Swooping on rich pickings

By ANNE GIBSON

Borrowing heavily to invest in under-priced houses has been a key to the growth of Doug Woodyard's business, which he says has doubled in size in the past year.

He set up Property Investments last year to help about 15 investors build up their stock of residential properties.

He helped his clients invest in $3 million worth of Auckland houses last year and $6.5 million this year.

He now has 640 clients and reckons the houses he deals in are such good value that some sell in hours.

Woodyard is one of many investors looking for houses selling for less than market valuation and taking on substantial borrowings to enable them to buy more.

They see borrowing as a way to get ahead and usually put in only 20 per cent of their own equity to enable them to buy more than they could otherwise afford.

Martin Blockley, head of AMP Banking's property finance and rural division in Auckland, says these schemes are not unlike the theories espoused by Dolf de Roos, who writes books and runs seminars on investing in houses.

Blockley is also an advocate of debt, noting that it helps investors step up into properties they could not afford if they were using only their own equity or cash.

He also notes the value of debt in potentially reducing tax bills, but he warns about investors loading up with too much of other people's money.

"Borrowing to invest in property is not a new concept, and the tax concessions and advantages that may be available have been well reported in recent years," says Blockley.

"Obviously when an investor borrows most or all of the purchase price of a property, they increase their risk by virtue of their debt levels, particularly if little or no capital gain is forthcoming. Some people, however, may be comfortable with this risk.

"Clearly, it is imperative to seek professional legal and financial advice when considering such an investment. Most banks will lend against the lower of purchase price or valuation. If people are looking to borrow against a valuation that is higher than the purchase price, either immediately upon or shortly after initial settlement, they should check the criteria of their lending institution as to the acceptability of this before committing themselves."

A spokesman for the Real Estate Institute says clever investors tend to spread their risk and diversify their investments.

Having all your assets tied into property can be dangerous, he says, because sectors go through peaks and troughs. So investors are better to spread their money in the share market and fixed-interest investments as well as property.

Andrew King of the Property Investors Association in Auckland says the pitfalls of such schemes are similar to problems with other types of financial investment.

"Property is a relatively illiquid asset compared to shares, the servicing of high levels of debt can be hard to keep up with if a tenant moves out and changes in interest rates on mortgages can have a big effect on the cash flow," King says.

But Woodyard, with offices in Pukekohe, targets houses with a big upside. His key is buying them cheap.

"We target mortgagee sale-type properties and sign a standard sale and purchase agreement with simple, user-friendly clauses," he says. "The agreement basically gives us a two-week option to buy."

He then e-mails details of the properties and their prices to his clients.

"If you want to buy, we legally transfer the sale and purchase agreement to you. You then become the purchaser. Settlement is generally four weeks after unconditional date."

Woodyard is keen on a certain type of property often found in South Auckland - a three to four-bedroom house with a garage, on a fenced section and built of low-maintenance materials. These, he says, rent quickly and bring fewer headaches for investors.

Other properties that interest Woodyard and his investors are those that Housing New Zealand will lease and manage.

"This gives a guaranteed rental return," he says, noting that contracts which can be between three and five years give investors an enviable degree of certainty on income.

But the main attraction for the houses Woodyard is interested in is that they are selling under the market rate - on average at 80 per cent of market valuation.

"This happens for a variety of reasons," he says. "People might have over-committed on their mortgage and need to sell quickly, there might be a marital breakup, a business might need the money out of the house to develop or the house might not have been marketed well so it simply hasn't sold."

So is Woodyard making money out of other people's misery? He admits he has to pull himself up to think about this point, but he believes he is helping people out of a tight spot.

Most of the transactions are at arm's length, so Woodyard says he often does not know the reason for the cheap sale. But if he has direct dealings with the vendor, he says he tells them that the offer is 20 per cent below market valuation, so they have a choice of whether to accept or not.



Woodyard gives investors a promise: "We guarantee you will be totally satisfied with your investment. If not, we will sell it for you at no cost and we will refund our fees in full," although under the company letterhead are the words "minor conditions apply to guarantee".

Woodyard charges the investors for finding the properties.

Property Investment charged $5000 for a 1980s three-bedroom house in Weymouth, which had a registered valuation of $130,000 but could be bought for $90,000, with a guaranteed rental return of 13 per cent.

A Milford house valued at $542,000 but bought for $445,000 incurred fees of $22,500.

Olly Newland, property investor and former chairman of collapsed listed property investment company Landmark Corporation, says Woodyard uses sound principles.

"He buys cheap at mortgagee sales and only if he can buy at well under registered valuation," he says. He then sells agreement to an investor for a fee. He covers himself by not buying unconditionally himself until he has unconditional on-sale.

"Woodyard can't lose. If he doesn't find someone to buy his agreement, he drops the deal and it costs him nothing. He is effectively a middle man, only earning if he closes both ends of the deal at once.

"This sort of wholesaling has been around for years. This is a common practice and a lot of hard work for somebody. It makes me wonder that if these deals are so good why doesn't he keep them rather than give them away?"