A drivers license and a car are good to have. They offer convenience and choice. But when a person throws caution to the wind, driving becomes hazardous!
- Bad drivers don’t know they are bad drivers
- Pigs don’t know that pigs stink
- And you don’t know what you don’t know about finance structure
The following “Horror Finance Stories” took their victims by as much surprise as the person who had someone pull out in front of their car and cause an accident.
At least when you get behind the wheel of a car you are (mostly) in control. Sure there are other drivers on the road and then there’s things we rely upon – like brakes etc. When it comes to arranging and structuring your finances; you will become a passenger and your broker/banker a taxi driver.
Assuming your broker/banker properly understands the mrd Advanced Finance Strategies we promote, is akin to assuming a taxi driver will always take you to your destination by the shortest route… safely!
You would have probably noticed of late that we have been offering readers and clients alike a no obligation, complimentary “Finance Structure & Cash Flow Health Check”. Many have responded and taken up this Customer Care initiative and as such, we are exposing more and more “crash victims”.
Good people unwittingly letting unskilled drivers take control of their financial vehicle.
CASE 1 – BARRY:
Barry is nearing the settlement of an investment property sourced through mrd. He chose not to use an mrd preferred broker (one familiar with the mrd Advanced Finance Strategies), preferring to use his local credit union. This is completely understandable as he had a long term relationship with his credit union. Barry was comfortable with their service, found them to be friendly and conveniently located near his home.
While friendliness and customer care are essential, there’s so much more to correct finance structure than familiarity and a warm smile.
Barry took up our “financial health check” offer; which was fortunate for him as he was quickly headed for a wreck! His local credit union had initially not allowed any funds for settlement costs, such as stamp duty and legal fees. If we had not intervened he would have arrived at settlement about $12,000 short; that is with just enough funds to cover the property purchase only. This could have resulted in him being charged penalty interest while he madly rushed around trying to find the extra funds required.
It doesn’t end there; the credit union was also…
In the process of mixing private credit card debt with Barry’s home loan
Refinancing an existing loan back to themselves; i.e. replacing an existing loan with an identical loan. This added no benefit to the client but would have incurred another round of establishment fees etc… payable to the credit union
With Barry’s permission, we sent the credit union instructions (in “chapter and verse”) as to how to set the loans up… and they still got it wrong.
Someone from this office then had to educate the loans officer just to ensure Barry was given the correct finance structure!
It didn’t end there…
Round 2! The credit union then planned to mix investment debt and business debt in with his private home debt… and continued insisting on (unnecessarily) rewriting their home loan with an identical loan.
Throwing petrol onto the fire… they had cross collateralised their home and the investment property. With a pending settlement on his doorstep, Barry had no time to lose.
The instructions back to the credit union were simple:
Leave the existing loans as they were and create a single new loan to take to settlement that would have been sufficient to settle leaving about $4,000 in the buffer for their next year’s expenses. Once the year is passed and the break fees reduced they will be looking to finance away from their local credit union; this time accepting our friendly suggestion that they use one of our preferred brokers.
This story had a happy ending, thanks to Doug… and a potential crash victim was saved!
CASE 2 – MARK:
Mark also chose to use a broker he was familiar with; someone who had an ongoing relationship with his place of employment and offered a bonus interest rate discount, due to this relationship. As it turned out, the discounted rates were similar to the big banks rates anyway.
Much to Mark’s disadvantage the broker encouraged Mark to take out fixed rates; some as high as 8.78% for 3 years. mrd, knowing the dangers of fixed rates discouraged Mark from using them… but we failed in our attempts to overcome his brokers persuasion. The odds are really against you winning with the use of fixed rates; 87% of the time according to statistics. The benefit of fixed rates for the broker of course is that they are locking in their commission for 3 years as it is too expensive for most clients to escape from.
The total cost of cutting this victim out of the wreckage (moving him from a fixed to a variable rate) is in excess of $50,000! This was a very expensive crash!
This broker advised Mark that he had the borrowing capacity for two investment properties. So, armed with that professional advice, Mark proceeded to unconditional status on two properties. Some months on, interest rates have dropped rapidly… yet Mark is left paying more than $20,000 a year interest above what he would be paying had he accepted our guidance up front. He can swap from his fixed loans to variable… but it will cost him in excess of $50,000 up front to do so.
The fight continues! We have no happy ending here just yet… Doug is busy trying to cut this victim free from a mangled wreck.
CASE 3 – LAURIE:
When Laurie approached mrd he was trying to refinance an existing (non mrd) investment purchase and was looking for additional funding to buy another through us.
