Developer Kickbacks

John Collett, THE AGE, Money 17 April 2015

Off-the-plan apartment developers are paying mortgage brokers up to $20,000 for each lead that turns into a property sale.
It is not just mortgage brokers who are receiving kickbacks for handing on names of their clients to property developers. Money is aware of inducements offered to accountants. The referral fees do not always have to be disclosed, leaving unsuspecting consumers vulnerable to being steered into property investments where the broker has a conflict of interest.

One mortgage broker from inner Melbourne, who spoke on condition of anonymity, said the going rate was about $10,000, although he had been offered as much as $20,000. A mortgage broker from Sydney, who also did want to be named, said the going rate was up to 3 per cent of the purchase price of the property. The brokers fear that they will be ostracised by developers if they go public. Another source, who works in the marketing arm of an off-the-plan developer, told Money that developers pay referral fees of up to 7 per cent of the purchase price, usually in two parts: part of the fee on exchange of contracts and the remainder at settlement. “There are large broker groups and also financial planners who have made a lot of money over recent years out of referral fees” he says. Sometimes, the referral fees are paid to mortgage brokers whose main business is marketing apartments on behalf of developers. They will run seminars spruiking off-the-plan apartments and will provide mortgage-broking services among other services. Often the company will talk-up the tax benefits of holding the investment property in a self-managed superannuation fund and will set one up for the investor as well.

Referral fees can be worth more to brokers than the commissions paid by lenders for selling the lenders’ mortgages. Peter White, the chief executive of the Finance Brokers Association of Australia (FBAA), says referral fees are “probably wide-spread”. However, he frowns upon the practice of taking referral fees.He says brokers are paid upfront commissions of about 0.5 per cent of the value of the home loan being written, or $1500 on a $300,000 mortgage. And there is usually an ongoing, or “trail” commission of about 0.15 per cent, or $450, a year. “That is for doing a month’s work from interview to settlement [of the loan] and maybe longer,” he says. “How do you justify $10,000 or more as a referral fee for flicking a name and number to a developer?”

Jan Kirstein, a broker and principal of Greenlight Home Loans in Townsville, and a volunteer director of the FBAA, receives offers of referral fees from developers but does not take them. “The reason is that we do not want to be compromised,” Kirstein says. “We want to give impartial advice to people,” he says. If he did take developer referral fees there could be “issues down the track” if something goes wrong with the property investment. “We have been going since 1998 and we have a lot repeat business,” he says. Kirstein says referral commissions also inflate off-the-plan apartment prices.

It is not just mortgage brokers that are the target of property developers. Money has seen a contract from a property marketing company offering accountants $1500 for each of the accountant’s clients referred to the marketing company that results in a property sale. The company appears to be one of these newer “composite” businesses offering all types of services, including financial advice and mortgage broking but aimed at selling off-the-plan apartments.

Developer referral fees do not have to always be disclosed. John Denovan, a partner with law firm Gadens, which specialises in financial services regulation, says if the broker makes the referral at the same time as arranging finance, any referral fees have to be disclosed to the client. He says if a broker makes a referral where there is no credit advice being given, credit laws do not apply and any referral fees would not have to be disclosed.

Posted in Property and tagged , .

One Comment

  1. Buy Propert Direct base their entire business around this formula. That’s why the worst kind of vice in property is advice.

Leave a Reply

Your email address will not be published. Required fields are marked *