Getting your mortgage through a mortgage broker is probably one of the best things you had done, when you embark on your home and investment property buying journey. However, while you are getting your mortgage serviceability assessed, you might have received some Property Buying Advice from your mortgage brokers. Whilst most are generic property buying information, some more "enterprising" mortgage brokers may go as far as telling you what to buy and what not to buy. We've seen this too many times. And we've seen too many property buyers being badly affected by such unqualified advice from mortgage brokers and mortgage clerks.
So, what happened herr? What do you need to know? Are mortgage brokers supposed to provide property advice? How qualified are mortgage brokers to provide property advice? Should they be licenced in real estate before they can provide property advice as well? What hidden agenda do you really need to know with property advice from mortgage brokers?
This article will explain what you need to know with property advice from mortgage brokers, expose what is not said to you, and how to protect yourself from the hidden agendas.
What is the role of Mortgage Brokers?
Mortgage brokers are lending specialists who help property buyers find the most suitable loan for their properties. They do this by helping and banks and lenders assessing the property buyer's income, expenses, assets and liabilities, plus other criteria, to determine the most appropriate lender for the buyers. Most mortgage brokers are doing the right thing, and there are no doubts that many are themselves property owners and property investors. Unfortunately, however successful they claim to be, almost every mortgage broker do not have the vast real estate experience needed to provide you with property buying advice. Furthermore, their mortgage licence alone, does not allow them to provide any real estate advice at all. What's more important is, their insurance do not cover you, if you had suffered from the mortgage broker's bad advice.
What do you need to provide Real Estate advice or service?
In Australia, the law specifically mandates that anyone providing property advice must be appropriately licenced in real estate. So, in order for anyone, including mortgage brokers, to provide any property advice, they have to hold a legally recognised real estate licence in your state in Australia. And this licensing is managed by the state real estate licensing authorities, such as the Consumer Affairs in Victoria and Department of Fair Trading in New South Wales. This purpose of licensing is to protect consumers, ensuring consumer receives educated, appropriate and well informed advice.
Can Mortgage Brokers Provide Property Advice?
Here's the the million dollar question. Can a mortgage broker or mortgage clerk provide any property advice? Legally, unless the mortgage brokers / mortgage clerks hold a valid real estate licence in your state, it is illegal for them to tell you what to buy, where to buy.
Some brokers do give high level tips on how to buy your properties. And that is ok. But, it will be illegal for them to give you anything more than that. They are not licenced and skilled to provide advice on any specific property or recommend properties to you at all.
What could go wrong with a mortgage broker advice?
While most of the real estate advice from mortgage brokers are no more than simple, relatively harmless guidance, and checklists, there had been too many instances where information provided by mortgage brokers are incorrect, incomplete, misleading or had resulted in the property buyer's financial loss. The 2 most common problems we have seen with mortgage broker advice are:
Valuation of the property
Location and types of property
To explain why information provided by mortgage can be misleading, or incomplete, let us start with giving you a crash course in the skills and knowledge needed by a real estate buyers agents in order to provide any property valuation / appraisal and location advice.
How do Real Estate Professionals Appraise the Property Valuation?
The task of determining the valuation of the property, is a lot more involved than logging into a computer system, entering the address, and reading off the screen. The assessor needs to have an up-to-date knowledge of the property market in the area, plus a good knowledge of the property being assessed, its characteristics, and buyer demographics. This is what real estate buyers advocates need to know, before we can give you a good assessment of the property valuation. This requires years of experience, and would also typically involve an on-site property inspection. For more detailed information on how this is done, this article gives you a good appreciation of how real estate agents perform a property valuation, and the problems associated with free resources and unqualified advice. Read here.
Thus, unless the assessor (mortgage broker in this case) is involved in the real estate industry, they would not be in the position to provide an accurate assessment. Now, is your mortgage broker / clerk always inspecting properties? Or are they always on the roads, selling their mortgage packages? Have they even physically inspected the property they comment on?
How do Buyers Advocates Find the Right Property for the Buyer?
During our onboarding process here at Concierge Buyers Advocates, we go through a series of detailed questionnaires in order for us to understand what the client is really looking for. This interactive Q&A discussion is guided, but not scripted and not templated, and can take between 45 to 90 minutes. It is a brainstorming session to uncover, explore what the buyers' want in their properties.
