Mortgagee sales – how to find a winner, not a write-off
In my last blog I touched on mortgagee sales as a value-adding strategy when seeking out instant equity.
While the number of mortgagee sales on the market appears to be on the decline after hitting a peak in 2012 following the effects of the GFC, the numbers are still significant. In the 2013 financial year nearly 4,000 homes were repossessed in WA, NSW, Victoria and Queensland alone, according to various state court reports.
Adding to this is the concern from the RBA that many home buyers currently taking advantage of the low interest rates are failing to factor in future rate rises. Meaning that, when rates inevitably go up, many may not be able to afford their mortgages, resulting in another bout of repossessions.
It is a grim prospect for the owners and the economy. But for investors, mortgagee sales can provide excellent opportunities to pick up an asset at below market value. It’s not uncommon to see these types of properties to sell at a discount of 10 to 15% and with some additional TLC, these properties can provide rapid financial rewards.
However, investors should proceed with caution. Not all mortgagee sales represent a good investment. After all, the vendor is still there to get the best possible price and they will be well aware of what the property is worth.
Here are some critical questions you need to ask when considering a mortgagee sale to ensure you pick a winner and not a write-off:
Have you done your research?! As with any property investment, research is crucial when considering a repossession. A ‘bargain’ in an area with poor growth prospects and rental return due to its poor location and infrastructure, and requiring significant renovation, is not a bargain at all. Note that several repossessions in the same area can drag down house values.
Is it habitable? Keep in mind that the property may have been stripped of anything of value such as appliances and furnishings. The effect of this is two fold: it will not only add to the costs of the purchase because these items will need to be replaced before it can be tenanted, but your lender will also require the property to be habitable as a condition of the mortgage.
What maintenance or renovations does it require? This can also be another significant issue affecting the ‘value-add’ of mortgagee sales. It’s safe to say the owner has been struggling financially, so it’s likely the property won’t have been properly maintained meaning additional funds will be required to bring it up to a standard where it can be rented or sold again. This may offer up a fantastic opportunity for a money-making renovation – just be confident of what the renovations will deliver in equity terms to avoid over-capitalising.
What will be the settlement timeframe? Most properties will be vacant but selling a property that’s still tenanted is not unheard of and could delay settlement. On the other hand, remember the vendor is a bank and they will want to settle in the shortest timeframe possible, unless hindered by a tenant. Know what the settlement timeframe is likely to be and be well prepared with finance and documentation to avoid any penalty fees.
What will happen at auction? Mortgagee sales are always conducted via auction and can generate a lot of buyer interest due to the expectation of a bargain. This competition among buyers can therefore drive up the price to a point where the discount no longer exists and the potentially exciting equity gain becomes much less viable. If you’re worried about the auction, consider hiring a professional bidder to bid on your behalf. They will take the emotion out of the bidding, ensure you stay within budget and can help advise on what the property is worth.
In short, make sure you’re aware of ALL the costs involved with the purchase of a repossessed property before you buy it, know what it’s worth and stick to your budget. Mortgagee sales are one example where it’s highly recommended that you inspect the property prior to purchase
Value adding – how to sniff out instant equity
With many capital cities and regional centres around the country tipped for double digit growth in 2014, it’s time to focus on how to take full advantage of the market and products available to accelerate your equity and portfolio development.
Selecting the right “value add” property is the key to rapidly increasing your portfolio and investment returns.
Homes on blocks with sub division potential
Blocks with sub division potential– allowing you to divide, develop, sell or lease the new property – provide significant opportunity for creating instant equity.
While sub dividing can be highly rewarding, it can also be a very complex process. Thorough due diligence is paramount as there are a number of factors to take into account that will affect the success of the project. These include zoning, access and drainage, among others.
Multiple discussions with the local council and other consultants such as engineers and architects will be required to ensure you meet all relevant government regulations and develop a property that will appeal to the market and make you a profit.
