Olly Newland: Know how to steer around disaster when times are tough

The reality of holding on to your own home is dwindling for many. Photo / Janna Dixon

Hardly a week goes by in my office without yet another property owner confessing that they have painted themselves into a financial corner.

Their stories are all too familiar, but for those caught, it is not just a story but an endless nightmare - for them and their family.

The unprecedented boom over the past few years covered all the sins and rolled over all the mistakes. Now, with a recession grinding hopes and dreams into the dust, reality has hit home - and it's big, ugly and here to stay.

Mistake oneI have lost count of the number of people I've helped who have made commitments to buy but are still waiting to be be paid for what they sold.

When times were buoyant it was a fairly safe bet to buy unconditionally with only a deal on paper and a deposit to rely on. Not these days.

One of my clients sold a farm for $3 million. On the strength of the agreement he bought several other properties. But his buyer walked away from the deal.

The deposit was taken by the agent who arranged the deal, and it turned out the buyer was a company with no assets. Now my client is facing the threat of financial ruin.

Lesson: If you have a deal on your property and want to buy again, it is essential to wait until the money is in your bank - or only buy with an agreement conditional upon settlement of your property actually taking place.

Mistake twoWith the advent of Trade Me and private sale companies it is becoming quite common for sellers and buyers to get together and save on agents' fees.

This practice is fraught with dangers as hard times bring out the worst in many. In one case in which I'm involved, the buyer and developer got together and agreed on a sale and purchase of a nice new home.

I warned my client (the buyer) of the dangers but he ignored my advice and paid a large deposit directly to the developer.

When it came to settlement, my client had the rest of the purchase money arranged but the developer could not settle because his borrowings were so great that the funds from the sale would not pay off his debt to the bank.

Lesson: If you want to buy privately do not pay the seller a single cent until your solicitor has confirmed that releasing any mortgages will not be a problem.

Mistake three Buying off the plans is another area where many a buyer's spirit has been broken. The unholy mess in the shoddy apartment market is just such an example. Thousands of wide-eyed Kiwis believed the hype of the "get-rich-quick" merchants that buying off the plans was the way to make money.

Many buyers handed over deposits that disappeared into a bottomless pit.

Buying a spec property off the plans is something to be avoided. Buyers make easy targets for the spruikers.

Lesson: If you still feel the urge and must buy off the plans, at least ensure the deposit is held in a solicitor's interest-bearing trust account and not released until every detail of the purchase has been ticked off and the property fully completed and certified as such.

Mistake fourI cannot emphasise enough that borrowing from the one bank for all your needs carries a high risk factor.

Time and again I have seen people borrow their home mortgage, credit cards, hire purchase, business overdraft, and the investment property mortgage from one source without realising that all the loans are almost always linked.

A default on your business overdraft or credit card can mean all the loans are called up at the same time. Most bank loans have an "all obligations" clause, which in effect means that any default will allow the bank to "cherrypick" their way through your assets and sell whatever is easiest for them.

It can get even more difficult when you have several mortgages over several properties with the same bank.

If you sell one property the bank could demand that you not only repay the mortgage on that property, but any money left over has to be used to reduce other borrowings. They are allowed to do this.

Lesson: To avoid this problem and keep your hard-earned money, always use different banks for different assets so each becomes a standalone investment.

Mistake fiveWhen you pour money into a property in renovating, the reality is that the market will not always return you a profit - as many do-uppers have found, to their cost. Whether upgrading your home or an investment property, you must always bear in mind the current market value and where the total costs will end up.

Falling in love with the property and spending too much, thus overcapitalising, is a common mistake.

If you end up with the dearest house in the neighbourhood it almost always guarantees it will be extremely hard to sell and recoup all your costs. If it's your own home you can be a little more relaxed, but an investment property is a business.

It's there to make money. Nothing more or less.

Lesson: Don't overcapitalise. If you are stuck with a property that has achieved all it can now and in the foreseeable future, then it's time to quit it and look for greener pastures.

* Olly Newland is a property investor, consultant and best-selling author of six books.

You can email your burning property questions to omn@ollynewland.co.nz or andrea.milner@heraldonsunday.co.nz

WHAT WOULD YOU DO?

If somebody had a mortgage of, say, $100,000 on a property worth $200,000 with one bank, then they went to another bank to open accounts (not refinance), does that new bank know the amount of their mortgage?
Dave
Not automatically. If you are asked for a statement of position you will have to reveal the truth but never volunteer anything.

We sold our house last October after living there for five years and renovating. We did not come out with what we had hoped for and we are struggling to find anything in the Howick area that we can afford and is suitable for our family. Should we stay renting and look to buy in winter? Would it be advisable to buy an investment property in, say, Mt Wellington to sit on for a year or two while we keep renting? Sheree

Better to stay renting than buy the wrong property. It's so easy to get into a deal and so hard to get out of it. There will be something out there for you so be patient.

Do you think we can maintain the Barfoot & Thompson advertisement's graph showing vertical price climbs bar the odd short sideways stop, or is there a real possibility that New Zealand real estate can have a proper cycle correction of generational proportions? Duncan

How long is a piece of string? I have no doubt that some time in the future we will regard today's prices as absurdly cheap, just as we have done so many times in the past.

The question is, when? I think the present downturn has around five years to play out and then we could see the climb in prices begin all over again. Two things will be the decider: if the financial crisis gets much worse then read 10 years not five.

If, however, inflation returns with a hiss and roar (a likely scenario) then it could be as soon as next year. Either way our children will look back some day and shake their heads in wonder at the "cheap" prices we were paying in the first decade of the 21st century.

We are a couple working in the healthcare industry with stable incomes. We have three rental properties at present fixed at interest rates of 5.99 and 6.35 per cent for three to four years. We are able to buy another rental but are concerned about affordability once interest rates rise. Our plan is to sell one of them within three years to avoid risk. Do you think we should buy one more as we planned or not take the risk at all? Andrew

I would definitely buy another property provided it was a great deal. Regard yourself as a shop with property investments as stock on the shelves. The more stock, the more chance of profit.

I have been in my home (in Wellington, one-and-a-half storeys, built in 1926) for nearly 20 years. Around 16 years ago I had it converted back to a home and income (the latter on the lower half). I wrote to State Insurance and told them of the separation and the tenancy, and pay a higher premium as a result. It has accepted my premiums over the years and my one or two minor claims. I often wonder what might happen, however, if I had to make a major claim (say in the event of a fire or earthquake) - whether it might have grounds to reject the claim given these modifications. What do you suggest I do for reassurance as to my exact position with the insurance company? Tony

I would get a city council inspector to check the property and then issue a Code Compliance certificate. Insurance companies can be quite sane when accepting premiums but can become very strange when it comes to paying out.

We own a property with a market value of around $450,000 to $500,000, which we rent out as we now live overseas. I want to get a second property - should we do this now, or wait? What can I do to alleviate the risks of getting a second property? Simon

There is no difficulty in buying property from overseas. With the internet and other modern communications, virtually everything can be done through your PC. The market is depressed now and bargains are available. There is no advantage in waiting. It takes time to look for that special deal so the earlier you start, the more time you have to learn and research.

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