Repossession is essentially when a mortgage lender takes possession of a property after a borrower defaults (i.e. misses payments).
In property circles, acquiring repossessed houses is often equated to automatically picking up ‘bargains’.
Whilst there may be an element of truth in this, it certainly doesn’t mean that you should overlook the investment credentials and assess the associated risks.
Buying Houses Pre-Repossession
Acquiring a property prior to the point at which a mortgage lender takes possession is a common strategy adopted by ‘quick house sale’ companies like our own (Property Solvers).
Vendors facing the prospect of repossession come to us via our direct marketing efforts in search of a potential solution to what can be a complex predicament.
Yet, sadly, there have been a handful of firms in our space that have been known to take advantage of people in such distressed situations.
As a result, observers often see this as a predatory investment strategy to acquire below market value housing stock from vulnerable sellers.
For this reason, and to demonstrate that this is far from the truth, it’s worth clarifying how we handle these kinds of cases…
The Property Solvers Approach
The reality is that any of us could fall into a default situation.
It’s grossly unfair to simply propose a below market value (BMV) purchase when a number of other options are often available.
Bodies such as the Property Ombudsman and Trading Standards (with who we are registered with) are also scrutinising this marketplace more than ever.
Although they are not as effective as the likes of the Financial Conduct Authority (FCA) from a regulatory standpoint, these days the sell house fast industry is increasingly being held accountable for its actions.
Pre-Repossession – Establishing the Facts
Appreciating the uniquely stressful time for vendors, we start our conversation with an impartial and no-obligation discussion.
Today, even in an environment of historically low interest rates, the risks of falling into mortgage default remain.
For example, homeowners may have accumulated significant unsecured debts which can sometimes compromise their ability to keep up with their mortgage obligations.
They may have also other secured or other financial burdens that are making their net liabilities stretch beyond their means.
During these initial conversations, we often find that there’s a very simple solution.
Property Solvers often refer people to organisations like Citizens Advice, Shelter, National Debtline and the Debt Advice Foundation. Whilst often under-resourced, they are accustomed to dealing with these types of issues every day and can often provide workable solutions.
Furthermore, modern legislation protects vendors facing this situation and the law these days genuinely works in the favour – much more than was previously the case.
Below we have summarised the advice we typically give to homeowners, based on how many months arrears have accumulated. For more detailed information, please check the contents of the Property Solvers stop repossession guide.
1-2 Months Mortgage Arrears
If the homeowner is one or two months in arrears, it’s usually a case of keeping in regular touch with the mortgage lender and coming to a mutually agreeable payment plan.
These rules essentially mean that the lender has a legal obligation to treat homeowners in arrears fairly and discuss any financial situation in an honest manner. Borrowers must also be given a sufficient amount of time for any arrears to be cleared.
In other words, whilst homeowners facing the prospect of repossession certainly shouldn’t ‘bury their heads in the sand’, lenders cannot take a draconian approach.
House repossession is a last resort and must not be initiated unless all other reasonable attempts to resolve the situation have failed.
We go on to suggest that the homeowner calculates how much they can realistically afford to pay (both with regards to the arrears and the ongoing mortgage payments).
They can then make this proposal to the lender who must respond without placing any undue pressure.
The pre-action protocol rules also underline that mortgage companies cannot initiate repossession proceedings where…
The borrower can demonstrate how any arrears can be cleared over a specific timeframe whilst keeping up with ongoing mortgage payments. This proof can be through payslips, evidence of savings or borrowing from friends / family for example;
The borrower has a Support for Mortgage Interest (SMI) application in process;
There is a legitimate insurance claim under a mortgage payment protection policy underway. These policies usually cover borrowers in the event of unemployment or sickness;
Financial assistance, known as ‘Preventing Repossessions Funds’, is being sought. Some councils also offer ‘Homelessness Prevention Schemes’;
The borrower has made a claim to the Department for Work and Pensions (DWP) for income support, income-based Job Seeker’s Allowance (JSA), pension credits (available for the over 60s), tax credits, Universal Credit and/or income-related Employment and Support Allowance (ESA);
Instead of selling, the borrower wants to rent out the property. In this scenario, the income will be used to cover the cost of the mortgage (and the arrears will be cleared);
The borrower is contracting an Independent Financial Advisor (IFA) who will liaise with the lender and the court to resolve the situation;
A complaint has been made to the Financial Ombudsman Service (FOS) about how the lender has been dealing with the arrears. The lender is obliged to hold back on any intention to repossess until the matter is dealt with sufficiently;
The property is being sold at a price that will clear the entire mortgage debt, arrears and associated selling costs.
