Spot the Obvious!

A Survey out recently explained that 1 in 7 people are not keen on buying an investment property today v's the 1 in 4 people a year ago.  To that my immediate thought was, duh, spot the obvious!!! Would you, Mr Joe Bloggs, be keen to by an investment property when everywhere you look there is yet another article telling you the property market is stagnant and the returns are next to nothing???  Of course this is potentially going to knock confidence a bit with a general consumer.

From my research (that anyone who logs on to REINZ.co.nz can get), I have discovered the following:

I have highlighted the two times where the drop in price actually happened which is 1998 - 1999 and again in 2008 - 2009.   If you work out the percentages it is less than a 5% drop - oh my goodness, big deal! right?  Agh no, not really.

Ok, so i've only done this for Auckland (for now) and sure, I know that some parts of the country and some suburbs were effected a lot worse than this picture I've painted above (Manawatu - where i have property for one), but I am just trying to indicate that I don't think it is really that bad (from my basic research anyway).

I just do not understand why there is so much involvement from so many people talking a property market down when the fact is, who can really predict past tomorrow?  The property market in my eyes is just doing what it does, its going cold for a few years, we are probably another 2-3 years away from it picking up but I don't think it is the end of property investment as we know it.  In fact, for me, I want to start buying up a couple of properties per year over the next few years, pay down the mortgages as much as possible to gear me up for the eventual return of the next rise (however big or small it might be).  There are more benefits to property than just Capital Gain.

Property, bricks & mortar, like it or lump it, is safe.  Supply and demand, employment, immigration, overseas  dramas, all major factors in property markets all around the world.

I'll leave you with this question; we aren't making anymore land are we?

Contemporaneous Settlements - What they don't tell you...

Just an explanation of what they are first.  Contemporaneous Settlements aka Double Settlements are a property transaction whereby a property is brought and settled twice on the same day; brought once by the property finder, who will have gotten the property at a very discounted rate, and then sold by the property finder and brought again by the end purchaser.

An example on how this works:

Key
Purchaser 1 (P1) - Property Finder
Purchaser 2 (P2) - End Purchaser/Owner

P1 negotiates the purchase price on a property for $200,000
P1 finds P2 and signs up P2 to purchase the property for $250,000
Registered valuation on this property: $260,000

When the settlement day roles around, hopefully everything will go through smoothly and P2 makes $50,000 as their fee, less any agent/solicitor fees etc and P2 purchases a property $10,000 under valuation.

Very simply, this is how it works.

So effectively everybody wins and all is good, right?  Well.... I have some views on this...

I agree that property finders can provide a valuable service.  Their role is to find incredible property deals and because they have the time and resource to do this it can really help some purchasers who potentially wouldn't have brought otherwise.  Property Finders obviously need to get paid on their service and so, a contemporaneous settlement is a good way to ensure this happens.

HOWEVER, what I fear some Property Finders don't tell you is how the banks view these deals and how hard they can be to get approved.

Firstly, if the vendors name on the sale & purchase agreement is not on the title, the bank could want to look into this further and request to see the original sale & purchase agreement between the original vendor and Property Finder.  Banks now look at titles on each purchase.  They didn't used to which is why these deals used to be so frequent.  This is not the case anymore.

So, (referring to key and example above) if the bank sees that P1 has got a contract on the property for $200,000 and P2 is trying to obtain mortgage finance of $200,000 which is 80% of their purchase price of $250,000; the bank will more than likely turn around and say that they will only lend on the original contract.
What does this mean?   It means that the bank will only lend 80% against the $200,000 NOT 80% against the $250,000.  What this effectively means is that you need to come up with another $40,000 for your deposit as the mortgage the bank will approve in this case will be $160,000 (80% of $200,000 - original purchase price).

So, ask questions around the final mortgage approval if you are considering purchasing a property through a property finder.  Check with your bank if they would lend in these circumstances and tell your bank everything; don't hide this as they will find out.

This is based off my market research into this and own personal experience with trying to get these deals through when I was a mortgage broker.

Real Estate Jargon - what does it all mean?!!

Real Estate jargon that is commonly used on listing adverts can confuse and annoy buyers who are searching for the most basic piece of information on a property such as - PRICE. The price in my opinion should be on all listings, especially as people who often search for properties do not live in the area and won't know that the property they are searching for (and possibly fell in love with), is out of their price range. We could all be saved a lot of time, frustration and hassle if prices were on listings!