This session is driven by the experience of our buyers advocates, primarily to independently understand and qualify:
what our clients say they want;
what our clients think they want;
what else had our clients not thought of;
what else should our clients consider; and
what else can our clients consider.
This interactive discussion is followed up with an extensive search for suitable locations and properties from ALL sources. Now, because the buyers agents at Concierge Buyers Advocates are fully independent, we can buy ANY property from ANY real estate agency, and off-market sources, to find the most suitable properties for our property buyers. Again, the experience of our buyers advocates, plus subscription based resources from industry data providers are used during the research, selection and recommendation phase. Our buying services give you access to data and information, worth over tens of thousands of dollars.
No sales agents, fake buyers agents and mortgage brokers will spend up to 2 hours or more understanding what you want, before telling you what you should buy. Unless the mortgage broker is in the real estate business as a licenced buyer agents, they would also not spend tens of thousands of dollars annually for subscription based data references. In addition, where do they get the real estate experience, the location experience and knowledge needed to provide such an advice?
What had gone wrong with Mortgage Brokers providing property advice?
Now, the above background information should give you an idea of the level of details, information and experience needed to provide you with a qualified and relevant property advice. Does a mortgage broker or mortgage clerk have that level of experience and access to research data and sources? Does the mortgage broker or clerk have the intimate information about that specific property and the property market in the area?
Don't get us wrong. Most mortgage brokers and mortgage clerks and administrators are doing the right thing. They stick to providing mortgage advice and pointing borrowers to simple, generic property buying guidelines. However, there are enough instances of mortgage brokers providing wrong / misleading guidance to buyers, causing them significant damages. And these instances had prompted calls from a real estate professional bodies for mortgage brokers to stop providing property advice. They are putting the buyers and their [mortgage brokers] own mortgage business at risk.
Before we look at two real-life examples of how buyers are harmed by such advice, let's here one such call. Here is an excerpt from Your Investment Property Magazine.
The call for Mortgage Brokers to step back from property advice.
The head of a Sydney based buyer’s agency and a representative of the Real Estate Buyers Agency Association of Australia (REBAA) has backed calls from the head a peak mortgage broking body reminding brokers not to provide unqualified advice.
Peter White, chief executive of the Finance Brokers Association of Australia (FBAA), reminded brokers not to provide advice in areas they aren’t qualified to do so, particularly investing in property.
“If you are only a qualified finance broker, act as a broker and do your best to meet your client’s needs,” White said in 2016.
“If you also want to assist a client in other areas like property purchasing, get the necessary qualifications and training otherwise you may be at risk of a life changing personal pay out,” he said.
White and the FBAA cited a recent case in which a broker was found to have breached his duty of care by the Credit Ombudsman Service and forced to pay more than $115,000. The Ombudsman claimed the broker had given incorrect and unqualified advice.
It is a known fact that second rate and small time property developers and property project marketeers incentivise mortgage brokers to sell their products. Mortgage brokers and mortgage clerks are often paid commissions by property developers to sell the developers' properties. Now, remember, anyone providing and selling real estate has to be appropriately licenced? Are these brokers licensed real estate agents? If not, they are putting themselves and you at risk, and they risk being called upon by the real estate industry watchdog. Licensing real estate agents protects property buyers from dodgy and fraudulent real estate purchases, and, to prevent unqualified persons from providing unqualified property advice, putting consumers at risks. Now, who is protecting you, if you suffered any loss by following the advice of your mortgage broker?
Examples of buyers suffering significant damages resulting from Mortgage Brokers Advice
Here are some real-life examples how some of our clients had been adversely affected by unqualified advice from the mortgage brokers. These are just a sample of examples that we are aware off. There are many other untold examples out there.
Case 1. Mortgage Broker provided misleading valuation, resulting in Home Buyer missing out on their Dream Home.
Our first home buyer client was looking for a high-specs, high quality home in the eastern suburbs, around Glen Waverley. We found one which "ticked every box" (in the client's own words). They paid for a building and pest inspection, got the Contract of Sales and Section 32 reviewed by the solicitors. Our buyer's advocate assessed the property to be worth around $2.4-2.5 million, and it could sell for around the $2.5 million dollar mark, which is within the client's budget. We agreed to proceed with preparing for the auction bid at around $2.5 million.