When Laurie financed his 1st investment property, he fell victim to a type of loan referred to as a “cash flow mortgage”. These loans capitalise part of the interest back into the loan, reducing the initial cashflow requirements. The loans rely on continued capital growth. After a few years people with these types of loans have to start paying the full interest rate. The early years of capitalised interest means they are now paying full interest and off a higher base. Obviously, this can place a heavy burden on some. Capital growth is predictable long term but less predictable short term.
NB: The overall interest rate associated with these types of loans is higher than you can find elsewhere… so “buyer beware”!
To assist with cash flow, Laurie had converted his existing investment property to student accommodation… but this made it undesirable in the sight of lenders. Struggling to find a way forward and build wealth for his family and wanting to please his wife who had her heart set on finishing the renovations on their home… Laurie asked for an mrd Finance Structure & Cash Flow Health Check
Next step… Doug and the mrd preferred broker go to work…
The broker worked tirelessly to find a lender who would accept the (student accommodation) property; eventually succeeding to refinance this loan with a mainstream lender. Laurie’s new loan came with a greatly reduced interest rate and a provision of funds so that he and his wife can complete their home renovations.
- Their expenses are now much lower than before
- They can breathe easy
- His wife is happy that the renovations are again on the radar
- With the added value these renovations will add to their home, Laurie will soon qualify to consider his next investment property; should that remain his goal
- With the lesson learned from this experience, Laurie has now converted his property back to a “normal” residential house
Thanks Doug… another crash victim has been saved!
CASE 4 – CRAIG:
Craig had been a student of various investment strategies for some time. Having taken some steps of his own, he secured a few cheap, older properties. Initially coming to us curious as to what the mrd Advanced Finance Strategies may reveal, one of our preferred brokers worked with Craig and put forward a proposal to deliver the objectives Craig was looking for:- Remove the cash flow strain associated with supporting his property portfolio from his family, so as to allow him to continue to build wealth for his family… without having to live like a pauper.
In reviewing his situation, Doug identified huge opportunities that Craig was not taking advantage of. We put together a proposal that allowed Craig:
- The ability to meet his initial objectives
- Add more than $1 million dollars worth of property to his portfolio
While Craig was yet another victim of a poor finance structure… the greater loss was an opportunity cost. Assuming that the $1 million additional value to his property portfolio doubles over 7 years (historical average), their wealth will now increase by an average of more than $142,000 per year each year for the next 7 years*!
* NB: A property that doubles in value over seven years, will probably experience five years of little and no growth, followed by two years of phenomenal growth; that is growth is normally not linear.
Craig is already better off… but the real gains are still ahead of him. This all came about without costing Craig a single dollar:
- mrd undertook this as a part of our Customer Care Program
- The new properties will settle without the need of a cash injection
- The mrd Advanced Financing Strategies have positioned Craig such that he will soon hold an extra million dollars worth of property in his portfolio for less money than it cost him before the $1 million was added
This was a massive wealth creation opportunity that only came to Craig’s attention because he responded to our offer of a no obligation, complimentary Finance Structure and Cash Flow Health Check.
Well done Doug! Not only have we saved another crash victim, you topped up his fuel tank allowing his (property) vehicle to take him further!
CASE 5 – Peter:
Peter had never had any dealings with mrd. He was referred to us when he was wanting to sell a property. This one was a sad case of injustice… Peter was not just a victim of poor finance structure… but of ruthless financiers and predatory marketers!
Peter and his wife live in country NSW (probably under water right now). To us they are typical of hard working, honest (‘as the day is long’) country people; the backbone of this wonderful country!
Peter had developed a skill-set over his working life… but that skill-set did not include knowledge about property investing or finance.
His goal was to build a retirement fund through property investment, to provide an income for his family that did not rely on government assistance. To achieve this, Peter needed the support of someone who would supply the knowledge and experience that he lacked.
Guess What?
Rather than finding support from someone who cared… Peter ran into some of the rogues that are prevalent in the real estate and finance industries. Would you believe me if I told you that Peter “fell for” a group whose guidance served their own interests; rather than Peter’s?
Of course you do… they’re everywhere unfortunately!
Peter settled on a property that was sold to him at an inflated price. I can say that because mrd was actually offered these very same properties when they were first released to the market by the developer. We turned them down; based on price only!
The property was fantastic and in a great location… just not good value! To have lost a bit to an overpriced property would not have been so bad. It would not have caused him to crash… rather slow him down a little (property is very forgiving if you just wait).
His real crash came from the finance arrangements. The marketers and the finance company combined to get every cent they could out of Peter; whose existing loan was with the CBA. It would have been very simple to finance the investment property also through CBA on a good interest rate… allowing Peter to achieve his goals. This is exactly what should have happened! That wasn’t good enough for these vultures (sorry, I have no idea how to be gracious in these unjustifiable situations!).
