March 13, 2016

Boom, Bust and Bankruptcy – the consequences of doomed property investments

Imagine this: it is 2009 and you are in your mid-20s. You have purchased your own home having diligently paid the mortgage since you saved your first home deposit. You have done well to have half the mortgage paid off and things are looking bright for the future.

One day you see an advertisement for a property investment seminar. It looks like a great opportunity. Just look at how successful the owner of the website states they are. Like a moth to a candle you are rushing to hand over $7,000 to hear how this person has acquired all this property wealth without a deposit or toiling away at a real job like the rest of Australia. You walk out of the seminar full of vigour and enthusiasm to put all that knowledge into practice. With the help of the ‘independent advisers’ and ‘example investors’ pushed out on stage at the seminar, you launch into the heady world of property investment. What an adventure lies ahead.

Three wonderful years have passed and you have become a property mogul. Rental income is over $500,000 per year and you have amassed an $8 million property portfolio, all by the time you are 24 and without having to save a cent of a deposit. What a wonderful inspiration was the property investment spruiker of the ‘buy up big’ property investment seminar you attended. Thirteen out of sixteen investment properties are all located in the one place, where the mines cannot get enough housing stock for all the workers flooding into Central Queensland. Rents are soaring and capital increases shine out like a beacon to the ‘greed is good’ brigade and the poor punters in the southern states looking to quit their jobs and live out their lives on the investments they have made. Time moves on, you have quit your job to live on rental income, the GFC is behind you, mining is booming in Australia and you bask in the glow of being awarded Property Investor of the Year.

Soon it is 2012, the world is changing and China does not need all of the coal being produced. The mines are being put into care and maintenance mode or closed down. Mass redundancies are happening. No mines = no workers = no demand for rental property. Suddenly there is no income and there is a $5.8m debt to be serviced and ultimately a $3.6m unsecured debt shortfall left outstanding to the banks. There is only one way for this story to end………. Bankruptcy.

This is the sorry tale recently reported in the media about one young Australian couple, who were named Young Investors of the Year for engaging in this highly speculative and ultimately disastrous investment strategy. Amazingly, five of the industry experts that awarded the prize described the couple as “some of the country’s most shrewd investors” and “property powerhouses who are showing the rest of Australia how it’s done”.

An article at the time of the award stated “The young couple wowed our judges with their awe-inspiring ability to get together property finance, even in times when they’ve been without savings or equity.”

By 2012, properties once valued at a median of $750,000 were only worth $180,000 as the mining boom started waning. In three short years this couple have ended up with a portfolio worth $2.2m that was once valued at $8m. They owe the banks $5.8m and have no way to meet the shortfall. Bankruptcy is inevitable, be it forced on them or they file voluntarily.

So who is to blame? The young naïve couple? The banks? The property investment spruikers? All of them? The banks are sophisticated, highly regulated lenders and will take appropriate advice for the loans they are presented with and lend according to strict covenants and security. Blame cannot be attributed to them. Ultimately, investors need to take responsibility for themselves and the investment decisions they make. All too often we see the ‘head in the sand mentality’ of debtors and bankrupts who refuse to deal with their situations or take proper advice. But what of the property investment spruikers? Who are they? What is their financial background? Where do they make their money? Who regulates them? Who holds them to account? I would speculate that they do not make their money from property investment, rather they make it buy selling outrageously expensive seminars and investment courses to unsuspecting and vulnerable Australians.

So what did our couple do? They attended a $7,000 seminar on how to invest in mining towns. They got caught up in the fervour and spent another $4,000 for a half day workshop. And to top it off they spent another $30,000 to be mentored by the same property investment spruiker. Reports also say that commissions and kickbacks were being paid to the ‘independent advisers’ to induce more investment and the couple were paraded on stage at the seminars as inspirations to all the potential new investors.

Two years ago I presented to a group of the same disgruntled insolvent investors at a western Sydney RSL club. Many of those investors were desperate and clinging to the hope of the mines reopening. Few of those faced reality and sought professional insolvency advice. Many of those are now bankrupt.

Investors need to follow the cardinal rules of investment: diversify their investments, take precautions for the inevitable market corrections, invest in a long term strategy and get proper financial advice from professional regulated advisers and practitioners.
SV Partners trustees are seeing an increasing number of these stories, be it as a result of property investment seminars or other managed investment schemes where we are being sought out by the banks, and other secured lenders to deal with investors’ unmanageable debts and the inevitable shortfall owned to the lender. 

If investors are in this situation, they need to seek out SV Partners professional insolvency advice early. There are options but leaving it too late, will only see the lenders inevitably calling us in to deal with the debt in a formal capacity. Please call 1800 246 801 if you would like to speak to our expert advisors.

Article written by Jason Porter, Director, New South Wales.

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