The evening before the auction, the mortgage clerk sent our client a "valuation" of $2.1 million, which is significantly lower that our valuation of $2.4-2.5million. Now, because this opinion came from a person representing the lender, the client wrongly trusted the valuation and would not agree to bidding more than $2.15million. The property was auctioned and sold for $2.52 million. Our property appraisal was spot on, and $2.52 million was a price which our client would be more than happy to pay for.
Because of this unqualified advice from the mortgage clerk, our client missed out on their dream home. Their intense preparation and their hope was dashed by this uncalled-for disruption from the mortgage clerk. They were emotionally distraught, knowing they could have bought their dream home, if they had not listened to the poor and unqualified advice from the mortgage clerk.
It was their dream home, their kids love the house so much they had even chosen their rooms during the property inspection. They were full of hope and they had been discussing and planning how they could use the house. They had the capacity to pay for it, and they wanted this so much. But because they had received and trusted an unqualified advice from an unqualified mortgage broker, they missed out.
They realised that they had misplaced their trusts, and their heart sank when they knew what they had done. They could have walked away with the keys to their dream home, if they had not trusted their mortgage broker's property advice.
What went wrong with this mortgage broker's advice?
The last minute "valuation" from the mortgage administrator was where things started going wrong for our buyer. Firstly, it is highly unusual for a reputable lender to send the buyers a "valuation" for any property before they receive the executed (signed) Contract of Sale for the property. What the mortgage clerk provided was not a formal valuation. The mortgage clerk is NOT licenced and unqualified to provide that. Only fully licenced real estate agents and licenced property valuers can provide property appraisals or valuation, and lenders organise these formal valuations AFTER they receive the executed Contract of Sale, not before the buyers buy it. This also highlights the need for buyers to get a good assessment of the valuation before they make an offer, or they are more likely than not, to overpay, putting their finances at risk.
Whatever this mortgage clerk / administrator had given, was just their personal opinion of what the property is worth. And it is no better than a 10 year old kid punching an address into a software that gives you the average price of the properties sold, without considering the quality of each individual property. Remember, our client was looking for a high-specification, high quality home, not an average suburban home...
Since this "personal opinion" came from a person representing the buyer's lender, it gave our client the impression that it was what the bank will lend. From our extensive experience working with mortgage brokers and the mortgage process, we know this mortgage clerk is new and had no idea what he was doing. He definitely wasn't aware that because of this action, he was about to lose his job.
Because this mortgage clerk sent our client his opinion in the last minute and this wasn't brought to our attention until minutes before the auction, there wasn't enough time for us to clarify with the lender, and change the client's expectations. This very last minute disruption, resulted in our clients limiting their offer and they lost their dream home, when they could have won it.
This mortgage clerk was trying to be helpful, but it backfired.
Emotional Distress and Financial Loss from this Mortgage Broker's unqualified advice
As a result of this unqualified advice, our client missed out on their dream home, and that resulted in our client suffering emotional damage and distress. This is on top of the loss time, and monetary losses from the wasted building and pest inspections and legal contract review, plus the 2 extra months of rents which the clients would now have to pay. It caused them about $10,000 worth of monetary loss. This same mortgage clerk subsequently provided another misleading information to our client on a second property. But we managed to discover this second instance early, independently fact-checked the mortgage clerk's claim, challenged the mortgage clerk's view and corrected our client's misunderstanding.
Any other uneducated buyers or buyers without any professional support, would have once again believed the misinformation from this mortgage clerk. If we had not picked this up, our clients would once again be misled by this novice clerk and missed the property they wanted. It would have caused our clients much more financial damage this time, as it came much later in the buying process.
Here is why savvy property buyers buy with a buyer's advocates on your side.
That's what property buyers pay our professional buyers advocacy services for. To protect their interests throughout the whole property buying process. We use our experience and independent professional network or agents and affiliates to support our clients, ensuring our clients receive the correct and most appropriate property buying advice.
Case 2. Investor bought sub standard properties.
This property investor contacted our office one day, seeking a review of their investment properties. They were seeking to understand how they can improve the performance of their property portfolio. In one look, our property advocates casually asked how had they accumulated the properties. "Recommended by their mortgage broker (who happened to be their friend)" was the answer. This was the first red flag.
