KEY POINTS:
Wouldn't it be great to have $2 million in mortgage-free property under your belt in 10 years without doing any more than signing your name?
That's the dream offered by some of the companies selling one-stop-shop packaged property investments.
Property marketers such as Blue Chip New Zealand and
other companies offer packages where investors buy a property with a 100 per cent mortgage, and then go on to manage the property on behalf of the investor.
In most cases investors have to make up a weekly or monthly shortfall between the rental returns and the mortgage and other costs of the property. Some companies use sleight of hand by getting the investor to borrow another 10 per cent of the value as "working capital", which is then drip fed in to make up any shortfall.
There's no lack of companies marketing the "speed wealth" dream. As well as Blue Chip, there are Investors Forum, Circle Group, Key2, Catalyst2, NZ Invest and many smaller outfits.
Some are "resellers" that simply buy properties in bulk from developers at a small discount and sell on at market price, taking their cut that way. Many charge an additional "finder's fee" or "brokerage".
Others such as Investors Forum are owned by property developers and have been set up as a marketing arm to find buyers for properties before they're built.
Not all of these companies work the same. Some have a partly packaged offering where they source properties, and sort out all the paperwork, but hand the property over to you to manage. Others offer the entire shebang including management and maybe even a rent guarantee that you'll be paid 52 weeks of the year whether or not there's a tenant in the property. Most of these companies steer you towards hand-picked lawyers, accountants and mortgage brokers for advice, but sometimes you can use your own.
Great for the investor if it works. But there is of course a catch. That is that it's hard enough to make ends meet on rental property in the current climate without having the profit creamed off by a middleman.
While new investors often love rental guarantees, especially when the rent seems to be higher than market rates, they usually end up paying for them because the price of the property may be jacked up to cover the company's costs. When the rent guarantee ends and the return drops, so can the value of the property. But in recent years investors have still made overall gains thanks to a rising property market, says property lawyer Tony Steindle of Steindle Williams Legal.
Sue Tierney, president of the Auckland Property Investors' Association, says packaged deals tend to appeal to new investors because the process is made easy for them.
"If your motivation is making property investment easy then it works. If it is buying bargains and getting capital growth and good yields I would question it."
Seasoned property investors prefer to make their money by buying property below valuation and making an instant capital gain. Tierney says packaged property investors often go on to meet more experienced investors and get the confidence to buy more property on their own.
"Anyone who has had a lot of investor education, has read the books or is an Apia member isn't likely to go for a packaged product because they have realised how easy it really is to do it for themselves. It is not hard to get your own accountant and solicitor and find a property."
Warning bells should ring when a property reseller or whatever they want to call themselves offers clients the use of in-house or recommended mortgage brokers, valuers, lawyers and accountants.
No one should ever buy a property without getting their own valuation. Resellers can and do shop around to get the highest valuations possible, says Steindle.
"There is a tendency for the prices to be a little bit inflated."
That's exactly what a potential investor in a Blue Chip property found out when he started shopping around. The investor, a beginner, posted the details of an offer from Blue Chip on the website PropertyTalk.com. The house on offer in the South Auckland suburb of Dannemora was priced at $550,000. Meanwhile an identical neighbouring property was on the market for $535,000.
What's more, says Williams, while professionals such as lawyers should be independent they're not going to bite the hand that feeds them if they're having a large amount of business pushed their way by a reseller.
Although the resellers tell their clients that they're getting a cheap conveyancing deal thanks to economies of scale, this isn't always the case. Steindle knows of one Auckland-based lawyer who works on behalf of a reseller and charges $1500 for conveyancing. Steindle would charge $850 for the same job, and discount conveyancers about $500, that's all plus GST.
Many resellers focus on the suggestion that they're in business to help investors get rich, when the reality is that their primary motivation is to sell property and any financial analysis they do is usually with the intention of making a sale.
Tierney adds that new investors shouldn't accept deals where they are asked to sign up on the spot. "Apia would be concerned for them if they did," she says.
Steindle says investors ought to be very wary of contracts received from reseller companies, which were often weighted against them.
He knows, because he acts for some of them.
"I have said to my developer clients that there is no way I would want investor clients to sign their contracts."
Some contracts, says Steindle: * Allow for the dimensions of the property to be changed, including making them smaller than the investor expected.* Have provisions saying buyers can only rely on what is included in the contract - whereas many believe what they see in glossy brochures.* Give the developer ability to add restrictions and easements, such as a developer who used the clause to change body corporate rules so that the apartment could only be used as a hotel room - thus making it more difficult for the investor to resell.
Financial planner Robert Oddy of International Financial Planners said one young woman came to him with a deal from Blue Chip that she'd signed before becoming one of his clients. "The contract was onerous and oppressive."
Despite the warnings, it has to be said that there are plenty of happy customers of these companies, say Steindle and others.
Mark Trainor has bought four packaged properties from Auckland-based Wealth Buy Property and a number independently.
He says if he had his time over he'd still buy the packaged properties.
In each case the mortgages were organised by Easy Start, an associated company to Wealth Buy Property, and the properties had a 10-year rental guarantee.
Trainor says he paid 3.5 per cent of the purchase price as a "finder's fee" to Wealth Buy Property, which "was not a disincentive" because he was saved the legwork of looking for his own properties.
But in terms of cash flow, the packaged properties do not stack up as well as his other properties, being negatively geared.
