I’ve written a lot about why to avoid buying into new inner CBD high rise apartment buildings but recently a leading debt recovery lawyer put a different spin on things.
Roger Mendelson has 37 years’ experience as a debt collector, and runs one of Australia’s largest debt collection agencies, Prushka, urged caution about buying into apartment buildings where most owners are overseas residents.
His advice is relevant whether you are thinking of buying in an apartment complex for investment or as an owner-occupier. He told ABC News:
“If the mix of investors is high, whether they’re overseas or not, like over 50 per cent, then that should ring alarm bells
If there’s a significant percentage of overseas owners, basically don’t touch it, I think that the risk element is just far too high.”
Avoid Investor Locations
I’ve often warned against buying in areas or buildings dominated by investors, it’s owner occupiers (who buy with their hearts more than their calculators) who push up property values.
Similarly locations or properties dominated by investors have the risk that as interest rates rise or sentiment turns (as it has in mining towns) they are more likely to sell en masse, lowering property values in that area.
However, Mr Mendelson’s warning on foreign investors goes further, based on the difficulty of chasing overseas residents if they fail to pay their strata or owners’ corporation fees for the building’s upkeep.
“The owners corporations could well run out of cash, and then you can see a scenario emerging where they can’t maintain the building to the standards required,”
That could start a real slippery slide of other owners bailing out and a larger number of the units being on the market and prices then tumbling.”
Mr Mendelson said that, in his decades of experience, it is very hard to collect debts from people resident overseas.
“The most logical step to take if the debt has accrued to over $5,000 is bankruptcy, but you can only proceed with bankruptcy if you can personally serve the owner, and if the owner is overseas this may well prove impossible to do,”
The risk is real
Mr Mendelson said the risk of foreign buyers not keeping up payments is real, especially in areas where apartment values may already be falling, potentially leaving investors who have borrowed money to purchase in negative equity – owing more money to the bank than the property is worth.
Such investors have no incentive to keep up any of their payments on the property as the bank already effectively holds all the equity in it.
In these circumstances, Mr Mendelson warned that Australia’s property market may function more like the United States, where owners who can not keep up with repayments simply hand back the keys.
This could result in a much greater risk of loss for any banks that do lend to foreign residents to buy real estate, as it is often more expensive to chase the debts overseas than to just take the loss after selling the property.
“It’s a torturous process for the banks, I think normally they wouldn’t bother, I would expect banks to just absorb the loss and move on,”
SUBSCRIBE & DON'T MISS A SINGLE EPISODE OF MICHAEL YARDNEY'S PODCAST
Hear Michael & a select panel of guest experts discuss property investment, success & money related topics. Subscribe now, whether you're on an Apple or Android handset.
PREFER TO SUBSCRIBE VIA EMAIL?
Join Michael Yardney's inner circle of daily subscribers and get into the head of Australia's best property investment advisor and a wide team of leading property researchers and commentators.