Investor Under Pressure

[Propoholic]

I've had a call this morning from an investor who has stretched himself with investment goals.

He currently has 29 residential properties with a gearing slightly above 70% and annual deficit of $100K (pretax).

Although the basic fundamentals of the portfolio have been misguided for sometime he has got into difficulty recently by venturing into trading and now is finding his five trades arent selling.

He has started defaulting on loans (two so far) and has a list of creditors (builder/trades etc) waiting on payment.

This investor has contacted lenders (this morning) and they are now planning to meet with him on a weekly basis. I've told him to start a sell down program and get his gearing down to 60%. This is important for him before the lenders start dictating sale dates and sale price - nb their view of an acceptable sale price may be significantly lower than his!
60% LVR may return to 70%+ due to a market softening?

He has dropped into his local Harcourts office this morning to list two properties for sale, these are in addition to the trade properties that arent selling. In his weekly meetings with his lenders he will be advising progress of sell down. In these situations the borrower/investor will not be receiving any net sale proceeds - the lender will be applying all funds to reduce debt. Hence, the borrower has lost all control.

This person is not a technical investor but has very much embraced the religious fervour and herd mentallity of the seminar circuit over the last couple of years. He has been encouraged recently (from various seminars) to continue buying and support purchases with trading profits.

After all, he's been taking action and has banked the results??

Right up until his first loan default (last week), his mortgage broker has been totally supportive of additional purchases and expanding the portfolio!

[Gatekeeper]

Here we go

[whitt]

lets assume he has some equity up his sleeve 70% LVR suggests this.

Maybe he could sell a few at 10-20% under val to get a quick sale.

Investor still comes out ahead as he has 30% to play with. He can use the cash from these to get through the storm.

Take a hit now and survive.

Lets hope he has resonable properties which sell fast and he has not X-collat the loans.


At least they are in the right hands with you Barry.


Those interest rates are biting out there. Wait another 12 months as more fix terms come off. Tip Iceberg.

[sarahd]

Right up until his first loan default (last week), his mortgage broker has been totally supportive of additional purchases and expanding the portfolio!

Why do you say this with surprise? Are you hoping the morgage broker is going to be their financial planner and do some risk management for them? The broker was being paid to get him iinto debt, not being paid to provide advice.

[Propoholic]

Propoholic wrote:-

Right up until his first loan default (last week), his mortgage broker has been totally supportive of additional purchases and expanding the portfolio!

sarahd wrote:

Why do you say this with surprise?

No surprise, just stating the facts.

sarahd wrote:

Are you hoping the morgage broker is going to be their financial planner and do some risk management for them?

No, but a lot of the more experienced mortgage brokers do offer advice to assist with planning and risk management of property portfolios. A number of experienced brokers are
sought for their extensive personal experience with property investment/land subdivision etc.

sarahd wrote:

The broker was being paid to get him iinto debt, not being paid to provide advice.

The broker was being paid to act for the lender however if a purchaser asks for advice then the broker has a fiduciary duty of care towards that purchaser. It is very similar to the real estate sales person - purchaser - vendor relationship. The real estate salesperson is acting in the vendors interests but also has to demonstrate a duty of care towards the purchaser. We all know that this does not always happen with RE salespeople or finance brokers.

In the case described the investor's rent does not cover mortgage interest let alone other property expenses. Virtually all of the investor's net personal income is being used to cover the annual loss. Not sure who's acting for the lender or purchaser??

[sarahd]

Fair enough.

But you don't know what the investor told the mortgage broker either.

Could have been low doc stuff?

I understand what you mean about duty of care, however most brokers only get paid by the amount they get in lending commissions. If they were showing duty of care and informing people not to go into debt in some situations, don't you think ther's a conflict here and there is incentive NOT to advise on risks?

I'm a fan paying for advice not commissions.

[sarahd]

Sorry paying a FEE for advice rather than commissions. The the adviser gets paid no matter how much lending occurs and acts in the best interests of the client.

[Dean@Massiveaction]

Any decent broker should be keeping their clients safe and advising them to avoid risky situations. However ultimately it's the investors responsibility. That many properties with 70% gearing is on the high side.

