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Case Study 9

Two-tier marketing

Frank and Cilla, self-employed and in their forties, had a typical experience with Gold Coast two-tier marketing. They sought to set up a retirement nest egg by investing in Gold Coast property and ended up losing more than $50,000 when they sold the property six years later.

After a seminar organised by a Melbourne financial advisor, they accepted a free flight to view Gold Coast units. They were shown projections which assumed 10% per annum capital growth and 10% per annum rental growth.

They agreed to buy a unit at the asking price of $167,500. With costs, their outlay was $173,000.

The investment, while consistently tenanted, failed to achieve the projected outcomes. Rental income did not rise as expected and the value of property "declined dramatically".

According to the projections, the 2002 rental income should have been over $310 per week. In reality, the original rent of $175 rose only $5 in six years. The projections also under-estimated the costs of the investment.

After enduring the cost of maintaining the investment for six years, Frank and Cilla decided to cut their losses and sell their unit for $125,000. After costs, they cleared about $119,000.

The projections had predicted their unit would be worth $296,000 after six years.

HHPF research shows that their experience was not isolated. One unit bought for $147,500 in 1994 sold for $100,000 five years later; another bought for $157,500 in 1995 sold for $110,000 four years later; while another bought for $159,900 in 1995 sold for $115,000 almost seven years later.

Before taking any action on this case, the HHPF awaits the outcome of some current two-tier marketeering cases currently filed by regulatory bodies and private parties.

Shirley’s case
Two-tier marketing