They refinanced his own home; which was of itself completely unnecessary… and tied the two properties together with high interest rates and heavy break fees.
Peter was a goner the moment he signed the paperwork!!!!
It was only a matter of time before Peter got into trouble with the loans. Anyone with a conscience would have tried to help these “Aussie battlers”… but instead they all lined up to make sure they got their commissions and fees out of Peter. The final straw was them taking over the property and evicting the tenant to ensure Peter could not recover. Not only was his investment property in danger but also his own home. The vultures were circling.
It was at this time that mrd became aware of his plight. Along with our experienced brokers and Peter’s solicitors, Doug and I worked tirelessly trying to rescue Peter’s investment property (i.e. help him to hang onto it)… but he was too far down the legal path for it to be saved. The best we could do is counter the remaining blows being thrown at Peter and ensure he salvaged whatever he could from the wreckage.
We were able to minimise his losses and ensure he kept his home; something he very nearly lost also! We were also able to assist Peter in lodging a formal complaint with the regulatory authority about the finance company involved.
In this case, Peter lost the investment property and was (temporarily) derailed from his financial goals… but his home was saved… and he is still alive to have another go at a later time. Had Peter come to us earlier and requested a complimentary Finance Structure and Cash Flow Health Check, we would have been able to identify the issues involved and intercept them before the crash. This was not to be!
Peter’s was a story with “as happy an ending as was possible”; in the 11th hour… thanks again Doug!
If you have not had personal dealings with mrd… you would be forgiven for thinking we are “just another mob out of Queensland flogging any old property to whatever sucker comes along”. I challenge you to test us. We know we’re different, but you never will know until you experience the mrd difference. I am so proud of the wonderful and dedicated team that I lead. If you suspect that mrd may be able to add some value to your wealth creation journey, then click here to request a no-obligation, complimentary “Finance Structure & Cash Flow Health Check” for yourself.
Happy Investing,
Nick Lockhart
mrd Customer Care Program… because investing is personal
Reader Comments
I have known Doug for more than 20 years so it is no surprise as to his skills in untangling these financial messes nor am I surprised as to his desire to help people. I think we both believe that “what goes around comes around”…karma if you like.
I discovered some years ago (around property number 6 I think) that having a great investment property is just half the battle. Without having the right loan structure and the knowledge to manage the cash flow correctly (mrd’s Advanced Finance Strategies) your chances of success long term are greatly reduced. Unfortunately, in my personal experience and as told in these stories, many bank staff, bank managers and brokers , while they may mean well , have little understanding of the correct way to structure loans to manage cash flow. The result may be another “car crash”.
We have seen a string of people over recent months coming to mrd to sell their investment property. From a commercial point of view that’s what “pays the bills” and most business people would accept that, sell the property as the client requests and take the commission. I am pleased to say that around 80% of the time (in my estimate) the mrd team have been able to shown people how to manage their cash flow properly so they don’t see the need to sell. No commission made but hopefully a client and friend “for life”.
As the song says “I believe in karma, what you give and what you get returned” (“Affirmation” by Savage Garden)
Great stories Nick!
Martin Bell.
I find your comments and inference that the finance industry is prevalent with rogues are misleading and offensive. While we agree there are bank and credit union officers who are not properly versed and there are some rogues out there in the finance industry, all in all they are professional people. Your comments are something I would expect form A Current Affair. You are quite right in givng these examples so people should be aware but please do not paint the industry as though it is full of bad apples. There are rotten ones in all industries, professions and all walks of life.
Nick,
could I make a suggestion for another article? All that you write I enjoy reading as its so educational! I am a Southerner born and bred (please don’t hold that against me). I have two investment properties – first purchased in 2002 and the second in 2007. Whilst I am awaiting my wife to start working and the dropping interest rates to improve my sevicability formula with the banks I am keen to be better educated in the stock offered by MRD. In fact, it goes deeper than that in that I have put many, many people onto MRD (because I know you guys are honest and reliable) plus I have a brother waiting for the thumbs up from me and he would purchase any property I would recommend. So I have a fair bit of influence with many who might purchase a property.
I have never seen the two properties I have purchased. Don’t say that with pride, but it shows that with the right relationship to someone like MRD this is possible (part of set and forget). I’ll get to the point now, I as a Southerner don’t have a clue about Queensland property outside the Gold Coast and Brisbane. If I see Cairns or Townsville properties advertised by you I look but quickly move on – I also would not make a recommendation to purchase to my brother or friends. I ashamedly say this is borne out of ignorance! Might I suggest a profile on each of these areas (or perhaps break Queensland into zones) and present a profile of each. As southerners we only hear of these places through the news due to : floods, cyclones or some other weather induced catastrophe. These are some reasons that add to general ignorance about these places.
