RENTAL GUARANTEE SCAMS

24th July 2007

RENTAL GUARANTEE SCAMS
How investors lose thousands with rental guarantees.

With the real estate market in decline, many cities are over-supplied with apartments. In Sydney, some developers are offering 6-7% guaranteed returns for two or three years. It's also happening in Melbourne, Brisbane and the Gold Coast.

Here's how these deadly devices can lose a typical investor $90,000 in two years:-

A developer has 100 units and needs to sell them for $350,000. But the market is over-supplied and their true value is only $300,000.

The rental market will pay only $300 a week. At a purchase price of $350,000, the investor's gross return is only 4.5%. Investors don't find those numbers attractive.

Rental guarantees allow the developer to hoodwink investors. The developer prices the units at $350,000 and guarantees a rent of $400 a week for two years. This provides a return of 6%. It now looks good to investors.

The developer will lease the apartments for $300 (the true market rate) and make up the $100 shortfall to the investor.

It sounds like a financial nightmare for the developer, but it's not. It costs the developer $100 a week to finance the guarantee, a total of $10,000 over two years.

But the developers has been paid $350,000 for a unit that's worth only $300,000. He is $40,000 in front.

In a development of 100 units, the developer has made an extra $4 million by selling apartments for more than they're worth. All thanks to a dodgy rental guarantee.

The looming financial nightmare has now been handed to the investor. When the two-year rental agreement expires, the investor has to find tenants in the open market - at only $300 a week.

Under the developer's guarantee, the investors were earning $21,000 a year. Now they're earning less than $16,000. The investors' returns have fallen from 6% to 4.5% overnight.

But it gets worse.

The value of the apartment has fallen because the income has fallen. If the investors decide to sell, they find themselves competing with developers selling new units with new guaranteed 6% returns. The conned just can't compete with the conners.

At $300 a week rent and a 6% return, the apartment is now worth only $260,000 in the open market.

It's a double-whammy disaster for the investors. Their annual income has fallen $5,000 and the value of their investment has crashed $90,000.

The history of Australian real estate is littered with examples like these.

It's a classic case of buyer beware: rental guarantees often guarantee investors nothing but heartache.

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This news article was written by Neil Jenman, Author & Consumer advocate.

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