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November 28, 2007 | |
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Dangerous options
By Scott Francis |
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| PORTFOLIO POINT: They might sound attractive, but property options can burn homeowners and investors. |
They sound vaguely similar to share options but "property options" an increasingly popular investment product in property investment circles are loaded with danger. In common with many "new" trends in property, the products have become associated with a small number of entrepreneurs. One of the best-known names in the property options sector is Zaffar Iqubal Khan and his Science of Property Options Pty Ptd. The other night in Brisbane I attended a three-hour seminar led by Khan. Here's what I learnt about property options.
What is a property option? The process involves writing "call options" over property assets. This allows the person with the call option (the right to buy) to control the property for almost no cost, and they then on-sell the property at a profit.
A call option gives someone the right but not the obligation to purchase an asset. So, if you have a three-year call option over a property you can purchase the property over that time if you choose - at a pre-agreed price.
Here's how the strategy works in practice. An "investor" finds a property that they think that they can resell down the track at a profit. They offer to buy a call option to buy the property for an agreed price, say $1 million, with a term of three years. They might offer the owner $500 for the option.
That means that by paying $500 the investor has the right but not the obligation to buy the property in the next three years for $1 million. The owner cannot sell the property to anyone else over that period - effectively the investor controls the property for $500. The investor now sets about on selling the property at a profit, while taking next to no risk at all.
This is the basis of the claim in the many advertisements that you can learn about "using the power of call option deeds to purchase multi million dollar properties with the ability to on-sell them without even having to settle".
Property options are not new. Many professional developers and corporations use options to buy properties. The property options, however, are unlikely to be token amounts of $500 - they would be properly valued and the properties purchased with the full intent of exercising the options, rather than just on-selling the property. There is a significant body of work into how to value "real" options, although none of them were even mentioned at his seminar.
The man behind the seminars
The Department of Consumer and Employer Protection in Western Australia warned about Zaffar Iqubal in an article on their website entitled Consumer Protection Stakes out get Rich Scheme - The Science of Options Pty Ltd. They found that:
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He was "bankrupted in New Zealand twice".
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He had a "ban on him being a company director in Australia until October 2006", although they found that "he was a director of several companies before that date".
How the seminars work
My seminar cost $47 with a "FREE Gourmet Buffet Dinner Included".
The first two hours of the seminar was taken up with talk about property options, the benefits of subdividing property, case studies and a couple of apparently successful former students. In the middle of the room were three books containing all the property deals that Zaffar said he had done, although there was no way to verify this. These books seemed to impress attendees, who pored over them during the break.
The last 45 minutes of the session were the hard sell of the next level: the two-day seminar that costs up to $9995. This consisted of:
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Heavily discounted prices for people who signed up immediately.
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Free airfares and accommodation for people who signed up immediately.
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Discussion of the various items included in the two day seminar and their 'value'
Throughout the seminar Zaffar let it be well known that he held the "four answers" that would overcome the objections that the potential property moguls in the room would hear when they offered call options to property holders. This is clearly the key of the strategy - and people would have to attend the two-day seminar to hear those four answers.
Part of the attraction of the two-day seminar was the people could, after the first day, receive their money back in full. The cynic in me might be a little concerned about getting money back from a two-time bankrupt, and my guess is that the "four answers" don't make an appearance until day two.
'We don't make money out of the seminars'
It was claimed that Science of Property Options did not money made out of the seminars, however attracting to 20 people to the two- day workshop at an average of $5000 a head would mean revenue of $100,000.
An easy payment plan too .
But wait there's more. For those people without the money upfront, the course fee can be split into easy monthly payments. It is hard not to see this as an aggressive marketing strategy to get people attending the course. This seems at odds with the claim that the courses are not money-making ventures.
This easy payment plan is not philanthropic either. Interest is effectively charged at a rate well above 10% annually.
The 50% profit sharing arrangement - a guarantee of success?
The cleverest marketing touch that I could find (I have an undergraduate degree with a marketing major, and am always interested in the marketing angles) was the fact that you could get a discounted seat at the two-day seminar if you agreed to pay 50% of the profits of the first five development projects that you completed in the 12 months after the seminar.
This is a brilliant strategy that I think works in three ways to reduce the perceived risk for possible seminar participants:
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If The Science of Property Options is prepared to take a 50% cut of profits then surely the property option system must be successful.
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I am paying less upfront than other people, and that reduces my risk.
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Suddenly I am in a partnership with The Science of Property Options - we are working together and benefiting mutually.
However, you still end up paying thousands for the seminar. The Science of Property Options has made a lot of money from you by the time you have attended the seminar.
Creating competitors?
Whenever you see a share or property seminar apparently offering the secrets of wealth, it is time to be very, very sceptical. Let's assume for a moment that the people at The Science of Property Options do hold a unique and highly successful wealth-creation strategy. (It's a long stretch but stick with me here.) It is completely irrational for them to be providing educational seminars and effectively create any number of competitors to them - competing for the same properties and eroding the competitive advantage held by The Science of Property Options.
The more rational thing for them to do would be to grow their own company, add staff to buy more properties and so build a bigger and more profitable company. Instead they are selling dreams in conference centres.
Think about the world of successful businessmen. You don't see Wal King running seminars on 'Profiting from Public Private Infrastructure Partnerships', or James Packer on 'From Media to Gambling - a Guide to our Success' or Richard Pratt on 'the Simple Steps to Profiting from a Cartel'. They keep their ideas - effectively their competitive advantage - to themselves.
Conclusion
Successful investing is as much about the areas you avoid as those to which you commit money. Paying heavily for advice from a two-time bankrupt might be one of those things worth avoiding. Of course, maybe my life would be a whole lot better if I kept an "open mind" (as we were challenged to do early in the seminar) and paid the $10,000 for the "four answers" that would overcome objections. Perhaps it has been a mistake that I will regret to keep my mind (and my wallet) closed.
