"Two tiered" marketing is a practice where unreasonably high prices are charged for real estate sold by dodgy marketing companies. What "two tiered" means is that there are two market prices for a property, there is the usual price paid by locals on the open market, and there is the outrageously high price paid by people on interstate buying trips organised by real estate marketing organisations, using investment seminars as a way to get people to listen to a hard-sell sales pitch.

People attending real estate seminars are given a hard sales pitch, based on the usual enticements of tax deductions and easy risk free profits from "bricks and mortar", and then sold properties at well above the going rate. In many cases the property is sold by the developer, or an associate, and is not made available for sale on the general market. They are only sold via real estate road shows.

The following information was taken from an article on two tiered marketing in Australian Property Investor magazine, June/July 1999.

Unfortunately, according to Iain Herriot, a senior partner with the Queensland real estate valuers practice Herriots Pty Ltd, the practice, which was first noticed in 1991, has grown phenomenally. Based on Dept of National Resources sales records, Herriot estimates that in 1998 42% of all settled strata titled unit sales in Queensland were two tiered marketed sales. In the same year, they claim over 12% of Sydney units were two tiered sales, and they estimate this may increase to over 30% in the near future. In Melbourne the figure was around 7% in 1998 and in Adelaide the practice accounts for 22% of sales in beach side suburbs.

Herriots research indicates that buyers invariably come from more than 30km away from the unit, and that locals rarely buy at two tiered prices. The majority of sales come from within the state (just over half of QLD two tiered properties were bought by Queenslanders in 1998), but these sales come from rural and regional Queensland. About 24% of QLD two tier sales come from NSW, 12% from Victoria, 8% overseas and the balance from other states and territories. The practice seems to be catching in particularly in Western Australia and is a growth industry in that part of the country.

You can recognise a dodgy real estate marketing organisation by their sales pitch:

• Wealth is available to anyone who wants it! I own ten cars, five boats, a helicopter and a jet! These pictures show me gadding about in the south of France! With a supermodel! You too can have this kind of wealth by following my 7 easy steps!

• Tax sucks, you lose half of what you earn in tax each year. Rich people rarely pay much tax because they are smart and invest in tax saving strategies. Negative gearing and depreciation allow you to save a fortune in tax.

• Residential property is as close to a sure thing as any investment. Historically it has doubled in value every ten years and almost never goes backwards.

• Shares are risky, you'll lose your shirt on them. Dozens of companies go broke each year, the whole thing is a scam. It takes decades even to break even if the market crashes.

• That you don't need any of your own money to grow wealthy in real estate. No savings are required and with many strategies you don't even need to have any equity in your home. The tenant and the tax man together are the ones that make you rich, often without you needing to spend a cent.

• That you should ignore friends, relatives, financial advisers, accountants, investment FAQs, articles at ASIC's Fido web site who will try to talk you out of using our strategies. Often these people mean well but they are the ones preventing you from getting rich. Becoming wealthy means ignoring such people and listening to us instead.

• That you are a big loser, that your small house and your old car and your boring job mark you as a failure. Unless you want to end up as a loser living on welfare you should listen to winners like us who will help you become successful (rich).

• Financial planners and stock brokers take big fat commissions for doing nothing. They have conspired with their big business buddies and their political lobby groups to inflict superannuation on you which is really just another opportunity to tax you at a high rate. You can regain control of your finances by investing in property, where you are in control and not subject to the risk of dodgy stock salesmen or sudden market collapses.

I have been to several real estate seminars that gave this exact message.

As a rule, I would recommend that you avoid dealing with any organisation that sells property at seminars or gives any kind of woop-de-doo "inspirational" message. If I was going to believe a forecast that a certain area was about to have a massive increase in price, I would be more willing to listen to someone who is buying in the area, not someone selling.

There are hundreds of two tiered organisations floating around, many operating out of Queensland. Some have real estate licenses, many don't.

