What Happens If I Buy a Property For More than It's Worth? | Ep. 205

In this episode, we discuss what happens if you come to settle a property, and it is worth less than the purchase price?

This is most important for investors who have signed an unconditional contract to purchase a brand new property that is currently under construction.

If we do go through a period of economic downturn due to the Coronavirus, then there may be a situation where some investors come to settle a property (12 months after going unconditional), and the property is now worth less than the purchase price.

In this instance, you would still need to pay the agreed price, but the bank will only lend you 80% of the valuation of the property, which means you need to come up with a larger deposit, whether in cash or by leveraging off your own home.

Let’s look in the numbers:

• Let’s say you sign an unconditional agreement to purchase a property for $500,000
• But, the property has decreased in value by 5%, down to $475,000.
• In the first instance, the bank would lend you $400,000 against the new property, and you might leverage your own home to make up the $100,000 deposit to make it $500K.
• In the second instance, now that the value of the property has decreased to $475,000, at 80%, the bank will only lend $380,000 against the new property, so you’ll need to make up the extra $120,000. That will typically be leveraged against your own home if you have enough equity.

We also mention that we are holding a property investment webinar this coming Tuesday, 7th April @ 5 pm. We’re going to open up our analysis of 165,000 data points to see which parts of New Zealand are likely to see the deepest downturns and the speediest recoveries. You can sign up to the webinar here.