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As homeowners struggle under high interest rates on top of escalating food and fuel bills, mortgagee sale numbers are rising - attracting property investors who are snapping up homes for a fraction of their valuations.
High-profile property investor and educator Dean Letfus says, "pretty much any" investors are monitoring mortgagee sales at present. "There's no doubt there are some bargains being offered," says Letfus, but sometimes the amount owed on the property is quite high, "so it doesn't automatically equate to it being a bargain".
He is seeing the biggest discounts at the top end of the market, saying there is an increasing amount of $1.5 million to $3 million properties going to mortgagee sale. They are often being sold off at huge discounts. Letfus is keeping an eye on a property in Half Moon Bay, valued at $2.4 million and going to mortgagee tender through Barfoot & Thompson. Letfus expects the property to sell for between $1million and $1.8 million.
Investor Grant Clifton says he just saw a St Heliers property sell at mortgagee sale for less than half of its 2005 CV of $2.3 million. The owner had rung him before the sale in response to Clifton's advertising (he attracts motivated vendors by erecting signs saying "We Buy Houses"), asking $3 million. He says it sold for $1.05 million. It is now advertised on Trade Me for rent at $1700 per week, which Clifton says would make it a neutral cash flow property with about $1.5 million of equity.
Ed Meile invests exclusively at another end of the market, in apartments. Thanks to a mortgagee sale, he just bought one on Beach Rd for a third of the price paid by the previous owners, who had bought the property in a Blue Chip deal. He says the price for which properties can be bought at mortgagee sale is based on what is owed to the bank. "All the bank wants is its money; it doesn't really care about [the owner's] loss."
Letfus agrees: "The reality is, the bank wants to get its money back, and if somebody's going to mortgagee sale in a bad environment and they're only 65 per cent geared, and the bank can get 65 per cent of the property's current value at a mortgagee sale, then if that's the best offer on the day and it clears the debt, the bank will take it."
Wellington-based Dorien Forster, founder of property investor education company Global Business Ideas, says her strategy at a mortgagee auction is to be the highest bidder if the property gets passed in, and then negotiate the final buy price afterwards. Typically if a mortgagee sale property is being offered through a real estate agent, there is no guarantee of vacant possession, Forster says, which is why she requires a substantial discount. If it's a "hostile situation, which it can be," the people living there can "trash the place as they walk out the door". She knows of a situation where this happened in the last hour and half before the previous owners vacated.
Vendors typically deteriorate to a mortgagee sale scenario where there is a relationship split and one person stops contributing to the mortgage payments, says Forster. Job losses are another cause, as well as the rising cost of living forcing people to decrease their mortgage payments until the bank calls a halt. Auckland property investor Ron Hoy Fong agrees, saying the cost of petrol alone has doubled in the last three years, while wages haven't.
"Food costs have gone up; I think this is contributing to the rise in mortgagee sales as well."
He says they also result when people have borrowed too much, such as other investors now having to dump properties.
Investors hunt mortgagee sales through a number of sources. Forster monitors mortgagee sales coming on the market via Trade Me, while Meile sources his mortgagee sale bargains through relationships with real estate agents. "Agents will email me if there's a good deal on apartments. I don't actively look; I wait for agents to contact me."
Some people will try to get rid of their homes because they can't afford them before reaching the stage where the bank gets involved. "More and more people will try to sell even though the market's bad."
Although Hoy Fong says there are bargains going now for those with cash, he isn't chasing the mortgagee sales yet, because he believes the market slump will deepen still further.
The market is poised to weaken. In its latest report, QV Valuations' Glenda Whitehead said: "With market activity slowing dramatically, consumer confidence knocked by increasing interest rates, fuel and food prices, we expect the trend of falling property values to continue."
And in its Property Focus report last week, ANZ economists said: "Since the end of last year, the gap between the median price that dwellings are listed at with real estate agents and the final selling price has widened to over 4 per cent.
It's another sign that sellers are now willing to discount their price expectations in light of the current weakness in the New Zealand real estate market. Given a rising number of days to sell, we expect more of the same."
In this ambiguous market climate, would-be investor Philippa Thorley is hunting mortgagee sales, mostly in Mangere and Manurewa, but is yet to buy, cautious in case there are better deals later in the year. Her buying criterion is to get the property 20 per cent under realistic market value - not yet easy to achieve with the amount of competition from other investors.
She sees some of the same investors bidding at mortgagee auctions each week, but says other investors are still sitting on their hands watching to see what others are doing. "There's definitely a very heady atmosphere out there - but don't worry, don't offer too much."
CASE STUDY: DEAN LETFUS
Dean Letfus began property investing in October 2004. "I finished work and decided I would either succeed or fail by giving property my full attention."
Letfus' strategy is to focus on a particular geographical area, and talk to real estate agents, telling them he is a cash buyer looking for "motivated" vendors.
With mortgagee sales, his rule is to try to buy at 30 per cent below what he thinks the property is worth.
Letfus says he was able to amass a portfolio of over $3 million in property in four months and "to begin to build a passive income stream".
He says he has over $7m of property, and has traded more than double that amount.