One organisation that most people have probably heard of is The Investors Club. According to a series of articles that appeared in Queensland's The Courier Mail on 9 Feb 2002, this organisation is presently under investigation by the Queensland Office of Fair Trading. I have a particular dislike for this organisation because of the blatant dishonesty of them calling themselves a "club".

I also have a certain amount of contempt for them, because after receiving their news letter for about six months I have realised just how amateurish they all are. The newsletter is a source of constant misinformation and anti-superannuation rhetoric, is filled with basic factual errors, contains a plethora of got-rich-quick testimonials and generally gives the impression of being written by someone that hasn't a clue about investment, or someone deliberately trying to appeal to someone without a clue.

Many people think that The Investors Club is some sort of buyers collective or non-profit organisation (or even, dare I say it, a "club" of some kind). Instead, it is in fact a for-profit property marketing company run by a former bankrupt named Kevin Young. "Club" members point to Young as a great success story, pointing out that he owns around 150 properties. I don't doubt that this is true, because the "Club" charges developers a marketing fee of 6% (usually between $11,000 and $15,000) to sell their properties. This fee is not only much higher than most real estate agents charge, but the Investor's Club charge it up front, before the Club even finds a buyer! Young makes an estimated profit of around $4 million a year, which may go some way to explaining how he was able to afford so many properties!

Developer's profit margins are usually very thin. If someone is going to pay 6% up front to sell the place they are almost certainly going to need to raise their price somewhat. In the Courier Mail article there were numerous examples of disgruntled customers receiving tens of thousands of dollars less for their properties than they bought them for - a two tiered trademark.

Valuers involved with the club say that they are notorious for buying overpriced properties and then haggling with valuers to equate the valuation with the purchase price.

An internal club memo attacks prominent valuers Herron Todd White for "incompetent valuation", while another leading statewide firm is chastised for its supposedly incorrect conclusions.

"The club has trouble getting the valuers to agree to their values," says Joe Stone, a former chief researcher for the club in WA. "Kevin was always saying you have to lay down the law to valuers."

Now I personally have no way of knowing if this is true, these are quotes from the newspaper articles. On the other hand, I get the Investors Club newsletter every month (after attending one of their seminars once), in the February 2002 issue there was this little gem: (In order not to be accused of taking a quote out of context, I have quoted the entire article)

Valuations

In recent months, the Club has been suffering from constant issues with some valuers not agreeing with sale prices or the owners estimates of values of their properties. This has always, and I dare say, will always, be an issue to some degree.

However, in recent months it has been particularly bad. Why? There are a couple of issues impacting on valuers at present that are affecting their work. Firstly, there are some valuers currently being sued by the banks for providing inflated valuations for two tier marketeers. Secondly, there are valuers who have worked with the cheaper builders to inflate the price of the new homes to include the First Home Owners Grant value, allowing the houses to be sold using the FHOG as the only deposit. Again, they have been found out by the banks and valuers are currently facing claims against their Professional Indemnity Insurance. All this has combined to drive most of the rest of the valuers into undervaluing as a matter of policy so that they will not face a P I claim as well.

Is this impacting on the Club only? No! In fact, recently my wife came home from work to tell me one of her co-workers was furious. He had sold his house through the local real estate agent to a local buyer. The buyer had gone to St George bank to arrange finance, which was approved subject to valuation. The valuer subsequently provided St George with a valuation $42,000 less than contract price and the loan was declined!

What can we do? Every low valuation we receive where we can obtain the comparative sales information is being double checked by our Research Department and then challenged. Sometimes we have been able to convince the valuer to come back to market value. Sometimes we have not. We will keep pushing! Club Loans then keeps a record of the valuers that are prepared to remain at market level and where possible, requests the lenders to only use these valuers. Ultimately, we are hitting the valuers that are not working at market level in their bank account by removing the substantial amount of work the Club generates from their workflow.

Meanwhile, Kevin Young continues to meet with valuation companies at senior level to educate them in the Club's systems and get their support to encourage their staff to be market realistic. Stay with us! We may not win overnight, but we will win for the benefit of all in the Club.