The profile would hopefully cover things such as:
• Demand and supply in area
• Propensity for extreme weather conditions
• Growth over time
• Comparison of value to say Brisbane,etc
I’m not sure if there a lot like me, but I would not consider such properties without better knowledge of the areas, but find it hard to put my hands on that data( especially data flavoured by someone trying to make a sale). I would accept it from MRD as I feel the relationship has been built and continues on.
I am quite happy for any of what I’ve asked be used in an article one day in the future.
Regards Phil
Hi Phil,
Thanks so much for your thoughts and your kind words; much appreciated. Your email serves as a confirmation that our existing website needs changing (which we are a long way towards having completed). With every property listing we agree to take on, we prepare a complete research analysis report (we call it a property report). For those areas that we are operating in we also prepare a complete area analysis report (we call these location reports).
There are pretty comprehensive downloadable reports right now that can be accessed on areas such as Cairns & Townsville; to name just a couple. You will find them in the bottom right hand corner of each individual property page; along with whatever else can be downloaded that pertains to the said report. The reports have not looked at floods etc; but I think you will find just about everything else you were asking about. Of course if there are ways we can improve what we are doing here, by all means send any suggestions through and we will look at and consider them.
These days, local councils seem to be imposing all sorts of building restrictions to mitigate any associated risk from cyclones, floods and so on. When Cyclone Larry went through Innisfail a couple of years ago it was only the older homes that suffered damage; the newer homes had all been built under a tougher building code and were therefore not affected. The 6:00 pm news stories around the country of course focussed on the damage only, leaving some to think that the whole town had been affected.
Kind regards,
Nick Lockhart
Hi Michael,
Thanks for taking the time to comment; much appreciated. The first thing that needs correcting is your opening comment: “I find your comments and inference that the finance industry is prevalent with rogues are misleading and offensive”.
I hope from all Nick produces you would know that he/we would never intentionally mislead or offend anyone. In Friday’s article, Nick highlighted 5 separate case studies. In four of them; client’s finances had been structured poorly, or perhaps a better loan product should have been used. There was certainly no suggestion of dishonesty or any of those brokers as being “rogues”. In one instance, however, the clients were “done over good & proper”. There is no polite way of describing a rogue, a shark, a parasite or whatever other adjective best describes people who profit by preying on the naivety and trust of others. We picked up the pieces of the couple who fell victim to this mob.
The dishonest practices of professionals in any industry can unfortunately reflect poorly on that industry as a whole. As you can imagine there would be many people who prejudge what mrd does on the basis that the property industry has way too many rogues in it. Our job is to demonstrate a difference and our ethics… one client at a time.
From your email address I see you are a broker. The sentiment of your comment indicates that you care about your industry and the people who turn to it for financial assistance; well done!
You are right, although there are a few rogues still around, the vast majority of people working as brokers or bank staff have the best intentions and genuinely care about the client they have been tasked to assist. I have met some exceptionally good brokers and bank staff and some absolute shockers as I am sure you also have. Without some personal referral it is difficult to know one from the other. The problem I am seeing on a regular basis is that the best of intentions can’t replace experience and advanced knowledge.
In my opinion there is a minority of brokers who genuinely understand the finer points of cash flow and finance structuring. I have personally had to re-educate a few who didn’t. People who had spent decades working for a bank and then gone out on their own. While they were great at writing the loan and getting it through the banks system that is just the beginning of understanding the global picture of cash flow and finance structuring.
A few years ago now, applying for my own loans through a bank before I trained as a broker, I had to instruct the banks loans managers how to structure them correctly. One of those bank loans managers now works as a broker for himself and now understands these issues in more depth and another is still in the same position as before, a senior loans manager with a big 4 bank in their Brisbane head office.
As Nick says, we don’t know what we don’t know about finance.
Until recently I thought I was pretty quick in a go kart until I came up against someone who I could only watch disappear in the distance. Obviously they knew things I didn’t about getting the kart around the track. The point is that I didn’t know that I didn’t know these things and I thought I knew how to do it.
It is the same with any skill, there is always more to learn and I am looking forward to learning the next trick that I didn’t know that I didn’t know.
Again, in my experience, there are some bank employees who are not trained or given sufficient time to understand the client’s needs fully and create the best cash flow and finance structure for them. They are trained to fill in the form and write a loan. Likewise, many brokers are paid such low commissions that they can’t afford to spend the time required. I found this in a couple of (not all) large franchised broker networks. The employees are paid such low commissions and they have such high staff turnover that they don’t have the time to do the best job possible or get a chance to advance their skills beyond the writing of a loan.
