Investors in hard-sell property investment company Blue Chip Financial Solutions Ltd may be wondering if they made the right investment decision. Some are complaining that they've been sold leaky properties and many others simply haven't been delivered the apartments they paid deposits for.
The news jumped out at me because I was cold-called by Blue Chip in late August and took them up on the offer of a one-to-one presentation.
This wasn't the first time I've sat through such a presentation. I started following up on dinnertime cold-calls while researching an article for Consumer. Invariably, I met a salesperson or went to a seminar from a company that made money by selling off-the-plan property.
They wanted me to borrow against my home and all suggested that buying their particular offer was a win-win situation backed up with graphs that only show property values going up. Blue Chip was no exception. Just its offer was more complex than most.
Blue Chip's suited smooth-talking adviser started out by telling me Blue Chip "specialises in helping Kiwis to invest in residential property".
Actually it would appear the company specialises in buying new-build properties in bulk from developers, on-selling to investors and then clipping the ticket on the insurance, valuation, legal fees, LAQC set-up and on-going management and maintenance.
My adviser said Blue Chip would find me an off-the-plan property for $435,000, "excluding furniture pack". I would borrow against my own home to the tune of $136,071 for the deposit, with a mortgage covering the rest. I would also set up revolving credit for a further $34,700 "working capital facility".
I was given a spreadsheet which suggested the weekly rental would be $520 and I would make $387,971 profit over eight years on my property.
Some of the details were a lot more complex than most property investment companies offer and I've seen a number in the past two years.
In the case of Blue Chip, the mortgage is arranged through Executive Mortgages, in which Blue Chip has a stake via its fully owned subsidiary, Tasman Financial Group. The valuation, loss attributing qualifying company structure, property manager and insurer were all arranged by Blue Chip. This week, Marisa Rakich, Blue Chip's marketing communications manager, said Blue Chip had "no interest" in the property manager but the company's adviser told me: "Auckland Residential Tenancies is a subsidiary of Blue Chip." The companies office confirms this is the case.
Like many of the sales people running wealth seminars, the Blue Chip adviser offered to help me work out my own "personal investment plan". The spreadsheet he sent me after our meeting said my goals were: "Long-term investment providing additional income to support retirement planning." It wasn't exactly an in-depth analysis.
It seemed his sole motivation was to sell me property so that he could get his commission, regardless of my financial situation. Certain things I told him about my make-believe financial situation (such as I was expecting my household income to drop dramatically in the near future) should have sent alarm bells ringing. But he ignored them. All that mattered was that I had enough equity in my house and that I would sign the authority to proceed document.
One of the most worrying things my Blue Chip adviser told me was that I wouldn't find out where my property was until I handed over the deposit. It didn't matter, he said, because investment property was about the numbers. Well, I beg to differ. There's a huge difference between a quality building such as the stately Metropolis, in Auckland's Courthouse Lane, and some of the rabbit-hutch-style units on the market. As it transpires, Blue Chip appears to have sold some clients apartments in allegedly leaky buildings.
How could I know if it was a good investment or whether the "independent valuation" was correct if I didn't know where the property was?
Blue Chip, said my adviser, offered a positive cash flow from day one and guaranteed the rental income. How this worked it transpired was through the working capital facility. This was a sum of $34,700 in a revolving credit facility that I would pay interest on and would be used to top up any monthly shortfalls. So I was paying for my own rental guarantee and cash flow with money I had borrowed. Rental guarantees are usually bad news because investors pay for them. But this approach is worse than usual.
All in all, I was going to be borrowing 100 per cent of the valuation of the property, plus additional monies to pay Blue Chip's brokerage fee (they were already getting a cut on the sale), valuation fees, body corporate, legal fees and LAQC formation costs.
At the end of four years, (or six or eight if I wanted to continue with the investment), the adviser told me, Blue Chip would buy back my property, taking out maintenance costs. The fact I hadn't paid these costs along the way is another reason why the investment looked cash flow positive on paper.
What wasn't mentioned was that if I had bought this apartment with the intention of selling it, then any gain could also be stung for capital gains tax by the Inland Revenue Department.
Blue Chip's salesman ran a credit check on me within an hour of leaving the meeting, which I wasn't happy about. The adviser also told me Blue Chip would hold the title and the lease. The list of worrying things the adviser told me is way too long to go through. What's more, absolutely no word was said about risk. No property is a risk-free investment. What would happen if Blue Chip and its "guarantees" went down the gurgler?
I do wonder how many of Blue Chip's clients have ever read a book about property investment or done any more research than sit through a Blue Chip presentation.
Finally, Rakich said to me: "Please be aware the product that may have been available just three-six months ago is not that which is available or being marketed by Blue Chip now."
Know when to run
This is an abbreviated list of warning signs to look for when attending investment seminars and presentations that I put together for Consumer magazine:
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