In my in-box today* from the UK-based property spruiker hawking Memphis distressed real estate … a chance to buy mortgage bonds … at 40% discount! Oh boy!
I wonder if this is how they offer “amazing finance packages” (no-questions-asked??) to the offshore suckers … sorry, investors buying up Memphis distressed real estate … um, er, ‘bargains’?
Wow! A 40% discount! (Puh-leeze) I love that last line: 'You won't find these investments anywhere else.' (Investments. Yeah, right. Oh dear.)
The more I read about these offers the more I think Neil Jenman is probably right:
AMERICAN WARNING
A deadly trap for Aussie investors.
by Neil JenmanHere’s a confident prediction: Hundreds (probably thousands) of Australian investors are going to lose millions of dollars in the American property market.
Right now, it seems to be all the rage, the latest fad. Buy real estate in the United States. It’s easy. Prices for American homes are so low and our dollar is so high that an investment in ‘the home of the brave and the land of the free’ seems like a really good idea.
Unfortunately, it’s not a good idea. For the average mum-and-dad Australian investor, buying real estate in America is a very bad idea. Never mind what the Aussie spruikers tell you, never mind how good it sounds, it really is too good to be true. …
Why would you think they are looking offshore for ‘investors’ to fund mortgage bonds at a 40% discount? Can’t they sell them in the USA at that bargain price?
Could that ‘discount’ indicate something about the reliability of the so-called valuations (appraisals) of the properties for sale breathlessly proffered in the promotional materials? e.g. “Buy at 60% or 70% of valuation — that’s a very very ordinary deal”. Look …
An example of a local spruiker's supposed 'very very ordinary deal'. Note the projected 'Purchase Price' of $50k as a proportion of the 'Valuation' of $80k = 63%. Wonderful. (But hang on, what effect could a bunch of sales at that discount have on values?)
Hmm. And then consider the issues enforcing mortgage defaults, for instance — from another country.
Good grief. It may not be a scam, but my antennae are twitching.
* I have never requested information from these spruikers by the way. I do not know how they got my address to SPAM me this way … but it’s an interesting coincidence.
– P
And if you buy in the next 2 minutes receive a free set of Ginzu steak knives. No mention of any repairs and maintenance, deferred maintenance/improvement costs, insurance, city taxes (high in the US as they fund hospitals, police as well). I have a friend working as an attorney in the US who said Memphis have a massive issue with over supply of houses. He didn’t know how much but other cities have over 20 year over-supply such was the ease of obtaining finance. If you’re lucky the property might not be in a flood plain too.
Lets not forget US accounting and taxation compliance fees, and the potential for the accrual rules in the Income Tax 2007 to come into play here in NZ too.
I am all in for some diversification and don’t think it is smart to have absolutely everything in property (shares, FX etc), but what is so wrong with investing in New Zealand cities and not getting sidetracked?
Hi David,
The local spruiker’s spreadsheet actually DOES record some of those expense categories you mention:
I can make out … “Property Management 900. Vacancy 900, Maintenance 500, Taxes (rates) 720, Insurance 480” (all USD)
Can’t you?
How ‘realistic’ those figures are, I don’t know … but if the Valuation is $80k, and Purchase Price is $50k … on a ‘very ordinary’ deal, well, I wonder…
As for the oversupply … that’s interesting. No such thing as a free lunch? Is that what you’re suggesting? – P
PS: Chuckle:
Thanks for noting those various costs are in fact clearly included Peter.
Thankfully Tennessee’s new build moratorium has meant no surplus of housing in that state.
As long as you are in a good state tax wise the costs of ownership are pretty identical to New Zealand.
Valuations is tricky. Like you I can’t believe the UK guy selling bonds. Scarier still is that his “valuations” will probably be from when the loans were taken out pre GFC.
For example if you got a 200K mortgage, 100% lending, then the “value” of that mortgage bond is 200K.
The house would sell in foreclosure for 40K currently so they can be heavily discounted, the investor being the loser after the bank.
Always get a CURRENT valuation on any property you are buying in USA. As you have used one of my examples above the 80K valuation has been done Jan 2011, includes an inspection and comps and ignores the 2005 sale price which might have been 120 or even 150K.
“Always get a CURRENT valuation on any property you are buying in USA.”
Good advice … USA or anywhere, huh?
Glad to hear you’re equally sceptical about the ‘mortgage bonds’ offer.
I guess it would be illegal to sell those (they’re securities, surely?) in NZ without a registered prospectus etc ?? …. I don’t know about Singapore, Malaysia … I can imagine a roadshow being set up to hawk such things through ‘seminars’ there.
-P