AUSTRALIA'S SUBPRIME INVESTORS

Tens of thousands of people are affected.

In the past few years, tens of thousands of Australians have unwittingly bought subprime investment properties. And they are still doing it today.

A subprime investment property is one where the price is too high and the return is too low.

So, why would any investor choose a subprime property? Well, unlike subprime loans, subprime investments are not so obvious, especially to inexperienced investors.

Subprime investors are almost all caught in the same manner. They come under the influence of someone they believe is a property expert.

These so-called experts attract investors in a number of ways. They may place large advertisements in newspapers or property magazines. They might make telephone calls offering tax savings. They may offer in-home consultations on wealth building.

Many will hold seminars. Most will hold themselves out to be all-round regular good guys, talking about how they love helping people create wealth. Some will make a big deal about how they donate money to charities or set up programs for the under-privileged. Some will profess to be deeply religious.

But, no matter how good they make investors feel, most are selling subprime property. They are making themselves far richer than any of their investors.

A lot of these property experts will share 'success stories'. They will brag about other investors who bought from them in the past and who now have several properties and hundreds of thousands of dollars (perhaps even a million or more) in equity.

It sounds so good. So tempting.

And, year in and year out, tens of thousands of people fall for it. They buy properties that are over-priced and give poor returns. Subprime properties.

Now, during the boom, many subprime properties rose in value. This created a camouflage effect, preventing investors from realising what had happened to them.

For example, let's say an investor bought a subprime investment a few years ago for $280,000. The investor never knew that better properties in the same area (prime investments) were selling for as little as $230,000. The investor never knew that the property expert (that lovable guy who donates to charity) was making a profit of around $50,000 per property.

In the next few years, during the biggest boom in our nation's history, property prices soared. Prime investments and subprime investments all increased in value. As the saying goes, "A rising tide lifts all boats."

The subprime investment may have increased in value from $280,000 to $380,000. But a prime investment, in the same period, could have shown twice the gain.

Instead of making a gross profit of $100,000, a prime investment would have made a gross profit of $200,000. Easily.

Most subprime investors never know that they could do a lot better. Many live outside the area in which their investment is located. They trusted the expert and now, a few years later, their property has increased in value. Everything seems fine. The expert is considered a hero. Some investors even buy more properties from the same expert. Sadly, these investors are true subprime suckers.

But investors who have bought subprime investments since the boom ended - and there are tens of thousands of them - are stuck with investments that are worth far less than they paid for them. Each month these subprime investments are bleeding the investors of cash.

As the global financial crisis spreads, more investors are struggling to keep their investments. Those who decide to sell are going to be in for a huge shock.

One typical subprime investor, who bought two brand new properties in 2006, is today saying, "I have come to the realisation that the purchase prices were inflated. In addition, since the economic downturn it's not possible to sell any of the properties, let alone for the intended price."

He is desperate. And he is not alone. In 2009, thousands of subprime investors are going to become desperate. Unless there is another property boom, really soon. And that's highly unlikely.

If you are considering investing in property, be careful you don't join the thousands of subprime investors.

Just remember that it takes almost no intelligence to buy property. Any fool can sign a contract, especially when a property expert is telling them that "historically property is a wonderful investment".

These property experts have a swag of swell sounding clichés to encourage you to buy. They'll tell you that it's "time in the market" not "timing the market" that's important and that the sooner you get in the better off you'll be.

Nonsense.

Timing is one of the most important factors when investing in real estate.

But what's most important is the price you pay. Price is much more important than location. Thousands of subprime properties are sold in prime locations.

So, if you are thinking of investing, you're probably wondering how you can pick the difference between a subprime property and a prime property. The golden rule (which you break at your dire peril) is to NOT take advice from an adviser who is selling you the property. It's astonishing how thousands of investors break this golden rule.

You've got to get independent advice.

If you want to make the best property investment possible, then start off by making one of the best pre-purchase investments - an independent valuation. It'll be the best few hundred dollars you ever spend.

Or, consider hiring a good buyers' agent. They know the difference between prime and subprime.

But, whatever you do, beware of any or all of the big three signs of a subprime investment. A big advertising campaign, a slick seminar or a 'personal consultation'.

Now, if you're thinking, "But, hey, that covers everyone I have been speaking to!", then you are speaking to the wrong people. You are probably on the verge of becoming a subprime investor.

In which case, here is one final suggestion for you.

Run.

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