Through the years of evolution mrd has seen many brokers come on board and fall away again as unable to meet the standards. A few were able to rise to the needs of mrd clients and the result is a small team of highly skilled brokers and experienced property investors.
Again, you are right, the vast majority of brokers and bank staff have the best intentions but don’t know what they don’t know.
I will be the first to admit that we do not know everything but we haven’t yet been presented with a finance structure that we couldn’t tweak and add value to in some way.
The mrd Finance Structure and Cash flow Health Check is a free service and there is no obligation to follow our recommendations so there isn’t a whole lot to lose but as you can see by the examples above some have gained enormously from it.
I guess the lesson to take away is to ensure your chosen broker has many years of experience and is an active property investor themselves.
The client is always welcome to cross check it with mrd to confirm they are getting absolutely everything they can out of their finances, just as they would get a second opinion from a doctor.
Doug
Hi Phil
Thanks for the suggestions and I will add my bit to Nicks comments.
As we have mentioned before we would not list anything that we would not buy ourselves and we aim to give you all the information that we would want ourselves to make a quality buying decision.
Katrina (and others in the office) spend many hours finding the information we include in the property and location reports .
On any of the Cairns property pages for example you can download documents like “Cairns Watch” written by Heron Todd White valuers as well as a 13 page research report on Cairns Typically the property reports themselves include all the information we have used to make sure the property suits our investors.
Information on population growth current and future – often graphs from the Australian Bureau of Statistics, major industries,infrastructure both current and planned etc. We often include data from the ABS, media reports and PRD Research data.
Each property has different research information. If you look at the 19 page Endevour Gardens report it includes written rent appraisals, reports on average weekly rental in the Caboulture area, median house price movement in the area , information on the QUT Caboolture Campus, Brisbane North Institute of TAFE, population growth , climate, distances to and from surrounding infrastructure and major cities, location and lifestyle.
These reports all show as downloads in the lower right hand corner of the property pages but perhaps we need to highlight them more.
Regards
Martin
Hi Nick
I am one of the idiots that did nothing when I saw what you were doing 7 years ago. Had I listened to you and not the others who were chipping in my ear, I would apparently have $400,000 more than I have today, because I passed on 2 properties that have gone up about $200,000 each!
I have LOST about $100,000 cash (not borrowed money) on 2 other investments that were supposed to be genius according to the ‘investment mentor’ I used to listen to who I now refer to as my investment nightmare!
Cheers
Andrew
Hi Nick,
A good article, unfortunately nothing new to me as i have seen some absolute shockers. It has been worse in recent months with people coming to me who have been advised to lock in to fixed rates because rates were supposedly going to 12%plus.
I just saved a family from losing their home (Andrew’s referral). They were given such poor advice that they were only days away from being locked out of their home.
Keep up the good work.
Brad ( Broker).
Hi Guys,
Enjoying exploring your website and shared market intel.
Point to consider for you:
Extract from Case 4 – Craig:
“…their wealth will now increase by more than $142,000 per year each year for the next 7 years”
Contrast this to the following extract from your article ‘You Don’t Have To Pay Property Shortfall’:
“A property that doubles in value over seven years, will probably experience five years of little and no growth, followed by two years of phenomenal growth”
In this context, you may wish to clarify the first extract for other readers who may be misled into thinking such linear growth is achievable.
I hope this assists.
Hi Deane,
Thanks for your comment (above) to our blog article “Property Investor Crash Victims” where you pointed what may be seen as a contradiction to another comment in the article “You Don’t Have To Pay Property Shortfall”. Well spotted and any possible confusion has now been done away by slightly clarifying the article with what follows:
While Craig was yet another victim of a poor finance structure… the greater loss was an opportunity cost. Assuming that the $1 million additional value to his property portfolio doubles over 7 years (historical average), their wealth will now increase by an average of more than $142,000 per year each year for the next 7 years*!
* NB: A property that doubles in value over seven years, will probably experience five years of little and no growth, followed by two years of phenomenal growth; that is growth is normally not linear.
PS: I am pleased that you have enjoyed our articles. Feel free to register for our complimentary weekly newsletters if you would like to via http://investmentmentor.com.au/services/subscribe-to-our-weekly-newsletter/
You may also be interested in seeing a recording of a recent live event that I took to capital (and some regional) cities all around the country via http://investmentmentor.com.au/events/slipstream-video/
Either way have a great week.
Kind regards,
Nick Lockhart