Mortgagee auctions put valuations in spotlight

[PeterEmpowerEd]

I'm picking that whoever rebranded the RM property "deals" as "Blue Peak" is having second thoughts, in the wake of the bad publicity that Blue Chip is currently receiving.

Probe into property hard sell
5:00AM Sunday February 24, 2008 Herald on Sunday
By Diana Clement

The Commerce Commission is investigating several alleged breaches of the Fair Trading Act by Blue Chip, which may have broken a string of laws.

The Serious Fraud Office (SFO) is also looking into the property investment business and asking for investors to call a free-phone service with information.

The spotlight has turned on dozens of other companies using hard sell to shift off-the-plan properties, luring investors to pay for their purchases by mortgaging their homes. The sales process many of these companies use may breach the Fair Trading Act and other laws.

To act against Blue Chip or other companies, the Commerce Commission will need to prove there was misleading or deceptive conduct generally, or that false statements or representations were made in the sales process. Adrian Sparrow, the commission's director of fair trading, told the Herald on Sunday that areas being investigated include false or misleading valuations provided to investors, and the legal status of properties.

Many Blue Chip investors now claim the independent registered valuations they based their purchases on were inflated - some by tens of thousands of dollars. John Horner, convenor of the business and commercial law committee of the Law Society and a partner at Quigg Partners, says if it can be proved the valuations were misleading, that may lead to prosecution under the Fair Trading Act.

Some investors believe the valuations were based on other off-the-plan apartment sales and did not truly represent the values of comparable properties selling on the open market.

If Blue Chip or another company had claimed to be selling at wholesale prices, as many did, but sold at market value or even above market value, that could also be viewed as misleading, says Tony Steindle, a lawyer at Steindle Williams in Auckland and author of Property Law, A New Zealand Investor's Guide. For example, if they were based on other off-the-plan apartment sales, and clients weren't told this fact and assumed valuations were based on a wider pool of comparable sales, they could have been misleading.

As well as the Fair Trading Act, it's possible there may have been breaches of the Securities Act and Resource Management Act.

In the case of the Securities Act, there will be questions over some of Blue Chip's more complex products, such as the "Blue Chip Premium Income" product. Investors provided deposits for apartments to get the development off the ground, but Blue Chip held the option to buy back the property before settlement. In the meantime investors earned a "product fee".

Under the Resource Management Act, deposits made by investors on yet-to-be-constructed buildings should be refunded if there hasn't been reasonable progress within two years, says Steindle. Yet the properties of some Blue Chip clients, who paid deposits up to four years or more ago, haven't settled.

One Blue Chip customer paid a deposit of $168,000 more than two years ago for a property in St Martin's Lane, Grafton, which was never built.

When the out-of-town investor sent an Auckland relative to visit the site earlier this month, she was told that Blue Chip no longer owned the development and a company called Icon had bought it 18 months before.

Yet a former Blue Chip salesman, who spoke to the Herald on Sunday, was surprised when he looked at sale-and-purchase agreements he was handing to clients on behalf of Blue Chip to sign. They were for a development by a company called Icon, but appeared to be for the same development he had sold previously under the name St Martin's Lane.

While the directors of Icon and Blue Chip do not share any directorships, the constitution of Icon Apartments refers to a "joint venture agreement". This was the same terminology Blue Chip used in selling its St Martin's Lane apartments.

The salesman said that during the selling process, clients were told the rents being guaranteed by Blue Chip were "market rents".

This may be relevant to a Fair Trading Act prosecution if it can be proved that the guaranteed rent was higher than market rent and clients had been misled.

Sparrow says if it can be proved that Blue Chip rents weren't at market level, but clients were told their rents were being subsidised, this could not breach the law. It could breach the law if they were being misled about true market value of the rents.

Sparrow says it doesn't make sense for several Government agencies to work on the same investigation independently. He expects that eventually one will take over.

Prosecutions under the Fair Trading Act are held in a criminal court. Defendants can be fined and ordered to pay reparations, but they cannot be jailed. If, however, it transpires that a crime has been committed under the Crimes Act, defendants can be imprisoned.

Individual investors of Blue Chip and other hard-sell property companies can also lay complaints with professional organisations - such as the Law Society, Institute of Chartered Accountants and the Valuers Registration Board - if they were advised by members and are dissatisfied with that advice. And they can complain to the Advertising Standards Authority, but with most Blue Chip companies in liquidation and the company unlikely to continue in business, this may be a waste of time.

Although the authorities are concentrating on Blue Chip, there are many more companies selling off-the-plan property using hard-sell methods.

A Consumer magazine investigation last year named other companies that used questionable sales tactics in their seminars and marketing material.

They included LJ Hooker Developments and the Aldy Group. Others selling managed property investments include NZInvest, Key2, Catalyst2 and Circle Group.

"There is a lot of deceptive stuff going on in the sale of new property," says Steindle. "I think salespeople are getting better at knowing where the line is and not breaching the law."