One of the greatest advantages of a house and land package is the instant equity that can be generated. Locking in construction and land prices through a fixed price contract means that in a rising market, any increase in the value of the property between when the contract was signed to completion and handover is to the benefit of the buyer.
It is not unusual to see in well-researched markets that, following the typical five-month build timeframe, the completed property is worth an additional $100,000 over costs to construct.
Purchasing a house and land package early on in your investment journey can provide you with the immediate funding ability to make another investment.
Off the plan properties
With construction of off the plan properties often taking six to 12 months, investors are given an extended timeframe to settle. In a rising market, investors can take advantage of this additional time to generate capital growth. As the property is purchased based on a fixed price contract, any equity the property generates between the deposit payment and settlement is the investor’s capital gain.
Astute property investors can add substantial capital value to older style properties especially if homes in the area are undervalued, run down or rented below the market. When undertaking reno projects, it’s essential to consider the leasing market in the property’s location. The renovations must appeal to the local market if you’re to achieve the full rental potential of the property and avoid overcapitalising.
Mortgagee sales – where banks are forced to sell properties due to unpaid mortgages – can offer excellent opportunities to pick up investments at below market value.
It’s not uncommon to see these types of properties sell for 10 to 15% below the market – the banks are typically desperate to sell and know buyers expect a discount.
Seeking out properties with the potential for ‘instant’ equity will enable you to take full advantage of the rising market, purchase again quickly and give your portfolio a real boost in 2014!
Holidays – The perfect time to plan your next investment move!
Holiday downtime can provide the perfect opportunity to reassess your current investment position, conduct a portfolio and financial health check and plan your next investment move – putting you in the best position to maximise returns in the new year.
Portfolio health check
Take a no nonsense look at each property in your portfolio, how it’s performing and whether it could be improved.
Strategy – First, review your strategy and goals. If your portfolio is not currently meeting your objectives, establish a plan to realign and improve performance. If your portfolio is negatively geared, you may need to revise your approach to focus on positive cash flow investments so that you’re not left out of pocket in 2014. Or, you may need to consider properties that will deliver some instant equity if your portfolio has not been growing as rapidly as you had hoped.
Finance – Are your current products and lenders providing you with the most competitive interest rates and fees? If you’re not sure what you’re paying, request this information from your loan provider and then compare with other products available. Utilise comparison websites and mortgage calculators. If you find better deals elsewhere, use this information to have your broker renegotiate with your current lender first to assess whether they can offer better terms. If not, consider refinancing – it could make a significant impact on your return.
Tax planning – Start preparing your investment property records well ahead of the new financial year to ensure you’re maximising your interest and tax depreciation deductions, and you have recorded any costs that can be used against Capital Gains Tax should you decide to sell in the future. Your property manager is the best person to access and provide you with this information.
Also review with your accountant whether you are utilising the best form of property ownership for tax purposes and your personal circumstances.
Maintenance – Up-to-date maintenance is critical in attracting the right tenants and rent, which in turn maintains the value of your property. Your property manager will be able to tell you what maintenance should be prioritised. Plan out what needs to be done, particularly if a lease is due to expire.
Structure – Is your portfolio structured to facilitate fast growth? Having all properties tied up in a single structure can be a major disadvantage as it often reduces your borrowing capacity and the ability to find better deals with other providers. Consider separating new investments into standalone structures so that equity in each property is protected, enabling you to continue building your portfolio by using a line of credit against the properties which have generated equity.
Equity – Establish what equity your portfolio may have generated by having the properties re-appraised by your local real estate professional. Also consider how some aesthetic improvements or additions could create equity that would allow you to expand your portfolio. Talk to your mortgage broker. This will give you an idea of what you have to work with for your next investment.
Plan your next move!
Spend some time utilising the wealth of free online resources to identify locations which display all the signs of good yields and capital growth. Research key factors such as industrial growth, infrastructure investment and low vacancy rates which suggest a population on the increase.
