Can You Rely Solely On RP Data To Assess A Property’s Value?
What’s the real risk in not inspecting a property yourself? Surely RP data is a good indication?
In this video you will learn;
- How investors can get into trouble
- Tips to avoid a mortgage investing disaster
- Plus much more….
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AR Mortgages Pty Ltd ACN 158 826 585 is holder of Australian Financial Services Licence 425073. This investment opportunity is open to wholesale or sophisticated investors only as defined under the Corporations Act 2001.
Watch the video and/or read the transcript below.
Question: What is a contributory mortgage?
Matthew: A contributory mortgage, that is a mortgage in which multiple
investors contribute the funds necessary, and they do so as
tenants in common. Let’s imagine that three or four people get
together and decide to buy a house together or a commercial
property together. They’ll be tenants in common according to the
amount that they invested. Each one will have shareholdings, if
you like, in that property. So when the property is sold,
they’ll get back on a pro rata basis the proceeds of sale. If
it’s a profit, on a pro rata basis they’ll share that profit. If
they actually lose some of their capital, then the capital
available to be returned will be returned on a pro rata basis to
what they put in.
It’s exactly the same with a mortgage investment. If a bunch of
investors contribute to a single mortgage investment, then they
share the highs and the lows according to the shareholdings that
they contributed. That’s a contributory mortgage.
Question: What’s the main benefit of investing in a contributory
Matthew: It would be a way of spreading risk. Banks actually do exactly
the same thing. So, if there’s let’s say a big 600 unit
apartment going up, 2 or 3 banks will get together jointly, as
tenants in common, and offer the funding. It means that no one
is exposed. But it also means, and this is probably the biggest
benefit, is that it goes through the strainer of the due
diligent processes of each of those three banks. If you’re
wanting to put together a consortium of banks, it’s much harder,
generally speaking, to satisfy everyone’s criteria, and you are
placed under greater scrutiny, because different people have
I’d say the same applies with contributory mortgages. If you’ve
got savvy investors and there are three or four of them, then
that borrower and the deal is going to undergo greater scrutiny.
Question: What are some way private investors have gotten themselves into
Matthew: Well, there’s a classic story. There were two private investors
who I accompanied on a trip down to Wollongong to inspect some
units that had to be sold. They had done second mortgages on
these units, two blocks of units. There were about 10 units in
each block. These guys had been doing second mortgages for
decades, and they had never lost a farthing. They had one rule,
and the rule was they never ever loaned unless they inspected
the property and spoke to the local real estate agents.
Every single time they did that, they told me and this has been my
experience, they never went wrong, because when you speak to the
local real estate agents, they will put you straight on the
value of that property. They know all the nuances of their
backyard. It’s their job to know, for example, if one side of
the street is better selling than the other. It’s their job to
even know the history of the various properties and what they’re
likely to go for. A valuer who flies in and values the property
and then flies out, he’s just going off what he’s read on RP
Data, and it’s nowhere near as reliable a source of information.
So we went down. As soon as we inspected the units, as soon as
we spoke to the real estate agents, these guys knew they’d done
their dough. I said, “How did it happen?” They said, “Well, we
were driving down, and we got as far as Campbelltown and we had
a flat tire.” One of the investors had loaned his car to his
son, and his son had flattened a tire and left the flat spare in
the back of the boot. They’re under a lot of pressure to settle,
and they never got to Wollongong, and they never got to inspect
the properties. They said, “Stuff it. We’ll just settle.”
They settled without inspecting the property. The one property
that they didn’t inspect turned out to be a real flea hole,
cracks in all the brick work, and it just wasn’t worth what the
valuer had said it was worth. He had used comparables of
fantastic units with bigger floor space, and instead of being
1950s red brick building, it was a 1980s beautiful building. So
he massively overvalued the property. Those valuers had gone
bankrupt, and there was no way they were going to be able to sue
to get their money back. If they had done their[dough, and they
almost laughed to each other about it, because it didn’t hurt
them that much. They’d made a lot of money over the years, and
they could afford to take the hit. But it reinforced in their
mind and in my mind that if you do not inspect the property,
then you can expect to lose your money.
Question: Any other instances?
Matthew: Again, it comes down to inspecting the property. There was one
house, which was loaned against, the valuer came back and he
said, “Oh, beautiful house. It looks fantastic.” He had photos
of the house, and the house had just been built. The fellow who
owned it was a builder, and he’d built the house himself. He
hadn’t gotten any of the tradesman’s certificates as he went
through. He had a DA, but he hadn’t gotten any of the
certificates as he went through. He’d done a shoddy job. Some of
the electrical work had been done by someone who wasn’t a
As a result, when we went on behalf of this investor to sell the
property, we were unable to sell it because it didn’t have an
occupation certificate, and the local council would only give an
occupation certificate if various remedial work was done,
including taking core samples and jack hammering up a slab. The
cost of those works were such that, by the time they were all
done, the occupation certificate was obtained and the property
was sold, they had about a 20% impairment on their capital.
Had they gone and inspected the property, they would have seen that
it hadn’t actually been 100% completed inside. Downstairs there
were rendered walls that hadn’t been painted, for example. There
were clear signs, when I inspected the property, that it had
only just been built, and yet the valuer chose not to mention
it. I suspect to this day that that valuer, getting paid $200
per site and he has to do 4 or 5 inspections a day, flew past,
had a look at the outside, and went off the RP Data figures and
didn’t actually go inside and inspect the property.
So almost every trap that you can get into can be solved by
inspecting the property.