Beware the World of ‘Property Options’
Henry Kaye is the name of probably Australia’s most notorious property spruiker. He hit the headlines in 2003 in relation to an award winning Oasis development in St Kilda, Melbourne.
At the time, everyone from the IMF to senior members of Federal Treasury were warning of a bubble.
Household debt had tripled to $530 billion — its now closer to $1600 billion — and various pundits held fears of an apartment oversupply.
At the time, Kaye was busy charging tens of thousands of dollars for property investment seminars. They promised to turn attendees ‘financial dreams into reality’.
The Age reported in 2003…
‘When historians come to write the book on Australia’s biggest property boom in living memory, they may reserve a fat chapter for Henry Kaye.
‘And in that chapter the story of Oasis might loom large. Because it is here that some of the practices that have fuelled the property boom — the role of high-priced investment seminars run by people such as Kaye…have been revealed…’
Kaye’s business model was to secure a large number of real estate investments using ‘option agreements’.
The properties were then flogged off to his seminar participants for vastly inflated prices.
To put simply, an option agreement allows a buyer to reserve the ‘option’ to purchase a property for a specified amount at (or before) a specified date.
The option buyer never need take possession of the property or pay stamp duty, maintenance fees, land tax, council rates and so forth.
Two things can happen. The option can either expire worthless or the purchaser can benefit from any increase in the land’s value. For example, if the property is approved for development.
The property option can then be traded at a profit.
In 2003 Kaye purchased 200 ‘options’ on the Oasis development. He on-sold them at mark-ups of between $40,000 to $140,000.
However, as the Oasis development neared completion, the valuations fell short.
Many people who had bought the options off Kaye were unable to finance the rest of the deal that Kaye had structured in his ‘no deposit and no money down’ sales spruik.
Real estate spruikers are rarely absent from the market. However, authorities typically only unearth them when prices are reaching a peak.
Hence, it is no surprise to see people like Kaye once again making headlines.
Henry Kaye, along with the ‘21st Century’ shiny-toothed salesman Jamie McIntyre, are currently under investigation. This time it’s for luring thousands of hapless buyers into option agreements for rural paddock land.
Kaye and Mcintyre promised windfall gains once the sites were rezoned for development. Except five years on and ‘not a house has been built, not a sod turned,’ according to the Sydney Morning Herald.
As one investor mentioned in the article put it, ‘If I had left everything alone and done nothing, we’d be better off.’
In theory, land banking ahead of re-zoning can be extremely lucrative.
However, contrary to the ‘get rich quick’ spruik heard at investment seminars, getting land rezoned to higher use values is neither a simple nor a cheap process.
To put it bluntly, how well connected you are determines how successful you will be.
For example, during a recent conversation with a strategic planner for one of Melbourne’s Growth Area Councils, I was told, ‘areas that might be considered logical urban extensions will not be re-zoned if they are not controlled by cashed-up developers.’
Authorities put the focus on ‘whether the developer will pay their wages or not, and whether developers will fund the background studies that are required to inform the planning process.’
Last year’s ICAC investigations into illegal donations from property developers fattening party coffers, gives some insight into this process.
The Sydney Morning Herald reported in August last year that,
‘Suspended Liberal MP Andrew Cornwell has admitted…that he pocketed a $10,000 “bribe” from one property developer and used it to pay his tax, and also took an envelope stuffed with cash from a second developer.’
The larger developers have made immeasurably more from the escalating value of their land banks than they could building homes alone.
See for yourself…
As recent research by Paul Frijters and Gigi Foster of Queensland University shows, if you want to get rich, forget innovation.
‘Eighty per cent of the wealthiest Australians have made their fortunes through favourable government concessions in property, mining, banking, superannuation and finance generally….
‘All heavily regulated industries in which fortunes can be made by getting favourable property rezonings, planning law exemptions, mining concessions, labour law exemptions, money creation powers…’
In this respect, the function of a country’s land market has the power to either make or break its economy.
Whether we’re in times of inflation or deflation, high or low interest rates, high or low taxes, one thing is assured: the boom/bust real estate cycle will continue to turn.
This will continue as long as the government permits the rental value of land to capitalise into a tradeable commodity.
The property spruikers are right about one thing though; you won’t get rich in this country earning a wage.
Riches are gifted to those that pocket the nation’s economic rents. And you can read more about that here.
Contributing Editor, Money Morning
From the Port Phillip Publishing Library
Special Report: The End of Australia Vern Gowdie’s new book is called The End of Australia: The Real Story Behind Australia’s Economic Collapse and What You Can do to Survive It. We are mailing free copies of this book to anyone who requests one online. It does not make for cheerful reading. But the idea is that you’ll be safer (and much wealthier) in 10 years’ time from receiving a more sober and realistic analysis of what’s going on…what happens next…and what you should be doing about it now… (more)