I have not attended a DG Institute (DG) seminar, however I have concerns that her students (“investors”) may be entering into complex financial arrangements with distressed house owners, and may have a grossly inadequate understanding of the owner’s situation and options, and possibly of the risks they face themselves.
I maintain this view despite references in DG information to “helping” owners, ensuring the owner has done “everything possible to keep their home from being repossessed”, and being “fair minded and genuinely want[ing] to help property owners solve their financial problems while earning a fair and reasonable profit in return”.
I base my comments on:
- some of the information provided by DG online (including videos),
- a manual DG has provided to students in relation to the Real Estate Rescue program, and
- my background in consumer credit & debt advocacy.
I’m not a lawyer, but I have worked in policy and executive roles in the community legal sector for over 20 years, mainly in specialist consumer and debt legal services. Many of my colleagues are lawyers who specialise in credit, debt and consumer law, assisting clients by negotiation, in the Australian Financial Complaints Authority (AFCA, formerly Financial Ombudsman Service), and in courts and tribunals.
DG has been teaching property investment and wealth strategies for some years. She says that after the global financial crisis she went from “many millions of dollars in wealth” to “many millions in debt”.
She says that she was “virtually homeless” at the end of 2008. Within 6 months, DG was promoted as the “bankruptcy busting barrister” from “Aussie Debt Rescue”. She appears to have promoted herself mainly as a debt specialist until early 2012 when she started appearing at property seminars and has been promoting seminars on buying distressed real estate for the last 4 years or more. Through her business, DG Institute, she runs seminars on property development, “wealth creation mastery” and “protecting your wealth”. DG also provides a 12-month mentoring program for $50,000 (credit is available). The Real Estate Rescue program costs $9,000 (or $11,400 for a couple). One article claims that DG Institute is predicted to turnover $25 million this year.
Grubisa describes herself as an “ASIC Licensed Debt Specialist”. I believe this means she holds a credit representative licence – just like many thousands of mortgage brokers do.
I focus my comments here on her Real Estate Rescue program.
Targeting “Motivated” Sellers
Few people are as popular as those in financial trouble. Community lawyers have seen some clients with 10 or more contacts or letters from businesses offering to “assist” once legal proceedings are issued in relation to an unsecured debt, or to a mortgage.
Businesses try to find people in difficulty before court action through various means, such as through court records, real estate ads, estate agents or conveyancers. In some cases, students attending seminars are taught to use vendor finance or lease options to take control of the property.
In the Real Estate Rescue (RER) program, DG teaches how to find financially distressed home owners. Once found, the manual suggests that you make contact, for example with a note that says:
“Dear Homeowner, I am looking to buy an original house on the south side of xxx Street…..”
One suggestion is that you
“use scrap paper (like you were walking past and grabbed whatever was available to leave them a personal note)”.
Drafts of suggested follow-up letters to the owner are provided.
Complex legal arrangements
Once students have contacted a distressed owner, they might offer to purchase the property, with agreement from the bank, if they can obtain finance. Alternatively, DG suggests the investor could apply the “Takeover Strategy”.
In the “Takeover Strategy”, the “motivated seller” may be persuaded to move out of the house and sign several documents including:
- An irrevocable power of attorney (giving the investor the power to deal with the house),
- An equitable mortgage, apparently in relation to amounts the investor may spend on items such as mortgage payments,
- a blank land transfer document, and
- a deed of takeover.
It appears that the “investor isn’t obliged to sell the property”, the arrangement can continue “for the remainder of the term of the mortgage” and the investor may choose to rent, renovate, buy or sell the house. While each case will depend on what is “negotiated”, the investor may pay mortgage payments, rates and other costs (such as relocation costs), and then receive all proceeds from any eventual sale of the property.
These transactions concern me because:
- The arrangement appears to be so complex it is unlikely the owner could fully understand the implications
- The owners who respond to these types of offers are often those who have had their “head in the sand” and therefore are less likely to have engaged with the bank or sought any advice or assistance
- The home owner is unlikely to be able to afford legal advice about the investor’s proposal
- The home owner may not fully appreciate the risks of handing over control of their property to a stranger
- The owner may have little understanding of what their other options are and may believe that the likely outcome of talking to the bank themselves – or even sale by the bank – is worse than it would be in reality
- The owner may have responded to messages saying “I want to buy your house” when the investor may have had no intention to buy
- It is unclear how an owner could practically enforce the agreement against the investor if the investor ‘walked away’ after, for example, partly renovating, damage by a tenant, negotiating a terms sale with a buyer or failing to make mortgage payments as agreed.