Investigate specific investment opportunities in your target areas, looking at those close to key infrastructure that would appeal to high salary workers, and calculate the potential yield and growth. Create a shortlist of opportunities and questions you have for the agents and you’ll then be ready to hit the ground running in the new year, giving your portfolio a flying start to 2014.
Positive Gearing Hotspots for 2014
After experiencing years of outstanding growth, house prices and rents in many resource towns have been ‘normalizing’ over the past 12 to 18 months due to softening mining investment.
As a result a number of these towns are now ideally positioned for a bounceback in 2014!
With renewed investor, mining and infrastructure confidence returning to the regions, many of these towns hit by the resource slow-down that was 2013 are now offering astute investors the opportunity to benefit from growth as they spring back into action in the new year.
Karratha recently made national headlines for experiencing a 30% reduction in median price from its peak in 2011. However this super-resource town’s house price correction is providing investors with an opportunity to access the market at its plateau ahead of expected upward trending in 2014 as the population continues to grow and absorb current supply.
Part of the WA government’s ‘Pilbara Cities’ initiative, Karratha’s population is expected to increase from its current 18,000 to 50,000 by 2035. To support this increase, major investment into civil infrastructure is underway to redevelop and revitalise the town. A $65 million phase 1 city centre upgrade is now almost complete with $110 million phase 2 works to start next year.
Most significantly, Karratha remains the service centre for Chevron’s Gorgon LNG project – Australia’s largest ever single resource natural gas project, currently 75% complete and with total capex estimated at around $50 billion.
With the lifespan of Karratha’s other LNG project, Woodside’s Pluto (completed in 2012) estimated to be 40 years and Gorgon at least 40 years, these two projects alone will contribute to a constant demand for housing.
The Anketell port and strategic industrial area is another major project in the pipeline for Karratha which will further add to worker numbers. While there have been delays due to funding, the project was recently granted environmental approval and is critical to the development of three major Pilbara iron ore projects totaling $16 billion. These projects would bring in a combined construction workforce of 10,300 and operational workforce of 4,350.
For long term investors, a stable Karratha market with a more sustainable level of growth ahead of it is good news. Yields remain exceptional at 9 -10% for quality new builds cementing Karratha as a top positive property town.
Hedland in WA’s Pilbara region has undergone a price correction after a period of unsustainable growth. For investors, it now presents an excellent opportunity to secure quality new stock at low prices as the town’s new mega project – port and rail infrastructure for the $10 billion Roy Hill iron ore mine – ramps ups. During construction, the workforce will peak at 3,600 people while the operational phase will require more than 2,000 personnel.
BHP and FMG, the town’s two other major players, have also indicated that further port expansion works will be required as iron ore exports continue to rise from the world’s largest bulk commodity exports port.
South Hedland is the main residential area and has been undergoing a major transformation in recent years as, like Karratha, the government strives to transform the town into a ‘City of the North’, supporting a population of 50,000 by 2035 – up from around 20,000 today. The town has already undergone a huge city centre redevelopment with significant civil works still in the pipeline.
The town is delivering investors yields well above average at 10 – 11% and capital growth is expected in the near term as ongoing industrial growth and the town’s increasing livability will continue to put pressure on housing.
This Pilbara iron ore town hasn’t garnered the same attention as the other towns in the region due to its inaccessibility for investors – until recently, there had been no land releases for 40 years. Following recent releases and new development, investors now have an opportunity to access this tightly held market.
Tom Price is integral to Rio Tinto’s Pilbara iron ore operations, providing infrastructure and services to the company and its residentially based workforce.
The company’s newest mine, Hope Downs 4, has now become fully operational with the permanent workforce totaling 600, increasing pressure on the town’s role as Rio’s service centre.
Like all miners, Rio is in cost efficiency mode but is still pushing ahead with expansion plans to lift production to 360 million tonnes a year – an increase of more than 50% of its existing capacity. Currently, around $2 billion could be invested over five years, cementing demand for worker housing in Tom Price.
