Property advisors and property mentors offer a supposably “free service”, but there’s a catch. Here’s how free property advisors make money from you
How are property advisors and mentors free? How do they offer their services to you absolutely free? There are a lot of property advisors out there who are offering to help you move towards financial freedom; help you to buy property; help to do all of the work for you and they’re not going to charge you anything. Is there a catch? The answer is yes and I’m going to talk about how they can offer these services for free and what the risks are to you in today’s episode.
Hey, I’m Ryan from onproperty.com.au, helping you find positive cash flow property. And I wanted to talk about this because a lot of people don’t understand how these property advisors make money and how that actually affects your buying decision and your investment property. It does affect what you buy.
So, an example of a property advisor is someone that will come to you and they say, look, let’s sit down, let’s have a strategy session, talk about where you want to be financially and then we’ll go ahead and we’ll try and map out how you can get there. And they will then map out how you can get there through investing in property and the services they offer is that they will help source the property for you. They will help with the contract of sale; they will help with negotiation; they will basically do the majority of the paperwork for you. They generally have mortgage broker services attached to that as well, so they’re going to help you get financing. They might even help you get insurance and help you with a self-managed super fund, as well.
So, basically, you’re going to them, they’re presenting you with some “researched properties” or some “shortlisted properties” that they think will move you towards your financial goals. They then help you through the buying process until you own that property and then you become the owner of that property.
Generally, it’s going to be with new-build properties and we’ll talk about why that is in a minute. But this is the process and they market themselves as property advisors or they market themselves as property mentors or even financial mentors. Generally speaking, they’re not a financial services and they don’t necessarily need to be licensed as a financial advisor or financial planner. Because property, in most circumstances, doesn’t come under that category and so you don’t need that level of licensing. However, that does vary from deal to deal and from advisor to advisor.
So that’s what a property advisor is. It’s someone that helps you source and buy property and they’re offering these services for free. So how do they offer these services for free? Well, I’m going to talk about how property advisors make money. Because let’s face it, there’s no such thing as a free lunch. They’re not going to offer you these services for free out of the goodness of their hearts, especially if that’s all they do. All they do is be a property advisor to people and offer this service. I can understand that friends or family and you’re trying to help someone buy a property. But when property advisors, that’s they’re job and that’s what they do, they’re going to have to bring home the bacon somehow. They’re going to have to make money some way. So, how do they make money? And this is very important because it does affect what properties they will present to you; what properties you can buy; and it can even affect the price of the property and lead to the property being overpriced. Which means you’re paying more for the property than what it’s worth and so you’re starting with actually a property that’s not worth what you paid for it.
So property advisors generally make money – and the majority of their money – from commissions from the developers. So what happens is, a developer will buy land or blocks of land or they might buy land and build a block of units and they now need to sell those units or sell the property; sell house and land packages. There’s a whole variety of different areas. These can actually be very difficult to sell. Most people looking for a house in the property market generally want to buy an existing property. So, it can be difficult for these developers who have large blocks of land, they have a lot of properties that they want to sell, it can be difficult for them to sell these properties. They go through a general real estate agent, generally, it’s very difficult for them to sell all of their properties. So, what they do, is they offer out these properties to property marketers; which call themselves advisors to you for a commission.
These commissions are much larger than what you’d see for a real estate agent in a lot of cases. Generally, we see 6-8% where a real estate agent may be 1-2% of the commission. Or we see commissions that are monetary-based. The lowest that I’ve seen in the industry, ever, is $5,000 and the highest that I’ve seen is $80,000 to $110,000 in commission. Generally, from my understanding, commissions tend to hover around that $20,000 to $40,000 or $50,000 mark.
So, basically, what’s happening is; you’re buying the land, you’re buying the house and land package or the unit or whatever it may be. And in the building contract, generally, there’s a commission that is then paid to your property advisor. So, that is how they make money. They make a commission from the developer.
Now, why does this affect you? Well, it affects you in a couple of different ways. The first thing, is that because they’re offering this free service, the properties that they can offer you to purchase are going to be limited. They can’t say to you, look, come to me, as an advisor, I’m going to find the best property. I’m going to look through all the properties in Australia and choose the best one for you. What they’re actually saying is, look, come to me, the only properties that I am going to offer you are properties where I get paid a commission from the developer. Now, you can see that that limits your market a great deal instantly. Because now, you can only purchase properties where the developer is willing to pay your advisor a commission. And so that really limits the pool of investment properties that you can look in to.
It also should concern you because it is a major conflict of interest in my eyes. Because they are getting paid to sell property. They only get paid when they sell property. They’re not actually getting based on your success. So, if you buy an overpriced property, they’re getting paid by the developer. They’re not getting paid by you. And so, their interest and their relationship and all their monetary value is coming from their relationships with the developer, which they need to sell the developer’s property on to people like yourself.