I must admit that when I am searching for property, I do tend to skip the ones that don't have a price, and I know a lot of other people who do the same.

I would like to shed a bit of light on the following common phrases and acronyms used by Real Estate Agents, instead of putting the price on their listings:

POA - Price on Application

This means you just need to make contact with the Agent to obtain the price or price range. It is sometimes said that POA is used when the vendor is testing the market so therefore may not be too motivated to actually sell.

Buyer Enquiry Over

Obviously this is what the Vendor would like the buyer enquiry to be over and at least with this one, Agents usually give you a figure to work off. However, being me, if I was going to offer, I would still probably offer just under the 'Buyer Enquiry Over' figure, you never know what vendors are willing to accept.

Tender

Tenders are a very good way, from a Vendors perspective, of drawing out the very best offers from potential buyers with minimal mucking around. As the buyer, you will need to make contact with the Agent to find out what the Vendors expected sale price range is. The Agent won't give you an exact figure but should at least give you a range so you have something to work off. If after asking the Agent you are still a bit unsure of the price - go to Zoodle - and purchase a sales report to find out what other like properties in the area are selling for. At the very least, download the free report on the property from Zoodle and check out the Capital/Rateable Valuation.

As a buyer, you need to go in with the leanest offer you can muster. What I mean by that is you need to have your offer look the most attractive to the vendor, so while a cashed up offer would be best, it is sometimes not possible, so what I mean by lean, is having minimal conditions on your offer and going in with your highest price. So, as a buyer, you have ZERO control of this situation and that is why I really really don't like it.

Auction

Auctions are a great way of Vendors relying on emotional buyers competing on Auction day which of course pushes the price sometimes well in excess of the valuation figures. Same goes as above in Tenders, for Auctions, you will need to get in touch with the Agent to discuss prices or check out Zoodle.

As a buyer, you need to have all your reports organised before the Auction day, such as valuation, building reports, LIM etc. Your 10% deposit needs to be on hand too. If you win at the Auction you are expected to pay your 10% deposit that day. If, you decide later that you don't want the property, you may find that you don't get your 10% back, so be very certain when you are bidding at Auction!

Negotiation

Another frustrating one as you will need to get in contact with the Agent to obtain the price expectancy of the vendor. At least with Negotiation you have a bit more control than Tenders and Auctions as it is a Offer and Negotiation process.

All this stuff and more is in my book, Young & Singles Guide to Property Investment - feel free to order yourself a copy.

UK Immigrants unknowingly entering into NZ Sale and Purchase Agreements

A new Blog Post by Steve Koerber regarding new immigrants purchasing homes with major leaky home issues, got me thinking; I back Steve up completely on this stuff and there is also another key issue when it comes to new immigrants buying NZ property, specifically people from the UK.

According to Statistics NZ - 18,361 people came to live in NZ from the UK from July 2008 - July 2009.

The house buying process in the UK is somewhat different to NZ. In the UK, a 'Offer of Purchase' is made to the vendor from the buyer via an Estate Agent. Ok, so you may be thinking, this is not too different to the NZ way of putting in an offer on a property via a 'Sale and Purchase Agreement'; but here is the difference: The UK offer is not a legally binding contract like the NZ one is. You can walk away from the UK one at any time and you are also at risk right up until the day of Exchange (our Unconditional day) of being Guzumped or Guzundered.

So, my issue is that UK immigrants are at risk of unknowingly making offers on NZ property and not understanding at the offset that the offer is a legally binding document and they are at risk of losing their deposit or worse.

To aid in this issue, I think that NZ Real Estate Agents should at all times ensure that Immigrants are made aware of the risks of an unconditional Sale and Purchase agreement and advise to set conditions especially a full building report in support of Steve's blog post as mentioned above.

20% Deposit... Is this the end for the First Time Buyer??

Should the First Time Buyer (FTB) wait because they don’t have a 20% deposit? NOT AT ALL! Yes ANZ, National, ASB & Sovereign have limited lending to 80%, but this doesn’t mean the end or, a hell of a long wait, for first time buyer in New Zealand. In fact, this is quite possibly a blessing in disguise! There are always exceptions to the rules and these exceptions are what I am going to uncover in this post.

