Predators may strike again

Glossy brochures and fabulous-sounding deals are being touted again. Photo / Doug Sherring

Unwary investors could be burned by the hot real estate market if they fall into the traps of the last debt-fuelled housing boom.

House prices have overshot their previous peak in 2007, which Real Estate Institute president Peter McDonald says confirms property as "the very best investment".

But barrister Paul Dale, who is representing victims of Mark Bryers' failed property company Blue Chip, says our investment market remains a jungle.

"It's the Wild West out there for the average investor. There are any number of predators with glowing brochures and fabulous-sounding deals - but ultimately no responsibility - who will take your money."

Unfortunately there are few investment choices in New Zealand, especially for older people reliant on modest income from a nest egg they've scratched together over a lifetime. So one-stop property deals such as those offered through Blue Chip - often with rent guarantees attached - seem attractive.

But independent property consultant Olly Newland says rent guarantees are only as good as the company giving them - and they are built into the top-dollar price the buyer pays anyway. If you're relying on a rent guarantee, you shouldn't be buying, he says.

During the height of the property boom, unsuspecting people with a bit of equity in their homes were signing purchase contracts relying on supposedly independent valuations commissioned by developers or marketers.

But the lure of repeat business led some valuers to push the boundaries, giving figures that were too high.

Earl Gordon, chairman of the professional practices committee of the New Zealand Institute of Valuers, says it has no power to compensate people who relied on valuations inflated for marketing purposes. And valuers don't have to carry professional indemnity insurance.

Meanwhile, those flogging sketchy property deals hide behind complex corporate structures to evade liability.

Mortgage broker Mark Jurgeleit says buyers should develop long-term relationships with expert advisers they trust. Independent advice doesn't come from someone recommended by the property seller.

Seminars convinced people they could make big money by buying investment property they'd never laid eyes on, and where the rent did not cover the mortgage. Part of the sales script focused on the tax effectiveness of offsetting rental property losses against income tax.

But some of the buying was highly speculative. People accepted 5 per cent yields and borrowed money at 9 per cent. No amount of tax relief will ever turn that into a cash surplus.

Sue Tierney, president of the Auckland Property Investors Association, says reputable, non-profit organisations such as hers educate about investing for better value than the costly get-rich-quick seminars.

And investors shouldn't buy a rental property unless the rent covers the mortgage.

Property marketers have in the past led buyers to believe they would arrange for the property to be on-sold profitably before they would have to settle the purchase.

Tierney says: "If you don't need to settle, you shouldn't have to sign a document." Don't sign anything unless you understand it completely, she urges investors.

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Before you borrow ...

Mortgage broker Sue Tierney says New Zealanders are too focused on getting the cheapest mortgage rate instead of looking at the big picture. "The banks with the cheapest interest rates have been those with the biggest break fees."

Property adviser Olly Newland says a good rule for investors is to calculate mortgage costs at the long-term average rate of 8.5 per cent and borrow no more than 70 to 75 per cent of a property's value.

Buyers who borrow higher than this ratio run the risk of being plunged into negative equity - where the mortgage debt exceeds the property's value - if prices drop.

If you have more than one property, do not have all your mortgages with one lender.

Standard mortgage agreements tie together all borrowings and all properties over which the bank has mortgages. So if a borrower tries to free up cash by selling a property in which they have equity, the bank can require more of the sale proceeds than just the amount the investor borrowed to buy the single property before it will discharge the mortgage. In slumps, banks are more likely to require all the sale proceeds because of concern over falling values.

Don't take out a capitalising loan - where instead of paying the interest instalments in full, a portion is added to the principal. If you can't afford to pay the full interest amount as you go, don't buy.