Despite the recent land release, housing supply remains very limited. According to a report by Regional Development Australia, Tom Price had a dwelling shortfall of 259 homes in 2012 and will require between 270 and 470 new homes by 2015 – well below current supply. The town has historically low vacancy rates and high percentage of renters – 86% of Tom Price residents rent their home, with a majority of those leased by mining companies providing housing for their staff.
This projected undersupply confirms Tom Price as an exciting investment opportunity.
Despite the market downturn, Moranbah remains the strongest positive property town in Queensland’s Bowen Basin with 20 operational mines within 80km of the town along with one of Australia’s largest CSG projects. Rental yields have weathered the decline stabilizing at around 8% and the town’s strong historical growth patterns are expected to be repeated as it reaches the end of its current cycle.
The major resource companies and government forge ahead with spending in excess of $13 billion and increasing the area’s current coal production from 100 million tonnes annually to a phenomenal 200 million tonnes per annum by 2020.
Three new coal projects are now under construction totaling more than $6 billion. The construction workforce numbers for these projects total more than 2,400 and operational workers will total more than 900.
A further three projects are undergoing expansion (total $1.25 billion) with expected construction and operational workforces of more than 1,000 and 300 respectively. And a massive 10 new projects worth $6 billion are in planning, indicating construction and operational workforces of more than 3,000 and 2,500 respectively.
The town’s growing workforce, and its limited land availability due to surrounding mining leases, is once again putting pressure on housing supply.
As these markets turn full cycle, investors are being presented with an opportune time to buy in low and maximise capital growth while benefitting from the ongoing positive cash flows that these towns consistently deliver.
Maximise your equity to build a portfolio quickly
There are many factors that can impact your buying power when investing in property. Being aware of them and understanding how they can drive or limit your strategy is the key to fast portfolio growth.
Utilise LMI to get started sooner. If you are just starting out on your property investment journey you will either use a saved deposit or equity in your home to make your first investment. First time investors shouldn’t delay their wealth creation by waiting until they have a 20% deposit to get started – it’s common to borrow 90% and take out Lenders Mortgage Insurance (required if your deposit is less than 20%) to get into the market as quickly as possible. LMI is an acceptable and tax deductable method to get your portfolio started and growing. When your portfolio has generated sufficient equity you can start to buy properties with a larger deposit – without requiring LMI.
Maximise your buying power. Each lender has different assessment criteria and your approved amount could differ significantly between lenders so shop around to make sure you are maximising your borrowing capacity and getting the best interest rate structure.
As you grow your portfolio, you will want to diversify your lenders. It can be tempting to stay with the one lender for simplicity but there is ultimately a limit as to what a single lender can offer. Using different lenders provides greater flexibility of products, reduces risk and provides more opportunity to further build your portfolio.
The best way to make sure you’re getting the best deal every time is to engage the services of an experienced mortgage broker – one that specialises in investment property. A good broker will know which lenders are likely to be more flexible with their borrowing capacities and will offer a variety of products from different lenders. Developing a long term partnership with a broker is a key element of a successful investment strategy and rapid portfolio growth.
Create instant equity. Look for opportunities in the market that will deliver instant equity within six months of settlement. Instant equity might come in the form of a house and land package, renovating a well-located but older unit, or adding an extension, such as a granny flat. If a property can deliver at least $50,000 equity through one of these means you will be very well positioned to purchase again within 12 months.
Unlock value. As a property’s value grows, the equity in the asset increases providing a source of funds to borrow against. ‘Unlocking’ this value allows investors to buy more property quickly without needing to save for a deposit. Maximising the equity in the property will increase your borrowing capacity and could even generate enough for you to invest in more than one property.
Agents will often provide free valuations to give you an idea of the market price and can also offer advice on how to improve a property and which areas you should focus on. However, lenders will do their own valuations and investors should be prepared for these to come in under what they believe the market value to be. Keeping the property well maintained and making aesthetic improvements will ensure you achieve the highest valuation possible.