I assume they either didn't buy very well or they've kept gearing up as they've gone along??

[donna]

Excellent Post Propoholic and it's interesting that someone with 29 properties is in a tricky situation.

I wonder why he didn't sell off some of the properties in the boom when top $$ were a given and positioned his portfolio for further growth in the slump?

I know the answer........he got the call to 'trade his way out of it'.

Does he frequent PropertyTalk.com? He would have got a good balance of opinion here.

Cheers,

Donna

[Commercial Dan]

Although the basic fundamentals of the portfolio have been misguided for sometime he has got into difficulty recently by venturing into trading and now is finding his five trades arent selling.

Poor bugger, but as I have said in the past few weeks, only a fool would trade property in this economic climate. Forget statistical fundmentals, it is all about people. Look at the exchange rate for e.g., it is taking a pounding Vs the US dollar, fundementals might say it should not drop so quickly like economists are saying...unfortunately when bubbles burst, commonsense and emotions go out the window.

That is the market economy for you.

[Jester]

This might seem a little too easy....so maybe it is.

If he has a 70% ratio why doesnt he just refinance to say 80-85% on 1 or 2 properties to free up some cash to see him through until the (now 7) properties sell?

If his broker he has now wont let him do that Im sure if he goes to another they will.

Purhaps he could also try another agent if this one isnt performing for him.

As someone else mentioned there is alot of people out there that will buy properties 10% under value tomorrow.

[The_Dog]

I think there are some valuable lessons to be learned from this example, and I mean that in a positive way. I'm sure the situation is recoverable, and it’s not a ‘total loss’ doorstep of death situation as some would have us believe. If he ends up holding 20 houses, is that such a disaster?

Credit to the man for building a 29 property portfolio in the first place. $100k shortfall over 29 houses is only $66 a week per property, so it’s easy to see how he got caught short. It’s a lesson in risk management and risk mitigation. Were the man too cautious, he would never have got to 29 properties in the first place. On the other hand, were he a little more cautious, he might not be in the current situation. It’s a fine line.

Can we have more detail around why his trades are not selling? I'm sure they would sell at the right (low) price, but are you saying they are not selling at all?

The Dog

[kieran]

Dog, How are you..? long time since Ive heard from you...

I think there are some valuable lessons to be learned from this example, and I mean that in a positive way. I'm sure the situation is recoverable, and it’s not a ‘total loss’ doorstep of death situation as some would have us believe. If he ends up holding 20 houses, is that such a disaster?

Brilliant Quote Dog!!! Good on you for focusing on the +ve!!! (but I know thats your style anyway which is why you are so successful!)

[The_Dog]

Great to see you back on the Forum Kieran. Are you back in NZ or still on tour? Are you getting my e-mails on the UK market growth?

The Dog is still looking to learn new tricks

I've been thinking a little bit about this chap 'under pressure' and thought about MY personal reaction to the Sub-prime 'crisis' and interest rate increases. And my reaction is..... NOTHING!!

Why am I doing nothing? Because there is nothing to be done. My loans are already structured optimally. My LVR is under control. My cashflow is maximised and my expenses minimised. It’s just good business practise, and my tip for the day – Don’t wait for a crisis to get your ‘house’ in order! (pun intended)

But I’m always looking to improve, hence looking to learn lessons from this chap. Any developments Propoholic?

The Dog

[Glenn]

This person is not a technical investor but has very much embraced the religious fervour and herd mentallity of the seminar circuit over the last couple of years. He has been encouraged recently (from various seminars) to continue buying and support purchases with trading profits.

Hold on a minute here.
I thought all these seminars were run by people who knew what they were doing.
Why on earth would all these people be paying good money to people if the information was not correct.
Surely any advise must be spot on. How on earth could they get it so wrong.
I see you say "various seminars" so the investors must be going to more than one "cult" to get the information.
Perhaps more than one seminar presenter is getting it wrong. Wrong that is when things go wrong.
Do in fact any of them know what they are doing.