In an 'uncomfortable' situation, Help!

Hi, as my name suggests I am a novice Property investor and have got myself in an 'uncomfortable' situation.

In Dec 2006 I was convinced into buying an off-the-plan unit by an "agent":
- In Cairns North, 2 Bed appt (has water views) in a large complex (>90 units)
- rental g'tee 2 years @ 5.2%
- Price 429K

Finally settlement time has come and 3 banks have valued it at 400K (best possible val). So to settle I have to fork out 85K from my pocket!
Have managed to scrape this together (borrow 25K from family), and 60K from equity in my home (which is getting dangerously high because I had already taken out some large amounts to put into shares before the GFC occured). I believe the complex has already had some 'fire' sales.
So you get the picture....

Cairns North seems like a $hit place to invest today (was better 3 years ago I guess). Luckily have managed to get a tenant ready for day 1, and monthly Interest minus Rent will be < $300 which I can easily manage.

What would all the experts on this forum (and there are plenty!) suggest I do?
- Nothing (because I can still manage to service the IP loan and my home equity loan and feed myself)

- Try to sell it off in another 6 or 12 or 18 months? (because (a). it's in Cairns and (b). I am uncomfortable with such a large equity access loan drawn against my home)

- Refinance this unit in 6 or 12 months? (as a friend suggested)

Thank you in advance!

I too am interested in the respsonses this thread gets as I am also a novice.

My personal advise, use it as a learning curve and make sure you do not put yourself in the same position again. As far as technical advice, im really not qualified to comment.

My instinct says to keep it if you can afford it.

Cheers

Mick

Do you know what the strata/body corp fees will be?

my instinct says you should have done your homework a little better!

still, if you can afford to hold it for a few years, then why would you crystallise your loss by selling now?

take it as a learning curve - you never know, in 5 years' time it may be the jewel in your crown.

noviceInvestor said:

. Luckily have managed to get a tenant ready for day 1, and monthly Interest minus Rent will be < $300 which I can easily manage.

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Any other outgoings? (Body Corp/Strata/Management)

The Y-man

What happens if you tell the banks you can't come up with the money, will the deal fall through? It kind of puts the blame on the bank since they should have valued it before giving you the funds...

I'd be calling the agent and telling him you don't have the finance and can't get it, because valuation has cone way below sale price - ask him to explain it!

I signed a contract to purcbase a house and land package subject to bank finance/valuation.. Contract price was 366k, bank Val came in 27k lower and I agreed with the banks, so I pulled the pin and didn't have any problems in doing so, I just lost my deposit money of 1k which was no biggie.

What is the deposit you paid on the property?

So far all the responses have come from interstate, so here is a little "local" knowledge.

Cairns is heavily tourist dependent. It acts as a hub for several major tourist areas such as the Daintree/Cape Tribulation, Atherton Tablelands and of course the Great Barrier Reef.

Cairns has been heavily hit by the GFC and the downturn in tourist numbers, particularly the high-spending overseas tourists. This may not improve soon due to the high Aussie $$$. Last figure I heard on the radio for the unemployment rate was around 12%. Flights from overseas have been curtailed. I believe that flights from Japan have been discontinued and Japanese flights go directly to Sydney (but that may have been a rumour).

Like many areas dependent on one major industry, Cairns is a bit more subject to booms and busts.

Don't be too hard on yourself, noviceinvestor, when you invested 3 years ago Cairns was expanding rapidly. But this is one of the downsides of OFP investing - if things go well the property can be worth much more than you paid when you come to settle. Unfortunately the opposite can also be true. The bank can't really help you there, they can't do the valuation until the property is completed.

Where to go from here? That is entirely dependent on your judgment as to how Cairns will perform in the future as opposed to where you would invest your money should you decide to bail out.
Marg

Everyone thanks for your comments. I really appreciate this forum and its members!

