body of Buyer’s Advocates. I’d highly recommend that any Buyer’s Advocate or property expert you use is a member of this body.

And leave tax returns and business advice to your accountant; investment and estate planning to your financial planner; home and investment loans to your mortgage broker.

At Entourage, we have carefully selected the right people in all these fields to deal with. You learn very quickly in this industry that if you don’t have your client’s outcome front of mind, then you will be out of business very quickly.