Mortgagee auctions put valuations in spotlight

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.

- © Fairfax NZ News