Do owners understand their options?
Investors are advised to “Make sure to properly disclose all aspects of the transaction to the homeowners, and make sure that they understand the options”. However, the options subsequently mentioned don’t include seeking free financial counselling or seeking help from a community legal centre. While these community services are stretched, they negotiate every day with banks, help people access AFCA and financial counsellors and some community lawyers regularly assist with mortgage defaults.
Apparently “helping” the owner also doesn’t include suggesting that the owner take any hardship request through AFCA – despite the investor being encouraged to use AFCA in exactly this way to delay action by the bank once the investor has the owner’s power of attorney. But as the manual says “you can probably tell you must strike a balance between what is profitable for you and what profits the homeowner”.
It appears that by suggesting that the investor “explored all the other available options” the aim is to build trust rather than ensure that the investor’s offer is the best option available to the owner. As the manual says “By the time you’ve spoken about all the options and you’re the only one still standing, they have actually made your argument for you. Again, it’s a win-win scenario”.
So, of course, the investor must limit the “help” provided if the investor is to make a profit– but that is a key problem with these strategies.
So what might investors tell (or not tell) owners to convince them to agree to the investor’s proposal?
In two case studies in the manual, the investor states that when banks sell properties, the owner gets nothing – even if the equity is significant.
In one case the investor explains that the owner “will get nothing of their equity when the property is sold [by the bank]” and that “$220K of equity will be eaten up by the bank and its lawyers as banks do not give change”. In another case study the investor tells the owner “The bank will sell the property and pocket everything” in relation to $180 equity in a $300K house.
This is not true. Banks have legal obligations to pay any surplus to the borrower and this is usually paid. Of course banks don’t always act fairly, but if a bank doesn’t market a property appropriately, or deducts more than reasonable costs, the owner can raise a dispute with AFCA which would likely result in payment of compensation. [see AFCA Approach to Mortgagee Sales]
If an investor is persuading a distressed owner to sell the property for a low price, or enter complex legal arrangements, the investor should not make any representations to the owner which the investor cannot prove are true.
What about the investors?
I suspect the investors are taking risks too, and they should ensure that the DG focus on a “growth mindset”, taking “100% responsibility” and not blaming others doesn’t stop them from critically considering and questioning what they are taught.
DG strongly advises that investors have the documentation checked by a solicitor “to ensure that they are bulletproof”. Even if the documentationis“bulletproof” it doesn’t mean that the owner, or the bank, won’t challenge the agreements, and investors should understand the risks, and potential costs, if this happens. In my experience, unusual arrangements are more likely to be challenged. Here are just some questions investors may wish to ask their solicitor:
- Are there risks I haven’t considered in using this strategy?
- Is there any risk in representing that I am interested in buying houses if I have no intention to buy?
- How accurate should I be when describing to the owner the potential consequences of continuing to be in arrears?
- Is talking through the clauses and getting signature on every page enough to protect me if the owner claims they didn’t understand?
- What happens if the bank refuses to accept the terms set out in the “estoppel letter”?
- Could a regulator claim that I’m acting as a real estate agent by controlling the property and arranging the sale? (eg see Commissioner for Consumer Protection v Susilo)
- What bases might the owner have to challenge the agreement?
- What is the risk that the owner could revoke the irrevocable power of attorney?
Is this fair?
Grubisa asks “Are people who buy distressed properties greedy opportunists? And says “those who are successful long-term are compassionate, fair minded and genuinely want to help property owners solve their financial problems while earning a fair and reasonable profit in return”
While everyone will differ on what they think is “fair”, I don’t think that this statement aligns with some of the information in the manual.
Even the well-meaning investor applying the takeover strategy is likely to:
- Be presenting a complex arrangement to a stressed person who has not obtained advice;
- Initially approach the owner as someone who is “seeking to buy” the property when they may have no intention of buying;
- Lack the knowledge to accurately explain to the owner the likely consequences of not accepting the investor’s offer; and
- Put some pressure on the owner to make a decision (before someone else offers the owner a better deal).
Whatever you think about estate agents or banks, at least if they are handling a sale they have legal obligations to take reasonable steps to obtain the best price.