By Tony Cordato of Cordato Partners
“How to Buy a House for $1” proved to be a very successful headline for marketing property education courses. In all, 3,400 people attended a “free seminar”, 2,000 paid for a three day “boot camp”, and 700 paid for a one year “mentoring course”, in 3 ½ years from January 2011 to June 2014.
So it is not surprising that the consumer watchdog: the Australian Competition & Consumer Commission (the ACCC) took an interest and issued section 155 Notices to find out what the courses were all about. After forming the view that the marketing was misleading, the ACCC issued legal proceedings for breaches of the Australian Consumer Law in March 2015.
On 11 August 2017 the Federal Court of Australia gave judgment in favour of the ACCC. The decision is Australian Competition and Consumer Commission v We Buy Houses Pty Ltd  FCA 915.
In her reasons for judgment, Justice Gleeson gave property educator Rick Otton and his company We Buy Houses Pty Ltd (WBH) four reasons why the statement was misleading:
Reason 1 – Calling a statement “mere puffery” has its limits
WBH argued that the statement “How to Buy a House for $1” was mere puffery – a marketing exaggeration – that was not meant to be taken literally. Justice Gleeson agreed:
it is inconceivable that an ordinary or reasonable person in the class of consumers likely to have read or heard the representations would have concluded that the ‘buy a house for $1’ meant literally that consumers were able to buy the freehold title to a house for a $1 with nothing more. It would be fanciful to think that a valuable asset could be purchased for a token amount.
And so, used in isolation, the statement is not misleading. But it is different when used repeatedly in the broader context of the book, the webpages, the seminars and the boot camps. Justice Gleeson ruled that repeated use made the statement a specific representation that:
it would be possible to learn a strategy that corresponded in some realistic sense with the claim that it was possible to “buy a house for $1”.
The same applied to “Buy a house without a deposit, bank loan or real estate experience” and “Buy a house using little or none of the consumer’s own money”. These statements were used repeatedly, and so were also specific representations, not mere puffery.
Reason 2 – The property educator must teach actual transactions
To comply with section 4 of the Australian Consumer Law, a person needs to prove that they have reasonable grounds to make representations as to future matters. In this case, the Court interpreted section 4 as requiring a property educator to use actual property transactions when teaching students techniques to buy properties.
Mr Otton compiled ‘answer sheets’ which were distributed at the boot camps to illustrate the techniques. The ‘answer sheets’ were modified versions of the actual transactions. As Mr Otton explained, “the figures were chosen because they were simple to digest”. The Court took a narrow view and ruled that the ‘answer sheets’ were misleading because they did not accurately describe the transactions.
Mr Otton claimed that he used little or none of his own money to carry out the transactions. But the Court found that in every case, he either borrowed money from a bank or from someone else.
Mr Otton said that his personal success in implementing the techniques in Australia was sufficient to prove that he had reasonable grounds to teach the “wealth creation systems” in his seminars, on webpages and in the book.
But Mr Otton was not able to produce any source documents for his actual transactions to show funds he contributed and profits earned. His explanation was that the documents had been discarded after he ceased to acquire properties for vendor finance in 2007 in order to focus on the successful property education business. The explanation did not sway the Court.
Because Mr Otton failed to provide proof of actual transactions, the legal presumption under section 4 was that he did not have reasonable grounds to teach the techniques.
In the Court’s view: it was not a realistic possibility for the reader to “Buy a house for $1”.
Therefore the statements were misleading and in breach of sections 29(1)(g), 34 and 37 (performance characteristics, suitability for purpose and profitability) of the Australian Consumer Law.
Reason 3 – Witness statements and documentary evidence of transactions are needed
The ACCC produced witness statements from 9 persons who had read the book, had attended a free seminar and a boot camp, and had tried but failed to make the techniques work in practice.
WBH countered this evidence by relying upon testimonials given by a number of current and former students at boot camps or in the book or on the websites as proof that the techniques worked. There were many to choose from. The book contained 34 testimonials, and the websites 22, from students who described how they had successfully applied the techniques.
This was a testimonial of the “sandwich lease option” technique:
I had a seller call me yesterday and after two minutes on the phone, I agreed to meet him at the house. I bought it for $1 at 10:30am this morning. By lunchtime I’d signed a buyer up, got a deposit and handed over the keys- AND got an invite back for a BBQ! That’s an hourly rate of about $12,000! Love this business!
For some unexplained reason, WBH chose not to provide any witness statements from these students to the Court, nor did WBH produce documentary evidence of their transactions.
The Court concluded that without any evidence of actual transactions, the testimonials alone did not demonstrate that there was a realistic possibility that the techniques worked. And so the Court ruled that the use of the testimonials was misleading and in breach of section 29(1)(f) (testimonials) of the Australian Consumer Law.
Reason 4 – “Buying a House for $1” is not a simple real estate technique
The Court accepted that vendor finance techniques Mr Otton taught might work. The Court examined: “rent to buy”, “sandwich lease option”, “deposit builder”, “handyman special” or “sweat equity”, “vendor finance” or “purchase by instalments”, and “some now, some later”.
Justice Gleeson said:
I accept that the techniques could be implemented profitably in the case of a seller with the financial wherewithal to provide vendor finance of the various kinds contemplated by strategies such as “deposit builder” and “handyman special”.
I accept that there is a theoretical possibility … of a “sandwich lease option” transaction which could enable a consumer to participate in the transaction as a middleman without incurring more than nominal costs.
The statement “How to Buy a House for $1” describes the “sandwich lease option” technique. It is an advanced technique, which requires skill and proper understanding to perform. This is a summary, taken from the agreed facts:
(a) a “middleman” enters into an assumptive (purchase) option and residential tenancy agreement with the owner;
(b) the middleman then enters into a sale option and sub-lease of the residential tenancy agreement with the buyer; and
(c) the middleman keeps the difference between (i) what is received from the buyer in upfront and ongoing option fees and rent and (ii) the fees and rent payable to the owner under the option and residential tenancy agreement;
This explanation shows why the Court was troubled by the use of the word ‘buy’ in the statement because it implies ownership, when in fact the “middleman” was an option holder, not an owner. A better statement for this technique might have been “How to Trade a House for $1”.
Property educators need to teach actual transactions and provide accurate worked examples.
Property educators need to keep good records of their property transactions, because those records are essential to prove that techniques taught work, and are not misleading.
The statement “Buying a House for $1” is theoretically acceptable, but in this case it was not demonstrated that the technique worked in practice and so it was ruled to be misleading.