2-3 Months Mortgage Arrears
Once the 2-month mortgage arrears point arrives, things tend to get more serious. However, stopping repossession without homeowners losing their homes is entirely possible…
Lenders tend to think the worse on borrowers who are avoiding them.
A certain amount of leeway is allowed but if a borrower continues to delay things or makes false promises, then further action may be taken by the lender’s legal department.
This will go beyond the standard warning letters and usually results in summoning to attend court.
If the situation has escalated to this point, we always underline the fact there is still time (usually between three and eight weeks) to turn things around.
Typically, we would also advise the following:
If the client has a court date, we stress that honesty is the best policy – as is remaining calm. Even in what may seem like a critically bad situation, the law is there to protect borrowers;
As long as the borrower has acted responsibly, kept in touch with the lender, explored all the options to clear the mortgage and made realistic proposals, the judge will be on his/her side;
Homeowners should complete the N11M defence form which enables them to explain their own personal and financial circumstances. Any attempts to pay the arrears can also be outlined;
If repossession is looking more imminent, we often suggest that the borrower also fills in the N244 County Court form. This can help to stop or at least postpone an eviction order;
A token payment (however small) is often a good idea as it demonstrates a clear will to prevent the worse from happening;
We remind people that they may have access to Legal Aid via the Housing Possession Court Duty Schemes (HPCDS). Note this assistance is only available in England;
If the homeowner simply wants to sell up, we will formulate a solution based on how much time is available;
If time is of the essence and the judge has granted repossession, we discuss our quick cash sale option (where we can exchange contracts in as little as 24 hours and complete within the following 7 days). This usually occurs after 2 or 3 hearings and the homeowner has not been proactive, breached a suspended warrant for possession or is not in a position to pay off the arrears;
In most cases, the borrower can buy a sufficient amount of time to sell the property on the open market (through our express sale service, for example).
Buying Houses Post-Repossession
Once a property has been repossessed, the owner relinquishes all rights and it is now up to the lender to dispose of the property.
Their priority will be to recoup the total amount of the loan by selling the property as quickly as possible.
Any shortfall may then be due by the borrower, who will also be liable for associated legal and court costs alongside the estate agency or auction fees incurred by the lender.
It is therefore in the lender’s best interest to get the best price possible from the sale. At the same time, they need to price it competitively to attract interest.
If a borrower has further secured debt against the property (and it is being sold with little or negative equity), the lender will subsequently chase what’s owed once it’s sold.
Where to Find Repossessed Property
A common misunderstanding is to think a repossessed property is a good deal simply by virtue of the fact that it has now reverted back to the lender.
Whilst there are certainly opportunities, it’s imperative to engage in the same detailed level of due diligence as for any other investment. We would strongly suggest assessing what works would be required (see our previous post on property refurbishment).
Lenders are required to sell repossessed property on the open market for the best price possible – typically through reputable estate agencies and auction houses.
Most will therefore appear on the main portals like Rightmove and Zoopla. Look out for listings with only a handful of photos, poor descriptions and a general feeling that the property is not being lived in.
Estate agents and auction house representatives usually also divulge that the property has been repossessed.
Be wary of deal packagers who claim to have a direct connection with lenders to source repossessed properties. Lenders rarely use this approach to sell this type of stock.
Buying a Repossessed Property
If the property is advertised through an estate agent, the process is slightly different from a normal sale.
Once an offer has been received and accepted by the lender, the agent must insert a ‘Notice of Offer’ on the listing. Other prospective buyers can then bid above this level for a set period of time (usually 7 to 14 days).
Yet, even once the offer has been accepted and the notice removed, the lender still does not need to commit to the sale. This means that, even after paying out conveyancing fees, surveys and associated costs, if another buyer offers a higher figure, you’ll more than likely lose out on the deal. In other words, you’re susceptible to getting gazumped.
This is why most property investors prefer to buy through auction houses. Once the gavel falls, neither party can pull out. Note that you will have to pay a deposit (typically 10%) and have 28 days to complete on the sale.