So, there’s a conflict of interest in that. Yes, they need you in order to make money but you’re not the person paying them so their best interest aren’t necessarily out for you as the client. So, you do need to be careful of that. The other thing that you need to be careful of, because legally, the commissions aren’t technically “added-on” to the price, these commissions need to come from somewhere. The $20,000 or $40,000 or $50,000 need to be paid by someone. Who do you think’s going to be paying for that? When you’re looking at a deal of the property, do you think the developer’s going to be paying for it? Well, they want to make a profit. Do you think they’re doing it for free out of the goodness of their heart? Probably not.
The fact is that this commission needs to be paid by someone. It’s generally going to be paid by you and this often leads to overpriced properties. Now, I talked more about the 7 things that you should do before buying property from a property advisor, and I do suggest that you go through and read that or watch that video. And you can listen to that over at onproperty.com.au/282. However, I will put a checklist in there for the 7 things you should do before buying property from a property advisor to make sure you don’t buy an overpriced property. I’ll put it in this episode. So, go to onproperty.com.au/283 in order to download that free checklist.
Now, property advisors also make money in a few different ways. The bulk of their money will come from the developer and the commissions on the build of the property; which means they’re only going to offer you newbuild properties where they can get a commission from the developer. Which limits your pool of potential investments. Meaning, you can only buy new properties and also means that there’s a conflict of interest there and it may lead to you overpaying for the property.
Now, property advisors also tend to make money through mortgage brokers. Either they offer these brokering services themselves or they refer you to someone and receive a referral fee. Look, I have a relationship with a mortgage broker myself. If I recommend someone to him and they end up going through him then I get a commission based on the commission that he gets paid. And if they’re doing it in-house, then chances are, they’re getting the full commission from the bank. And look, this is very common in the mortgage brokering industry, this is not something that I would be worried about. It’s very common for mortgage brokers to get paid a commission from banks and if they’re acting as mortgage brokers, it’s going to be common for them to get paid that. And that won’t inflate the price of your mortgage. So that’s not something that I would be worried about.
There’s also a possibility for them to make money by either providing insurances – generally, that’s not the case. Generally, they’re going to recommend you to an insurance provider and they might get a referral fee off that. Again, it depends on which property advisor you’re going to and what different things they’re offering.
The other way that property advisors tend to make money is if they’re helping you invest through your self-managed super fund. Then, they may be able to charge you fees to help you setup your self-managed super fund or to help you manage your self-managed super fund. Or they may offer that as a free service in order to make the commissions on the property.
So, as you can see, there’s a myriad of different ways that property advisors can make money by offering you a free service. It does, in my mind, provide a big conflict of interest if I was working with you as a client and I’m going to say, well, I’m only going to offer you the properties that I get paid. There’s no incentive for me to offer you an existing property, even if that’s a great deal. There’s no incentive for me to offer you a property in an area that I think is going to grow or going to be better if I’m not getting paid. There’s no incentive for me to offer you a property that is under-valued if I’m not going to get a commission on that. So, the only incentive for me, if I was a property advisor offering my free services, is to offer you the properties that I get a commission on; whether they’re a good deal or not.
And so that’s what worries me about property advisors and, look, there are some great deals out there. There are some great properties advisors out there but I hear way more bad stories about people working with property advisors than I do hear good stories about people working with property advisors and getting good deals. I hear good stories, the majority of good stories, come from people who work with buyer’s agents that they pay themselves, rather than these free property advisors.
So, some better alternatives, consider going to a property buyer’s agent. Now, this is someone that you pay yourself out of your own pocket. Generally costs about 1-2% of the purchase price. So, on a $500,000 property, you’re talking $5,000 to $10,000 in terms of payment that you need make to them. Is it tax-deductible payment? Look, it does cost you money out of your pocket; which is something that the free property advisors take advantage of because you feel like you don’t have to pay for anything even though you are paying at some point down the line through their commission. But property advisors, especially ones who are exclusive, I’ve only work with ones who don’t get commissions as well from the properties they buy. They’re only getting paid by you. So, their incentive is to provide you with a great service.
The other thing that I would do is just simply do your own research. Always do your own research. That’s a better alternative than just going to a property advisor and hoping for the best. Even if you go to a free property advisor, you decide even with the commissions they’re getting and stuff, you still want to go through them, always do your own research before buying a property.
And again, I’ve got a free checklist for the 7 things that you should do before buying property from a property advisor and you can check that out by going to this episode at onproperty.com.au/283. So you can go through that and you can make sure that you’re covering your bases so you know you’re not overpaying for a property. You know that you’re going to get the rental income that you’re promised, etcetera, etcetera. So you can download that free checklist and I hope that helps.
I hope that this has explained to you how property advisors offer their services for free. They also call themselves property mentors or property marketers or property re-sellers. There’s a few different names out there but, I guess, most people would present themselves as an advisor trying to help you invest in property and achieve financial freedom. When the reality of the situation is the majority of them are making money on a commission from the developer, which can present a conflict of interest.
So, I hope this has helped. Whatever you decide, good luck! I wish you the best in your property journey. I’m Ryan McLean from onproperty.com.au and I help you find positive cash flow properties. Until next time, stay positive.