“The Reality of Buying 20% Below”

Have you recently had problems with your tenants, and therefore have decided to Review your portfolio?

Perhaps the yield has dropped?

Has the suburb or area recently attracted undesirables?

So you are thinking of selling poor performing property and reducing your debt?

It sounds like a sensible strategy but will your lender agree?

I was recently called in at the 11th hour to help resolve a problem where a family had sold a property at a significantly reduced price to offload it. They had purchased a property in Auckland under one of the “buy at 20% below value” schemes.

Sometime later it was re-valued and the increased equity was used to help fund the purchase of another property. Sounds great so far, you say, however, after a string of tenants leaving the family concerned that the street was becoming a “tinny” street and was regularly frequented by police. Keeping good tenants for a long period of time would become increasingly difficult and the decision was made to put the house on the market.

Fortunately a buyer was found privately and very quickly. And after discussing it with their accountant they decided to call it quits and sell for the original purchase price, i.e. the true market value.

However the sale posed a problem, which they did not consider. Their bank had provided finance on the basis that the property was worth 20% more ie the new valuation. On settlement date, when I was called in to assist, the lender would not release the security because the net proceeds from the sale were insufficient to clear the debt. As a result the (LVR – loan to value ratio) was more than the lender had originally approved and now required lenders mtg insurance approval. A full mtg application had to be prepared in the afternoon of settlement date causing a lot of distress to the family, purchasers and both solicitors… and submitted to the lender and mtg insurers.

We were extremely fortunate to receive a quick and positive response.

Several lessons can be learned from this situation.

  • Caution! when purchasing ‘20% below’ are you really buying below market value?
  • As both a mortgage broker and landlord with many years experience, I would recommend that you have:

    a) Surplus funds available to ride out the difficult times, i.e. empty property due to renovations.

    b) Don’t borrow the maximum against all of you properties, i.e. 95% on both your home and rentals.

    c)When selling, do discuss it with your mortgage broker first and establish your bottom line sale price.

    d) Do as much research and due diligence that you can, gather your own evidence to be sure that you are actually buying below market value.

Because the reality can be, that once you have purchased a property for a certain price, that price becomes the market value.

We would extremely fortunate that this situation had a happy ending however it has brought to our attention, a situation that in the future could catch many clients out, if this market does drop.

Printed with the permission of Tarawera Publishing and NZ Pproperty Magazine