Are real estate agents out to con people?

It's good stuff, share it!Share on facebook
Facebook
Share on whatsapp
Whatsapp
Share on twitter
Twitter

From this flyer that I received in my mailbox, it sure seems like some agents are. I have less of an issue with Case Study 1, but let’s dive into both scenarios which have some painfully stretched assumptions and half stories. It is this kind of misinformation that pisses me off annoys me tremendously because they could lead unsuspecting homeowners down a wrong path just to earn a commission.

Note to international readers: CPF is the Singaporean superannuation fund. Accrued interest at a rate of 2.5% p.a. arises when CPF contributors “borrow” from their retirement funds and will be clawed back from the future sale proceeds of the property. This is to ensure that people don’t deplete their retirement funds to fund speculative investments without any opportunity cost. The 2.5% is what the contributors would have earned if they kept their funds in CPF, so you’re just fully accounting for your forgone CPF returns.



Case Study 1

So the assumptions are easy to set out, sell an existing S$1m property with a S$430k loan, net equity of S$570k. They then recommend selling the existing property, take out larger loans to buy two condos of which one is to rent out, and keep some of the cash as a “cash savings/reserve fund”.

You can quickly notice:

  • The flyer totally ignores stamp duties…??! Duh? That’s S$43,200 buyer stamp duty assuming additional buyer stamp duty doesn’t apply. Let’s also assume SSD doesn’t apply.
  • Also conveniently ignored are the agent commissions. (obviously…these people are offering to work for free. Or am I reading this wrongly?) That’s easily S$20k-25k on the sale of the existing property.
  • The first two points would already reduce the equity by S$63,200 at least!
  • Then there’s the higher leverage from taking on loans for two properties. What buffers do they have against decreases in property values?
  • What about the highly probable negative cash flow on the investment 2 bedroom condo? The almost double monthly installment on their new own-stay condo?
  • Yes, in a property upswing they would benefit more than if they simply sat put, but that’s on the back of much higher risk and significant friction arising from taxes and transaction costs.

As they say, to a man with a hammer everything looks like a nail. 😉 An agent can only recommend that you buy or sell property, since that is what earns them their commission.




Hey, you want to take on more leverage and buy a second property or hold a “cash reserve/reserve fund” which btw will cost you interest? Skip the hassle and costs of selling your property and remortgage it to take out equity. You could also get a HELOC…previously popular amongst homeowners in USA. Nothing bad happened there, of course. I’m joking…that sh*t partially contributed to the whole ’07 property crash because the then underwater (-ve equity) owners abandoned their homes when the banks came a’calling.

I changed my mind, this Case Study 1 sucks so badly.

Case Study 2

After that painful Case Study 1, lets get into Case Study 2.

The main thrust behind this case is that the cash a homeowner gets is lower the longer they keep their property due to CPF accrued interest. This is blatant scaremongering using flawed assumptions to induce people to sell their properties. Unethical no?

Not only does it disparage the concept of CPF accrued interest that I explained above, readers have to keep in mind that the refund to CPF and the accrued interest still belong to the homeowner! They can access the funds later when they reach retirement age. If you’re complaining that you don’t have enough money because all your cash is stuck in CPF, please do realise that you are the model citizen for which CPF is designed to support. The one who can’t manage for their immediate finances and need help to plan their own retirement. (putting aside those in really low income situations who undoubtedly face challenges…plus they’re probably not reading this blog like you).

The key and most dubious assumption used in this case study is that the property does not appreciate in value after 15 years. Any increase in property values would offset all or part of the accrued interest so the reduction in cash proceeds is not as much as claimed.




It is also assumed that the homeowner would not repay any amount of the funds drawn from CPF throughout that 15 years. (Readers may wish to know that they can voluntarily early repay any amounts withdrawn from their CPF. That way, you get the CPF to pay you 2.5% per annum on your retirement funds.)

So they say sell your property today, and what’s next? Would the person not need to buy another place to stay in? That’s fine if they can replace their home for half the price or rent and risk house prices/rental rates increasing.

This case study is so stupid I don’t have anything else to say about it.

Conclusion

Don’t ask a barber if you need a haircut.

 

Author: Mr.C

Mr.C – our resident investment expert and the muscle behind this entire movement for Sipping Coconuts. When his nose is not buried in anything financial, he’s either sailing or cooking or with the kids and always with a beer or a coconut nearby!

It's good stuff, share it!Share on facebook
Facebook
Share on whatsapp
Whatsapp
Share on twitter
Twitter

Leave a Reply

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