Let the Buyer Beware when buying property from Developers and Investment Clubs

Don’t be duped. When you find a Buy to Let Property for sale from  Property Developers or an Investment Club - Check the facts!  It is not good enough to read the glossy advert, and simply assume that all is as it seems.  

Last week, in one day, I was double spammed by both a property developer and an investment club. Ordinarily I trash the spam, but this time I read the emails and they made my blood boil. 

I called the "investment consultant" to ask for more information about their buy to let properties for sale. I was shocked to find out the actual size of the apartment (Not mentioned on the advertising splurb). When I asked slightly more higher grade questions which any investment advisor should know, like, "How do you calculate the return on investment that you are quoting?".  I was told she did not know how and would get back to me - I am still waiting!

Every year new investors get duped again and again.

Being a buy to let investor with more than 30 years property experience and 22 years of skin in the game as an investor, I can immediately see through the smoke and mirrors that property developers often use to market their product. 

An experienced property investor will probably not be duped when offered a buy to let property for sale, so they prey on new investors, eager to get into the property game. 

Buy to Let Investment - False claims and false advertising

My first impression when looking at their proposals was that the prices were too high, but when I looked to see how they justified the prices and the projected income I  could no longer stay silent. I couldn’t believe the levels of deception and false advertising employed.

Their assumptions of market related rentals were generally way too high and their expenses were either way too low or simply left out of their calculations completely.

And to make matters worse property developers quote meaningless and inaccurate return on investment figures.  

When I spoke to my business partner, Warren, he too, was aghast and asked to interview me to discuss our main points of contention when faced with acquiring buy to let property for sale, especially from developers and investment clubs.

In this video we attempt to shed light on subject and give you eyes to see through the smoke and mirrors.

For obvious reasons we have not disclosed the names of the developer and investment club, but since the tactics used by these two were universal, we didn't deem it necessary. 

Some Youtube comments ...

As an investor it is crucial to do a proper due diligence before spending hundreds of thousands of Rands only to discover the truth when it is too late.

Buy to Let Investment - Market projections

I understand that in property investment everyone has to make projections and assumptions – I do this all the time – but it is essential to start with the correct information and ALL THE INFORMATION.

To be fair, not every property developer employs these tactics, and some have better reputations that others.

 My hope is that you will be empowered to establish the truth before you invest and help you to ask the right questions.

To assist you in this endeavor, we have made these 2 investment tools available free of charge. 

The Interview

For ease of reference here are the basic points discussed in the interview above. This article should be read in conjuction with a previous article where I mentioned 8 reasons why I don't buy brand new off-plan townhouses. [read here]

1. How do I know if the price presented by the property developers is right?

Compare with similar units in the area – see deeds office records  (Internet adverts can be misleading)

Look at unit size - they often exclude the size in the marketing brochure. And in an example like this one below from a property developer, does the already small 54sqm include the balcony?

1 bedroom unit should be at least 50 sqm,

2 bed unit should be no less than 60 sqm

Price: Look at rate per sqm – divide the price by the size in sqm.

2. When it says buy to let property for sale priced from , what does that mean?

That is the cheapest unit- and it is usually sold by the time you call

Or the price of a top floor unit - and hence more difficult to rent out. 

3. What level is the unit on?

Ground and 1^st floor are ok, above that is problematic to rent out

4. What is included in the levy? What levies are payable?

• Maintenance
• Security
• Complex management
• CSOS levy
• Maintenance Reserve Fund (The maintenance reserve fund must equal the complex’s full year budgeted levy income)

5. Is the stated levy accurate?

I have never seen property developers provide an accurate estimate before! In the case above, I would expect the levies in a 1 bedroom apartment to be around R1000.

Estimates used normally have unrealistic security /maintenance and management costs.

Estimates normally don’t include “maintenance fund” savings – By law this has to be an addition of a minimum of  15% of levy 

Compare with similar 2^nd hand units in the area.

6. What Rates and taxes are payable?

Rates account is normally included refuse removal– check that both are accounted for. 

7. Are the estate agents fees accurate or included?

Normally these are excluded from their calculations – (they assume you are going to look after it yourself)

Sometimes they include a subsidized fee which is not market related.

8. Is the quoted rental accurate?

Be careful as they are trying to paint a pretty picture and often inflate the rentals above market

9. What is this rental subsidy or rental assistance?

They often subsidise the rental by R 1000 or R 2000 for 12 months, to sweeten the deal and because they can’t achieve the above-market rentals they quoted.

10. Monthly shortfall – what is this?

How much cash you are going to have to contribute every month to cover all the costs of bond/levies and fees

When looking at buy to let proeprty for sale, make sure you know their assumptions – IE:  rental achieved/agents fees/bond term /interest rate/etc

11. Rental yield – what is this?  And what can I expect?

• Gross yield  Total rental per year/purchase price. This is a totally irrelevant number because it doesn’t account for expenses and you didn’t invest your own money (you probably borrowed the purchase price).
• Net yield Net annual rental (after all expenses) / purchase price – Note this should be a negative number if there is a monthly shortfall. The table above is a classic example where the net yield should be negative because of the monthly shortfall. 
• Return on investment Although they often quote this, they never show how they get to this number. It is a mystery how can it be positive if there is a monthly shortfall?

12. Is it necessary to create a series of trusts and companies to own my property portfolio?

Many clubs hard sell the concept of owning properties in a series of trusts and companies and then offer [for a monthly fee of course] to manage them for you.

In my experience it is not necessary to use a trust or company to own your investment properties until your portfolio reaches about  5 or 6 properties. 

You will notice how many of the marketing brochures contain calculations  based on 100% bond finance.  In reality the banks only provide 80% bond finance for properties held in trusts or companies and require you to sign personal surety.

Sometimes they recommend that you own in a company for tax purposes and place the company share in a trust. [The tax rate in a company is 28% and  in a trust it is 45% ]  -  

I believe a structure like that is altogether too complicated and expensive to run!

 I personally own some properties in  a trust and have not paid tax in the trust for more than 2 decades! I simply make sure the trust does not make any profit.

13. What about 99 Year Leases? Are they the same as a normal sectional title purchase?

We have seen a resurgence of 99 year leases especially in Waterfall Midrand. I chatted to our property specialist attorney recently and this is what he had to say

He agreed that you need to be especially careful when entering in a 99 year lease. My advice is contact him at Faurie Nel Inc  before you sign on the dotted line.

I say "be careful" because in none of the Waterfall developments that I have viewed do they mention anywhere in their sales literature or brochures that they are selling a 99 year lease. Only by asking the question directly will you be informed that you are paying upfront for a 99 year lease. You will never own the property! 

For my personal opinion on 99 year Leasehold, watch these two Youtube Shorts  (60 second videos).