Of the 5 properties they had owned, only one is an investor grade property which could have been cash-flow positive, if it wasn't their own home. The other 4 were apartments which were designed for investors. They were all over Melbourne. Melbourne CBD, Box Hill, Sandringham, etc.
Now, for the uninitiated, there is a MAJOR difference between an investor-grade property and a property meant for investment. An Investor Grade Property is what our pro-buyers buyer's advocates would recommend, while the latter is what pro-developers real estate salespersons would sell to the uneducated, unsuspecting foreign investors. Foreign investors almost never ever visit the property they buy, so they would not know how bad some of these properties are. I will cover the difference in a later article.
Back to this client, while the 4 apartments were bringing them income, they realised that they were insufficient to cover their outgoings. The total cost of their mortgage, repairs, expensive body corporate and council rates, etc are more than the rent they collected. This situation is called negative gearing.
This mortgage broker "friend" of theirs was receiving tens of thousands in commissions for each property he sell. While negative gearing can be helpful to the rich, who are investing in these properties with their spare cash, it is dangerous in the long run for the majority of moms-and-dads property investors. When property prices crash, or when interest rates rise, they would have increasing trouble servicing the mortgage, and when they can no longer afford to hold their properties, they could end up with their properties being repossessed by the lenders.
This client was also surprised to realise that despite years of owning these properties, and making payments towards the properties, the value of their properties had not grown at all. They still owe the lenders more than what the properties were worth. They are in a situation called negative equity. Where they owe more than what the assets are worth. It is dangerous. They could find themselves in financial distress for years to come.
With this client, if they had bought the right properties with the capital they had, they could well be retired with a few properties fully paid off by now.
There are many more other examples out there. Time and time again, we hear stories of property owners ending up in trouble or with the wrong properties, due to unqualified advice from unqualified people. And it is about time property buyers get educated on who they should trust to receive these advice.
What should you know about property advice from mortgage brokers?
Mortgage brokers process a lot of property mortgages, developers know this. And they also know it is a good channel to push their new properties to naive home buyers and property investors. So, they incentivise the mortgage brokers. The brokers are paid commissions, or "introduction fees", for each property they introduce.
Can you trust a mortgage broker's advice?
Yes. You should trust their mortgage advice. Their skills and experience are in assessing your serviceability, how much you can borrow from the lenders and finding out which lenders will suit your needs.
However, if it is property advice, take their advice with a pinch of salt. Most of their advice are nothing more than generic, and should not be taken as specific to your needs. It takes a lot of experience, industry and market knowledge to determine a property's value, where and what you should buy.
Also, remember, mortgage brokers' property recommendations can be biased. They are paid commissions by property developers and project marketeers to sell their products to you. So, unless you are 100% confident your mortgage broker holds a valid real estate licence, is a reliable practising real estate agent, and is independent and neutral in their recommendations, you are putting yourself at risk, when you trust their property advice.
What should home and investment property buyers do?
As property buyers, you should always do your own research and independent due diligence. While your mates' advice and mortgage brokers' inputs in some instances are good, they should never be relied upon as the gospel truths. They are all unqualified advice. They are either ill-informed, ignorant, or they could even have a hidden agenda.
Can you trust sales agents providing buying advice and service for free?
The law is simple and clear. Unless you pay for the real estate agents to work for you as buyers agents, the fact that they are providing you "free" services makes them a sales agent, and they are working against you. These sales agents are paid by the seller, either directly or via commission sharing with another agent or sales person. And real estate agents are legally required to protect the best interest of whoever pays them. For more information on this, this article will explain why it is important to find out how your real estate agent is paid.
Where can property buyers go for independent property buying help?
Look for buyers agents or buyers advocates who charges a fee. The Australian law mandates that the real estate agent MUST look after the best interest of the person who pays for their services. As independent Melbourne buyers agents based in Glen Waverley, buyers engage out paid services to help them buy their properties confidently.
We protect the interests of property buyers throughout Melbourne, Victoria and Australia. Our 3-step process helps property buyers outsmart the market, and make confident buying decisions fast.
Get in touch to explore how we can help protect your property buying interests.
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