Grant Liddell, the SFO's new director and chief executive, said staff had been investigating Blue Chip for more than a week. The investigations are based on complaints made to the office. Anyone with information they think will help should phone the SFO's call-free service on 0800 109 800.

Sparrow is inviting anyone who has concerns about Blue Chip and other companies selling off-the-plan property investments to contact the Commerce Commission so it can analyse trends that emerge.

Phone the commission on (04) 924 3600 or visit www.comcom.govt.nz

http://www.nzherald.co.nz/section/3/story.cfm?c_id=3&objectid=10494212&pnum=0

...

The tide is turning ... the backlash I talked about here may be finally rolling in.

[muppet]

Mortgagee auctions put valuations in spotlight

Mortgagee auctions put valuations in spotlight
Sunday Star Times | Sunday, 24 February 2008

Uninformed investors are finding out property isn't always worth its registered valuation, says Greg Ninness.

The mounting losses faced by many residential investment property buyers could become a significant problem for banks and other property lenders.

This is because many investment properties are now selling at prices well below the amount the banks and finance companies lent against them.

At an auction last week, one investor sold an investment apartment for $315,000 less than the value of the mortgages secured over it.

It was not an isolated case. At a mortgagee auction across town, suburban houses were also being sold at prices well below the value of their mortgages.

The first sale was at an auction conducted by Auckland apartment specialists City Sales last Wednesday.

Five inner city apartments were put under the hammer and about 40 potential buyers turned up.

The first lot was a two-bedroom apartment with a balcony and car park in the Volt building, which occupies a prime position on the corner of Queen St and Mayoral Dr.

Valuation records indicate the apartment was sold off the plans to an out of town buyer for $318,000 in 2004. The car park was sold separately and although there is no record of its purchase price, it probably sold for about $60,000, bringing the likely total cost of the package to $378,000.

According to the property's title, the apartment and car park were both mortgaged to ANZ National Bank, the apartment for $450,000 and the car park for $100,000, which together meant the bank had security totalling $550,000 over them.

The apartment and car park were auctioned as a single package and, as an added sweetener, the apartment was offered fully furnished, which would increase its attractiveness to a new buyer looking to rent it out.

Although the apartment was vacant, the auctioneer said City Sales' property management arm had assessed its market rent at $420 a week.

He didn't have to wait long for the opening bid of just $190,000. A trio of bidders pushed the price to $230,000 at which point the auctioneer announced that the apartment was "on the market" meaning it had passed its reserve price. It was eventually sold under the hammer for $235,000.

The agent's commission on the sale would probably be around $15,000 which would leave $220,000 in cash for the vendor, $330,000 less than the amounts secured by the ANZ's mortgages.

ANZ may not have advanced the full amount secured by the mortgages and there is no way of knowing how much the borrower may have already repaid or whether other security was provided for the loans.

Unfortunately other vendors were in a similar situation at the same auction.

The other four apartments put under the hammer that day all had substantial mortgages over them, either to Westpac or the BNZ, and all were either sold or passed in at prices well below the value of their mortgages.

It would be easy to dismiss such circumstances as being restricted to the apartment market, but that does not appear to be the case.

On the same day that several investors were taking a bath at the City Sales auction, Barfoot & Thompson was holding a mortgagee auction of several properties at its inner city rooms.

Barfoot & Thompson handles more mortgagee sales than any other agency in Auckland, and its director Peter Thompson said its mortgagee listings had doubled in the past few months.

Last weekend the company placed an unprecedented double page newspaper advertisement of its current mortgagee sales.

Its monthly mortgagee auctions have become a regular fixture for investors on the hunt for a bargain, but last week's auction was different to those which took place last year.

Ten properties were listed for sale, slightly more than in previous auctions. But the usual pattern last year was that most properties would be withdrawn from sale just prior to auction, as their desperate owners managed to cobble together a refinancing package at the eleventh hour.

But last week only one of the 10 advertised sales was postponed, the other nine were all to be sold. This was serious and the mortgagees meant business.

There was also a difference in the type of people attending. Last year such auctions were often played out to packed rooms and many bidders seemed like people who had just learned how to leverage off the equity in their home to buy an investment property by attending a seminar. Their enthusiasm was often reflected in the prices they paid.

Most of the the 40 or so at last week's auction had the air of hardened investors calmly picking over the bones of other people's shattered dreams.

First up was a large bungalow in below average condition which had been converted to three flats. Its main attraction was its location in the CBD fringe suburb of Eden Terrace where it was surrounded by commercial and light industrial properties, making it a developer's dream.

The property had a rating valuation of $600,000, but sales records show it was purchased in August last year for $1.2 million. The mortgage was to Property Finance Securities (in receivership) for $1.363m. After much encouragement from the auctioneer it sold to a dapper gentleman in a pinstriped suit for $780,000.

Next up were two modern homes of a good standard in suburban Mangere, both of which were being sold from under the same owners.

Sales records suggest the owners were a couple who had formed a Loss Attributing Qualifying Company and leveraged off the equity in their family home to buy the second property as an investment.