Andrew Ward
Club Loans

Now I don't know about you, but this does seem to confirm, albeit with a different spin on the facts, that the club considers screening out conservative valuers to be correct and just business practice! Their reasons are a load of BS, but they freely admit to blackmailing valuers into accepting whatever price the "Club" thinks is fair, under the threat of having their work taken away. Furthermore, they keep a list of soft valuers that are somewhat more pliable (or corrupt) and use these exclusively. If The Investors Club is not a bona fide two tier marketing scam, then at least they share most of the same features.

There are a few ways to protect yourself against this kind of marketing. Always get a valuation done by a reputable valuer (and not one recommended by the salesman!), this costs just a few hundred dollars. Only buy off a licensed agent with professional indemnity insurance. Avoid buying off anyone with a sales pitch that reminds you of what I write in this article, and the next one on "quacks".

The Real Estate Institute of Queensland offers some excellent advice on how to avoid getting burned by overpriced property – not just for people buying in Queensland, but anywhere in Australia. Points to note...

• Is the salesperson a licensed real estate agent or a registered salesperson?

• Are they members of your State’s Real Estate Institute (REI)?

• If they’re not licensed real estate agents or members of your State REI, then enquire what licences, if any, they do hold.

• Are they members of any other recognised professional organisation?

• Contact those organisations for verification.

• Find out how long they have been in business.

• Try to establish whether the firm has any assets or whether it’s a $2 company.

• Discover whether or not the firm has a current professional indemnity insurance policy. For example, all REIQ members are required to hold such a policy.

• Be clear in your own mind about the reasons you’re considering buying real estate. If you’re buying for investment purposes then you should take a long-term view. You should not expect large capital gains in the short term in a low inflationary economy unless you’ve added significant value yourself.

• If you intend to negatively gear a property, consult your financial planner, accountant or tax agent for advice. A real estate agent can give you property advice but you should look elsewhere for financial advice. Do not rely on historical data/future projections offered by the sellers.

• Try to inspect more than one property so that you get a feel for what is available.

• If your time is limited, consider asking a trusted associate to short list properties for you to inspect or appoint a real estate agent to find suitable properties for you. In this case, the real estate agent will be working for you, the buyer, and you will then become responsible for paying that agent’s fees. Never buy a property without seeing it first.

• Be wary of anyone offering inducements to you to inspect properties... there’s no such thing as a “free lunch.” Someone has to meet the costs at the end of the day and it’s usually the buyer. If you do accept an inducement, make sure that you are under no obligations. Get a written undertaking to that effect.

• Ask to see a comparative market analysis that will show the recent sales prices of equivalent properties. Make sure that sales in complexes other than the one in which you are considering buying are included. Consider appointing a registered independent valuer to advise you of the current market value of the property. Make sure the valuer is a member of the API.

• Find out what sort of contract you will be expected to sign if you decide to purchase. The standard REIQ contracts have already been vetted and approved by the Queensland Law Society. These documents provide a number of protections for buyers with which Queensland solicitors will be very familiar. If you’re buying property in other States check with your local Real Estate Institute.

• Engage a solicitor to assist you with the conveyancing.

• Don’t sign anything unless you know exactly what you’re signing... in particular, don’t succumb to high-pressure sales tactics to get you to sign immediately – before you’ve had a chance to reconsider or seek outside advice about the deal.

Note: recently I received an email from a well known real estate author saying I was, in his opinion, spot on about two tiered marketers and my take on The Investors Club. He did, however, wish to make it clear that in his opinion the REIQ harbours more than its fair share of two tiered marketing shonks among its members. I suppose this is much like the Financial Planning Association, who claim that one can never go wrong dealing with an FPA member when in reality FPA members are no better qualified and no more ethical than planners who choose not to join. Both the REIQ (and other state real estate bodies) as well as the FPA primarily exist for the purpose of lobbying governments (often to oppose reforms that would favour consumers more than advisers) and marketing their members.