There are still a couple of ‘mainstream’ lenders out there (at the time of writing) that will lend 95%. The key to this is that they require the 5%, to be genuine savings, and they require the ‘deal’ to be fairly squeaky clean; i.e. clean credit history, stable employment etc.

With the 20% deposit issue, if you are in the situation where you had only saved 5% or 10% and you were thinking that you had to save for another year, or worse, longer; don’t worry, I have a few suggestions, but I challenge you to think outside the square. Why not look at the following options to secure your new property:

1. Borrow the shortfall from a further mortgage on mum & dads property that you pay for (yes this can be done and is of no cost to mum & dad)
2. Get a personal loan for the shortfall
3. Secure the new purchase against mum & dads property (again, no cost to mum & dad and no, this is not the same as option 1)
4. See if the vendor will look at leaving in the shortfall
5. Delayed unconditional or settlement day to allow you to save for the shortfall (this will give you the immediate motivation & deadline to save, save & save some more)

Some of these options will depend on serviceability, but they are options that shouldn’t be ruled out if you are really serious about buying a property. We don’t know how long these lenders are going to keep their LVR’s limited to 80%; it might be years or it might be months. If you were to look at option 2 for example and hypothetically the lenders put their LVR’s back to the standard 90-95%, you could possibly refinance the personal loan into the mortgage or of course, repay that personal loan. Either way, it’s a good option if you can comfortably service both the mortgage & personal loan.
If you are a buyer in the current climate, I actually envy you, as I personally am tied up for another year or so. The interest rates are now well and truly in the 6%’s, another couple of months might very well see them into the 5%’s – so on that, don’t go fixing in any longer than 6 months right now if you do decide to buy. For the first time in years, buying an investment property with a 20% deposit is generally coming out cashflow positive - before tax. If you are buying your first home as opposed to a rental – you might find that you could even be paying less with a mortgage, than what you are currently renting for, if you had a couple of flatmates assisting you with ‘border income’.
If you have any questions/comments about any of the information in this post, I’d love to hear them so feel free to comment away.
Furthermore, if you would like to discuss your own personal mortgage situation, please get in touch as I’d love to help!

Is it a good time to buy?

Well, a very interesting day yesterday - the Reserve Bank has slashed the Official Cash Rate (OCR) by 1% - fabulous news to home owners or people looking to enter the market as a couple of the leading banks have already reduced their fixed rates in light of the OCR drop; namely ANZ, ASB & Sovereign; the others will be sure to follow suit in due course.

So, the question that remains on prospective purchasers minds is.... Is it a good time to buy?

My first question to anyone who asks me this is - how long are you looking at holding this new property for? The answer to that is almost always "long term", and this generally means; 5 years plus in which case; what is going on right now in the current market will have been forgotten by then and potentially a good capital gain would have been made on the property purchased.

I want to have a look at the facts and also want to have a look at the speculation around this topic of whether or not buying now is a good idea:

FACT

• Rates have decreased quite significantly recently making money cheaper than it has been in a while
• Property prices have dropped
• Banks are tightening up criteria for higher lending deals i.e 90% plus – BUT, it’s NOT impossible – 100% deals are even still being approved.
  I strongly believe that if you are going down the 100% route; it is all in the way you structure your mortgage; 100% mortgages are absolutely fine if you buy an appropriate property and if you structure the mortgage in such a way that equity can be created in the shortest space of time.
• Buyers market is still very apparent.
  Meaning - first time buyers are not shoved out of the way like they would be in a booming market - they have time to make a comprehensive decision and act accordingly.

SPECULATION

• Property prices have bottomed out or have yet to bottom out
  Nobody really knows the answer to this question – are they going to continue on a downtrend or are they just going to stay stagnant for another 12-18 months?
• Banks will stop lending altogether for a period of 18 months
  I don’t believe this at all.
• Banks will call in existing mortgage debt
  I don’t agree with this at all.
• Interest rates will fall further
  Who knows, it seems to be looking like they will but have you got a crystal ball I can borrow because I dont' think anyone actually knows.

The Facts outweigh the speculation in that if property is something you want to get involved with, then it actually isn’t a bad time to be snapping up some bargains; but I must stress the importance of a long term hold.

What I am trying to get at with all this takes me back to my original question – how long are you in this for? If it is long term and let’s face it, property is usually and should be long term; then depending on the type of deposit that you have and your overall situation; you would structure the mortgage in a way that the risk of purchasing property in the current market is negated.