Thrive Investment Finance Samantha Bright says she has seen a lot of trustees who bought off-the-plan unconditionally in their super funds, but by the time the property was ready to be settled, they were unable to obtain finance because the financing requirements had changed.
“By the time it comes to settle, they can’t get finance because that lender no longer does SMSFs or their fund balance isn’t enough or the lending [requirements] have changed,” Ms Bright told SMSF Adviser.
“Just because you can get a loan today for your fund, doesn’t mean that when your property is finished in six months that loan is still available.”
Buying off-the-plan unconditionally can leave trustees at the “highest risk of drama and nightmares”.
Ms Bright said she recently had a trustee contact her in desperation after they bought an inner city Brisbane property off-the-plan unconditionally.
“You can’t get finance approval to buy off-the-plan for SMSFs, so they had no finance approval and they were due to settle in two weeks,” she said.
The property was located in a part of Brisbane where lenders are hesitant to lend because of the large amount of units being built in that area.
“Their valuation came in at $40,000 short and the lender won’t give them more than 55 per cent on this building and they are $30,000 short just to settle,” Ms Bright said.
“If they don’t settle, they lose their $38,000 deposit and they’re liable to be sued by the developer for up to two years if they have to resell that property for less than what they bought it for.”
Ms Bright said the property was recommended to the trustees by the financial adviser who set up their SMSF.
“The broker was in-house. It was all in-house so they actually paid for financial advice, they paid for the SMSF, then they bought the property which no doubt the financial planner would have been paid a commission on and now they can’t settle. It happens all the time,” she said.
“I don’t think some advisers and accountants understand how dangerous it is for their clients to do this.”
“the property was recommended to the trustees by the financial adviser who set up their SMSF”
“then they bought the property which no doubt the financial planner would have been paid a commission on ”
If only they could go to an accountant who could have given them independent advice and warned them of the risks. But as this is now financial advice we can’t do so and the SMSF members are now reliant on financial planners.
Still, I am sure the FP gave them lots of compliant paperwork to read in compensation for the large commission they paid him.
Maybe the accountant could have recommended they get into some trees instead. And got paid a big fat commission on both the investment and the loan that probably wasnt disclosed.
Or maybe you mean like the client i saw last week. He had $15K in super which used to be in an SMSF because his ‘trusted adviser’ told him that as a small business owner it was a really good thing to have….obviously he meant for the accountants small business….not the clients….
I was starting out as an accountant when BOTH accountants AND FP’s were pushing the olives, fruit, nut & paulonia trees, aloe vera, family trust distributions to phoney beneficiaries etc etc usually with non-recourse loans. Neither industry can claim to be ‘pure and innocent’ in relation to that period.
Had to help many who had been given this bad advice to compile & lodge applications years later when the ATO offered some form of amnesty/comprimise after the mass marketed schemes got away on them.
Throw in a few dodgy property developers and their vertically integrated ‘professional’ cohorts (but this still goes on). Bankers, real estate sales man and laywers all had their hand out too (all of those paid for barrister tax opinions…).
Given that I see this brought up fairly regularly, I’m genuinely interested if the mass marketing schemes you refer to are still as prevalent, or if you are seriously flogging a 15+ year old dead horse everytime this gets brought up just to have something to justify your accountant vs FP comments?
Don’t kid yourself either, accountants aren’t the only ones putting people into low value SMSF’s.
If you want to talk about fees and commissions, I have a client that set up an SMSF on advice from their FP after being told the set up would be ‘free’. Still got charged $6k+ for a plan and to roll over & invest their money into their new SMSF. With around $1M in super, they are being slugged $20k a year for a couple of meetings and a bunch of share trades. Even if they are getting good advice, I really don’t see that much value in what they get, but unfortunately, that has been how the industry works. The sooner we all get completely away from turnover/commission based remuneration, the quicker the horror stories will dry up.
Probably impracticle, but maybe remuneration a client satisfaction basis would sort out some of the rot, in multiple industries.
Cam and FP Fail
The majority of the vertically integrated property development schemes I have seen operate with both financial planners and accountants on board. Whilst I enjoy living on the Gold Coast I see a lot of these schemes due to my location and enjoy reporting them to ASIC for inappropriate advice (not that ASIC does much)
These models:
(1) Advertise property sales on the basis people believe that property can never decrease in value — generally making some reference to an SMSF allowing your superannuation to work harder
(2) Accountant establish’s the SMSF — Prior to limited licensing was almost always done through the accountant given it involved less paper work and an accountant is more difficult to take legal action against than a FP. Accountant often has a different name above the door but not always
(3) Referred to the financial planner who prepares risk advice and sometimes an investment SOA for any “surplus funds”
(4) In-house accountant looks after the ongoing compliance for the SMSF
(5) Mortgage broker who is also employed by the group looks after the loan and the valuation
The “really good” ones also incorporate a related entity as the solicitor acting for the client and I know of one which completes an “independent” valuation.
