Private property issue #109 - Dodgy developer

Lately, I've seen developers get creative with sales tactics.

One reader of this newsletter emailed last week and asked: “I see Wolfbrook offering an $8k cashback. Is this a good opportunity or a red flag?”

I’ll never shy away from a straight question. So, let’s do an honest analysis.

Let’s see if the developer’s offer is as good as it seems.

To make sure I get the facts right, one of my journalists talked to Wolfbrook to get all the details.

Good opportunity or red flag?

So, what’s Wolfbrook offering?

Right now, if you buy a property from them, they’ll give you an $8,000 cashback and a 5-year rental guarantee.

That means that if you sign a contract to buy a house from them, they’ll put $8,000 in your bank account. And if you can’t find a tenant, they’ll pay your rent.

In their marketing, they say you could use this money to:

“Take a trip to Fiji, buy some new golf clubs, repay some personal debt, or if you want to be boring, invest it in to your next property?”

Hmmmm … it may be boring, but buying the right investment property matters.

If you’re reading this, you probably agree.

Your goal when you invest is to buy the right investment property. Not to get a seemingly “free” trip to Fiji.

Here’s what I’ve seen go wrong with these types of “free holiday” gimmicks.

Some developers say, “Buy this house for $800k, and I’ll give you a $10k cashback.”

That sounds great so an investor buys the property.

Then, later, you find out the property is only worth $750k.

So you overpaid.

You shelled out $790,000 for a property that was worth $750,000.

So how do we tell if it’s a genuine good deal?

3 ways to tell if a developer is pulling a fast one

Back in February, I wrote this article giving you the 3 ways to know if a developer’s cashback is dodgy.

That way, you can spot whether a deal is legitimate or grubby.

Here’s how Wolfbrook’s offer stacks up:

Test #1: Does it apply to every property?

If a developer offers a cashback on every property, it's not a genuine incentive.

Their properties are overpriced, and they know it.

Wofbrook’s cashback fails on this test because it applies to every property. Why not just give a discount?

Test #2: Is the cashback in the contract?

If the developer doesn’t want the bank to know, that’s probably because it’s not squeaky clean.

When my journalist talked to Wolfbrook, they got the fine print. It looks like the cashback is in a secondary contract.

So, there’s a risk that the cashback is hidden from the bank. That fails the second sniff test.

Test #3: Is there a valuation to show it’s a genuine discount?

To see if a cashback stacks up, you really need to get an independent registered valuation.

If the valuation comes in lower than the purchase price, you know the cashback wasn’t a genuine discount from the start.

The developer is doing a Briscoes. They’re “marking up to mark down.”

So, developers should actively encourage buyers to get an independent valuation.

When my journalist talked to Wolfbrook’s sales team, that didn’t happen.

It’s not a straight ❌. It’s more of a question mark right now.

So, right now, this deal doesn’t pass my 3-step sniff test.

Why don’t they just lower the price?

I’m not a huge fan of developers offering cashbacks.

We’re constantly told that we have a housing crisis in New Zealand.

If a property is well-priced, it will sell. And you don’t need a gimmick to sell the property.

If it’s overpriced, it won’t sell. So, you have to find gimmicks to get people interested.

I’ve worked with Wolfbrook in the past. But this is something that I disagree with them on.

If you’re looking at these deals, get a valuation and ask for a discount instead.