Here are the answers:

Deposit + Shortfall to cover bank's low valuation + stamp duty + legals = 85K

Ongoing Yearly costs:
Council rates + Body Corp Insurance + Administration Levy + Sinking Fund + Land Tax
TOTAL = $3610 per year

Contracts were exchanged 3 years ago. Banks have already done their valuations (all major 4 of them) - and I have accepted one loan offer. Settlement is next week.

Can someone please tell me how much would I need to sell this at so that I break even?

Thanks once again!

noviceInvestor said:

and I have accepted one loan offer. Settlement is next week.

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There's your problem - if you didn't accept an offer because you couldn't make that $85k, you could have got out of the finance clause. Most people wouldn't have scraped and begged relatives, they would just just given it away.

yes but it is unlikely he would be 3 years into an OTP contract and still subject to finance. I would hazard a guess it was a cash unconditional offer, as most OTP contracts are

There have been quite a few court cases fought in Queensland over people wanting to get out of OTP contracts when values decrease. Mostly they have been obliged to complete the contract.
Marg

marg4000 said:

Cairns has been heavily hit by the GFC and the downturn in tourist numbers, particularly the high-spending overseas tourists. This may not improve soon due to the high Aussie $$$. Last figure I heard on the radio for the unemployment rate was around 12%. Flights from overseas have been curtailed. I believe that flights from Japan have been discontinued and Japanese flights go directly to Sydney (but that may have been a rumour).

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That's something to think about eh?

The high Aussie dollar has hit Cairns twice. It's more expensive for overseas tourists to come to Australia, so they stay at home. And it's cheaper for Aussies to go overseas, so they go overseas instead of local. It means an overall reduction in tourist numbers.


See ya's.

a perfect example that comes immediately to mind is the docklands development in melbourne. when it orginally started to come online, values dropped dramatically and i recall a lot of purchasers getting caught having to settle for more than the property was worth and being force to sell at massive losses. i remember seeing a few go bankrupt in the process.

also happened in sydney more recently in south sydney (can't recall the suburb) when several very large development complexes came online at the same time.

bet they wished now that they'd been able to hang on.

what you will find in cairns is that the big builders will stop building, the market will stall for a few years until demand catchs up with supply, demand will overtake supply because no one has been building, builders will begin to start new projects but product won't be finished for 2-3 years, prices will increase for that 2-3 gap period, market will then be swamped with new product, repeat cycle.

I'm with Blue Card.

Hold on to it if you can afford to. Time cures all wounds.

Take it as a good learning process and keep moving forward. Switching costs are too high to consider crystalizing your losses and exiting for no other reason than you feel bad that you paid too much.

Cheers,
Michael

Definitely a hold proposition - if only to get out of the period when there are people "fire selling" because they are unable to settle.

Heck, maybe if you can afford it, you should go in and make some killer offers on the fire sale ones, so you can "average down" (lower the average cost of your purchase) Never know, you might end up with 3 for the price of 2

Cheers,

The Y-man

Ausprop said:

yes but it is unlikely he would be 3 years into an OTP contract and still subject to finance. I would hazard a guess it was a cash unconditional offer, as most OTP contracts are

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I agree Ausprop.
The financier would normally require all OTP contracts to be unconditional, giving them confidence to fund the project. They would probably also require ongoing sales to be obtained during the construction period to satisfy their required debt coverage ratio, in line with construction fund drawdowns.

noviceInvestor, unfortunately, you may find that should you walk away from the contract, the developer may keep your deposit, and then proceed to sue you for the difference of the contract price you paid and the eventual sale price (if it is lower)

Boods

Didn't know you were stuck with em if the value went down, but that explains a lot of what I've heard.

And people wonder why OTP apartments (especially on the gold coast or just in some other state to the buyer) keep coming up as a 'what not to buy' ...

True, RumpledElf, but it can also work the other way.

In a rising market there are stories of people settling on properties bought OTP and making immediate gains of over $100K. In a previous boom OTP properties on the Gold Coast were changing hands up to 7 times before completion.

In OTP, timing is everything.
Marg