As a FP I can roll off numerous examples of terrible advice made by accountants, as I am sure you can in relation to FP’s. Licensing is designed to protect the “consumer” and therefore allow action to be taken against rubbish advice which is why I believe accountants should be licensed. Whether the compliance regime which is in place in this country, including the large amount of paperwork required, assists in this regard is another argument.
There is absolutely nothing wrong with LRBAs. Incorporating leverage into an investment portfolio, when done sensibly and with careful planning, can be extremely beneficial as part of a SMSF’s overall investment strategy over the longer term. In many instances, it is not the ‘LRBA’ that is the problem – but rather second-rate advice and extremely poor asset selection that results in unfavourable outcomes for SMSF trustees.
Purchasing property through a SMSF using a LRBA must be done under very strict borrowing conditions and considerable consideration should be given to liquidity issues and cash reserves (which is sadly underscored as being completely lacking in the example provided in this article).
LRBAs are not suitable for everyone and SMSF trustees should seek advice from an independent SMSF specialist who is not part of a ‘vertically integrated’ firm before deciding to deploy an LRBA (i.e. a firm that is in bed with property developer and who provide the initial advice on the establishment of the SMSF, motivated solely by the fact that they are involved in the property purchase and the facilitation of the loan to fund the purchase).
‘Property marketing firms’ masquerading as a supposed ‘financial advisory firms’ need to be stopped. ASIC completely banning any form of kick-back and/or incentive offered by property developers, real estate agents and lenders would go a long way to stopping dodgy LRBA practices and transactions.
I agree mate… LRBAs can be fine when used correctly… Thing is they are spruiked by those who are able to receive commissions of 30k – 40k for each property sale.
The issue is not the LRBA itself but the fact that property is not a financial product and spruikers can take the p*ss… Thing is property as an asset class means that most purchases leave a client overweight in a geared, illiquid asset at the top of a market cycle.
But nah instead lets focus on adding more red tape to financial planners and accountants…
Banning any form of kick-back and/or incentive offered by property developers, real estate agents and lenders, ONLY in relation to SMSF LRBA transactions isn’t going to add any additional red tape for financial planners and accountants. If they accept kick-backs and/or incentives from developers, real estate agents or lenders they are not working for the client. A licensed financial planner or accountant has a fiduciary obligation to their client. Full stop!
I think you have misinterpreted my comment. I agree 110% with you.
My point was that the gov really isn’t focusing or seriously considering banning kick backs in real estate… They are currently more focused on adding additional red tape to other industries and letting the property market overinflate further until it all ends in tears.
If a Financial Planner wants to recommend a client contribute $1,000 per year salary sacrifice to super it requires a long compliance document (SOA) and proving that the strategy is suitable for the client….
A property spruiker can sell/bully through a seminar a client to invest in a $500,000+ property (requiring a loan) without any suitability requirements and can receive a massive commission in the process with little ongoing responsiblity.
System is broken.
PH, agree completely I am completely in support of the LRBA strategy, just not when it’s done for others gain and not the trustees.
Agreed. An easy fix would be for the government to legislate that “any asset” acquired by an SMSF using an LRBA is designated as a “financial product”. They could also classify property developers, real estate agents and credit providers (lenders) as “product issuers” for any transaction involving an SMSF using an LRBA. The FoFA – Conflicted Remuneration rules would then kick in to take care of the rest.
Great advice, but is no different for people buying off the plan outside of SMSF (the values are the same/the bank policies may be more difficult, but people can still run into problems outside of SMSF with this strategy too
Not a surprise at all. I recently undertook an audit on a Qld property acquired off-the-plan under a LRBA by a SMSF. In this instance the rental agent was linked to the developer. When I did a property search based on the street address, it lead to an adjoining property, not the one purchased. The bottom line is the street address “allocated” by the developer is not the same as the street address linked to the property in the land title office. To me, this made the lease agreement etc. incorrect. When this was brought to the rental agent’s attention, they became “cranky”. More problems followed. My suggestion, as auditor, is to treat off-the-plan like the plague.
I suspect the melt-down in this area will warrant a royal commission (or other such investigation) and be ultimate reason that LRBA within Super are banned. I don’t think existing property purchases are an issue, as banks are very prudent. It is the off-the-plan kick-back free for all and non settlement that is the issue. Speak to a banker familiar with settlements in this area and they will tell you some sad stories. Many people have been taken for ride.