One home had mortgages to ASB for $723,000 and Finance Assist for $150,000. It sold for $535,000.

The second home had mortgages to ASB for $547,000 and Finance Assist for $150,000. It was passed in at $370,000.

The number of distressed sales is still a small part of the total market, but is expected to increase.

City Sales director Martin Dunn is one of a growing number of real estate agents and valuers who are becoming increasingly concerned about the reliability of the so-called registered valuations which underpinned the decisions of thousands of mum and dads up and down the country to invest in residential property and of the banks and finance companies to advance them the money.

If, as Dunn and others believe, many of those registered valuations are not worth the paper they are written on, then there's likely to be tears before bedtime. And the lending managers who helped shape their banks' policies and the valuation firms who advised them, could have some explaining to do.

http://www.stuff.co.nz/sundaystartimes/4413341a6445.html

[SuperDad]

Ouch!!!

Those are some nasty losses.

Paul.

[xris]

Although the authorities are concentrating on Blue Chip, there are many more companies selling off-the-plan property using hard-sell methods.

A Consumer magazine investigation last year named other companies that used questionable sales tactics in their seminars and marketing material.

And don't forget people, for top investment advise at a top rate just give Matthew a friendly call.

xris

[Glenis]

Although the apartment was vacant, the auctioneer said City Sales' property management arm had assessed its market rent at $420 a week.

He didn't have to wait long for the opening bid of just $190,000. A trio of bidders pushed the price to $230,000 at which point the auctioneer announced that the apartment was "on the market" meaning it had passed its reserve price. It was eventually sold under the hammer for $235,000.

It seems good buying but check out these other listing on Trade Me http://www.trademe.co.nz/Browse/Cate...250000&x=0&y=0
and the auction price is not that different to these listings (although there is the carpark with this one). The current rents noted are $330 and $370. Where we have been slamming the property valuations maybe we should be taking the rental appraisals with a grain of salt too? In addition this is talked about as ideal student accomodation - they are only there 9 months of the year.
Glenis

[SuperDad]

Glenis,

There are many students that need accomodation more than 9 months per year.

Many international students are on 12 month language courses, for example. Graduate students study 12 months of the year. Students often take summer school papers in addition to their regular year in order to speed up their degree.

I think you make a good point about taking rental appraisals with a grain of salt.

Paul.

[Glenis]

True about the students.

Part of the point I was trying to make was that people will say "what a bargain!" but the reality is that other properties in the same building are selling at about the same price (although this example has a car park). Because we know the extent of the borrowing it seems like 'a deal' whereas it is some poor smuck who has been conned by agents and independant valuations and the bank in their rush to lend money haven't done their client any favours either.

In my succession of jobs I once worked for a building society, back in those days every bank and building society had their own valuers on staff. Do they still do that? The last property we bought they took the GV and sale price and didn't worry about a valuation - mind you we didn't borrow much.

Next up were two modern homes of a good standard in suburban Mangere, both of which were being sold from under the same owners.

Sales records suggest the owners were a couple who had formed a Loss Attributing Qualifying Company and leveraged off the equity in their family home to buy the second property as an investment.

One home had mortgages to ASB for $723,000 and Finance Assist for $150,000. It sold for $535,000.

The second home had mortgages to ASB for $547,000 and Finance Assist for $150,000. It was passed in at $370,000.

First property here - mortgages $873K - loss on property (mortgages only) $338k. Second property - mortgages $697k. Total borrowings $1,570,000. Interest @ 10% 157k pa - $3020 pw, even interest at 7% puts it at $2,110 pw. I know there is the tax advantage, but even so, that's a lot of loot to front up with each week and I haven't taken all the other expenses into consideration. What were they thinking?

[McDuck]

Ouch!!!

Those are some nasty losses.

Paul.

But who made the nasty gains and when?

[ream]

And how did the Herald find out the amounts of the mortgages? Only the bank's name can be seen on the title, the amount is normally very hard to obtain as far as I know?

[Cadmium]

And how did the Herald find out the amounts of the mortgages? Only the bank's name can be seen on the title, the amount is normally very hard to obtain as far as I know?

I would like to know the answer to this also! That would be very useful information to have at times.

[Beagle]

It would not be the loan amount but the priority amount, i.e. the amount used by the lender of the first mortgage to prevent other lenders securing a loan against the property.

[ream]

Really? In that case the article is highly misleading.... Also, how is it any easier to find that figure?

[Beagle]

it's not usually on the title document, but it may have been in the auction documents. Otherwise they could have access to the LINZ system.

[ream]

OK, thanks. I did wonder how they were allowed to sell at less than the mortgage amount, so it makes a lot more sense now. Very misleading journalism though.

[Beagle]

If it did sell for less than the loan amount then the lender has recourse to the lenders insurance to top it up (which is paid by the borrower) and/or they will seek the balance from the mortgagor. This may mean that the mortgagor would have to sell another property, which could be the family home. Not a great situation to be in.