The Auckland home that lost $100,000 in 20 years

Some houses might look like a bargain on the surface, but come with a warning for buyers to take care. Photo / NZME

By Susan Edmunds of RNZ

You might think if you bought a house in Auckland 20 years ago and sold it this year, you would be guaranteed to make money.

But in a couple of recent sales, owners have lost money – and more than $100,000 in one case.

The reason? They were leasehold properties.

These are the kind of properties that often capture first-home buyers’ attention, because they stand out among “for sale” listings due to their prices.

A one-bedroom waterfront apartment in Auckland, for example, is listed at the moment for less than $100,000. Or a three-bedroom home in Kohimarama with an asking price of $355,000.

One property in Papanui, Christchurch, sold last week for $100,000 with a CV of $580,000.

But while they might look like a bargain on the surface, there is a warning to buyers to take particular care.

When a property is leasehold, it usually means that the land under it does not come as part of the purchase. You’re only buying the building, or part of it in the case of an apartment, and the right to put it on the land, for a fee.

The ground rent can run into tens of thousands of dollars a year and it usually increases in regular intervals, which can reduce the value of the property.

Ed McKnight, economist at Opes Partners, pointed to one property in Kohimarama, which sold for $320,000 earlier this year with a CV of $1.425 million.

He said it had previously been bought for $330,000, so the value of the property had dropped by $10,000 over 19 years, while the wider Auckland area recorded an increase in sales price of almost 250%.

Another property in Parnell sold for $87,000 last week with a CV of $970,000.

“It was previously bought for $205,235 back in June 2000. So over 24 years the property has gone down in value by 58%. Over the same period property values in Parnell have gone up by 335%.

“The property sold 91% below CV. But that’s not a sign that the property was a good deal.”

NZ Property Investors Federation spokesperson Matt Ball said leasehold properties could sometimes work for an investor.

“We do have members across the country who have leasehold properties as investments or rentals. The trick with this type of property is to pay close attention to the conditions of the lease and to be sure the numbers add up.

“For example, be aware of how frequently the ground rent is up for review and how much it could increase by, as this could significantly impact on the financial viability of your investment. With due care, a leasehold property can be a good investment.

Auckland Property Investors Association spokesperson Sarina Gibbon said it would be important that buyers had good legal and investment advice.

But McKnight said the ground rent could be “extraordinarily high”, which made purchasing tough for investors as well as owner-occupiers.

“The issue with this is that the ground rent increases at the rate of land inflation, while the rental income increases at the rate of rental inflation.

“So your rental income might increase at 4.5%, whereas the ground rent might increase by 7% per year. Over time this can severely erode the rental return.”

He said fewer than 1% of the properties sold in the last 12 months were leasehold.

“On top of this, sometimes the land and the house will transact at different times, which can skew the data. Because it can make it look like the same property is being bought and sold at wildly different prices.”

-RNZ