My uber driver shared his disastrous purchase story with me

In a recent Sunday trip across town, my uber driver asked me what many do.

“Cate, what do you do for work?”

So, I explained. Being a buyer’s advocate is an exciting role, but it’s not well-understood by everyone. Once my driver realised I had real estate expertise and I consulted my clients with strategic purchase plans, he piped up with a lot of questions about his own situation.

This isn’t unusual, and I was reasonably captive in his car. He seemed like a nice person though, and I didn’t mind him trying to tap into some free advice.

Initially he asked me if I knew of good mortgage brokers. Of course I do, but I wanted to understand a bit more about his predicament before I shared mortgage broker details with him. He had purchased land in the outskirts of our sprawling city during our low-interest rate times and now that the interest rates had increased, he couldn’t service a loan for the construction of his home. Worse still, he had signed a building contract and was about to default on that arrangement. This would attract penalty fees, and his concern was obvious. I asked a few more questions about his acquisition timeframe and his building contract, wondering if there were any ideas I may be able to come up with for him to explore.

But then his story got worse.

He had used ‘this guy’ who had steered him into the land purchase, but not before this same person had advised him to purchase an investment property in his superfund. I was trying to establish whether this professional was a mortgage broker, or a sales agent, or a financial planner. According to the driver, he was a mortgage broker who also sold property. But not all property, just selected properties.

I was immediately concerned. Superannuation is a licensed product, and it is illegal for any advisor who doesn’t hold an Australian Financial Services license to sell, influence or advise about licensed products.

An AFS license is not a real estate license.

It is generally financial planners and/or accountants who hold an AFS license. There are strict penalties that apply for those who breach the ASIC rules in relation to the provision of financial products.

My uber driver described his adventure with his self-managed superannuation fund purchase. His guy had put him in touch with someone who assisted him in establishing his SMSF. His balance was under $100,000, another surprising insight that caught my attention. It’s widely known that while there is no minimum balance required to set up an SMSF, but it usually becomes cost-effective once you have a balance of $250,000 or more. This is because the fund will need to cover the deposit, loan costs, property expenses, and loan repayments. I did wonder about the economic viability of a balance under $100,000 for a new purchase.

My driver’s guy introduced him to an unfinished off-the-plan in a commercial zone. It is part of a high rise block on a main road in Melbourne’s north west. He signed a contract for $495,000 with a developer guaranteeing a rebate to be paid back to him upon settlement. His ‘guy’ also received a payment.

I was already feeling terrible for him.

The biggest breach, however came along at finance time. His guy couldn’t get him a loan within the SMSF. He didn’t understand why, and there are a few reasons I could imagine, particularly given the magnitude of the debt, the impact of high owners corporation fees, and the likelihood of the projected rental income being insufficient. Not to mention the commercial zoning, which often requires a far higher deposit.

The problem was, he had already paid the deposit by this stage.

His guy advised him to buy the property in his own individual name, as opposed to the SMSF. He did so, and the loan settled. Fast forward a year, his land settled but his ‘guy’ then advised that his servicing had been adversely impacted by the off-the-plan unit and it’s cashflow shortfall.

His guy then stopped taking his calls.

By this stage, he had reservations about the process he’d been through, and he seeked a second opinion. He was told that his SMSF did not comply and he was told to consider unravelling the purchase and putting the funds back into his SMSF.

He contacted a local real estate agent to appraise his off-the-plan-apartment. He was told that his apartment hadn’t grown in value, and sadly the agent appraised it at $380,000.

Not only was his superannuation in a mess, but the super he had managed to save was potentially worth zero now that he had invested in a poor asset.

My uber driver asked me what I thought he should do.

His situation is very unfortunate, and the number of warning bells that sounded as he shared his story were plentiful. I can’t help him through this, nor can a mortgage broker. He needs financial advice and I believe he needs to talk to the authorities (ASIC). It seems that there were multiple breaches and I believe he should be prepared to share what he went through so that others don’t also go through this.

“Free advice” is never free. It comes with some terrible strings attached. And the decision to create a self-managed superannuation fund requires expert advice from a licensed professional.

My uber driver seemed to be a lovely guy, but unfortunately that uber ride was one I’ll never forget. I can only hope that he eventually navigates his way out of this and recovers from his losses somehow.