Know how to steer around disaster when times are tough

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 one I 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 two With 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 four I 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 five When 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. Visit www.ollynewland.co.nz for more information. You can email your burning property questions to omn@ollynewland.co.nz or andrea.milner@heraldonsunday.co.nz