Jacking up prices is rife at the moment

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Good Returns is hearing that a real-estate-based get-rich-quick scheme known as "hydraulicing" is rife at the moment.

Monday, November 26th 2001, 4:41PM

by Jenny Ruth

While there are a number of ways of achieving it, the basic idea is to hoodwink a bank into lending 100% or more of the purchase price of a residential property, often by way of back-to-back sales to seemingly unrelated third parties.

But before any reader decides to try it, beware. The practice is almost always fraudulent.

Serious Fraud Office director David Bradshaw says a third or more of his organisation’s current investigations involve permutations of the practice. A recent conviction the office obtained in Hamilton resulted in a three-year jail sentence, which is now being appealed.

"There’s a group of people who are taking advantage of this scheme to basically get loans on property that exceed the value of the property," Bradshaw says.

Often, but not always, the practice is facilitated by valuations way above the reasonable market valuations. But determining when hydraulicing has occurred isn’t as simply as identifying a valuation that’s higher than reasonable.

"We have trouble with valuations because it’s a less than precise science," Bradshaw says.

In a case involving a variation of the practice relating to Fletcher homes in Palmerston North a few years ago the High Court suggested a margin for error of between 15% and 20% on either side of the true market value isn’t too bade.

Bradshaw says professional valuers say the margin should be more like 5%, but even so, "it’s an area that’s difficult to pin down."

Instead, his office will check to see whether a valuer has done the job properly.

In a recent Christchurch case in which a valuer pleaded guilty, it wasn’t to a fraudulent valuation per se, but to relying on information supplied by the client rather than finding the information independently.

There are cases where banks are quite happy to lend on apparent cases of hyraulicing. For example, a person might buy a house in a mortgagee sale at well below the market price and then onsell it to another buyer. But the difference in that case is the bank lending to the second purchaser is aware of the situation and that the second purchase price is at fair market value.

"The ones which concern us are the ones where a third party is deliberately inserted into a transaction simply to raise the price," Bradshaw says. "Sometimes the third parties aren’t even real."

The sad side of the practice is that it very often involves people from lower socioeconomic groups who struggle to find the deposit for a house.

Promoters will hold out to them the promise of being able to buy a house without a deposit. The promoters aren’t around when the buyers discover they can’t afford the mortgage.

Another variation, seen in the Hamilton case, involves hoodwinking low income people into signing over their freehold homes to support the practice.

A few years down the track these people find the banks foreclosing and their credit ratings ruined, Bradshaw says.

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