Remember to ask your solicitor to run through all paperwork before moving ahead. Be wary of restrictive covenants, negative easements, problematic tenants in situ amongst other issues.
Funding a Repossessed Property Purchase
Should the property stack up financially, it’s more than likely that a number of buyers will be circulating with an offer.
The quicker you are able to move, the better.
Note that being a mortgage buyer does not necessarily preclude you from having a chance. However, cash buyers are likely to be looked at more favourably as the bank will be able to dispose of the property quicker.
For this reason, you may want to look into bridging finance or some other kind of debt facility that’s accessible within a short timeframe. However, remember to account for the high-interest costs and arrangement fees with these types of loans.
If you’re buying at auction and looking into a more standard mortgage to fund the purchase, make sure that you will be able to complete after 28 days after the hammer falls (exchange of contracts).
As obvious as it seems, it is vitally important to understand what types of properties and projects you wish to invest in, across both the residential and commercial markets.
Specialised commercial property portals are less common placed than their residential counterparts, but listing sites such as Commercial People can help make your first steps into commercial property investment that little bit easier.
In general, investing in commercial property is often significantly more cost-prohibitive than investing in the residential market, meaning you’ll often need significant financial backing to enter the market.
As with all investment, there is an element of risk involved; however, while investing in commercial property can offer significant financial rewards, there is also an equally significant risk with the financial barrier to entry often higher than a residential venture.
As such, commercial investing can be considered more financially risky.
Commercial properties are far more exposed to the economy than their residential counterparts with economic downturns often resulting in several businesses (especially SMEs) going bust. As a commercial landlord, this could mean your rental income could stop for an unknown period until you’re able to find a new tenant, and with the rise of CVA’s, your legal options to claim lost rent are not as clear cut as it once was.
In addition to having to fork out legal fees to challenge default tenants, you would be expected to spend more money to remove the tenant from your premises which again contributes towards the higher financial risks for commercial landlords. It should also be noted that, commercial properties typically take longer to find new tenants than residential properties due to the legal complexities and logistics involved in the deal.
There are a number of things commercial property investors can do in order to reduce the inherent risks of commercial investment such as diversification. By diversifying your investment portfolio and investing in multiple commercial assets across various markets, you can somewhat minimise the risk of a potential market crash affecting one of your other properties.
Naturally, residential properties also carry similar risks, such as problematic tenants or inability to attract renters (leading to a lack of rental income); while a significant house price crash could drastically depreciate your property’s value. However, due to the price of purchase and rent often being lower in the residential market, the impacts these incidents will have on you as a landlord will be significantly smaller than those in the commercial sector.
Return on Investment
In the residential market, returns on investments can vary hugely between the various different types of investment.
Traditional ‘Single Lets’ offer significantly lower rental returns than HMOs and student accommodations, where you’ll receive rental income on a per room basis rather than a per property basis.
While it is difficult to definitively say whether commercial property investment offers higher or lower returns than residential properties, commercial landlords enjoy higher rents and longer-term rental contracts than those in the residential property market.
Location, Location, Location
Location is certainly one of the first and most important things investors in both commercial and residential markets look at when contemplating whether to invest in properties.
While you are looking for where people live and local amenities with residential property, with commercial premises you’ll be looking at where people want to work – which can have some crossover in city centre locations, such as London, Birmingham and Manchester where demand is both high for both residential and commercial properties.
However, despite the similarities, commercial property still has unique requirements such as the proximity of the premises to road networks, the amount of floor space, the use class of the building and more.
Financing your Commercial Investment Property
How commercial and residential properties are financed can vary greatly. In commercial property, some of the common methods are direct funds and indirect funds, both of which has its own advantages and disadvantages.
Direct funding, also known as ‘bricks and mortar funds’ – refers to an organisation or individual directly funding a project, whereas indirect funds are where you buy shares in a company that invests in property.
Rental / Lease Lengths
Although the lease length for commercial properties could vary depending on a number of factors (including what type of property and which sector you are in), it is typically much longer than those of residential properties. Despite the average commercial lease lengths being reduced in recent years, they still remain considerably longer than those in the residential sector. As a landlord, this could give you a great advantage of receiving guaranteed long term income stability.
However, with a long lease, you should also remember that there is much less flexibility and greater scope for legal issues to arise in the event of selling your commercial property.
Meanwhile, in the residential market, you could be looking at anywhere between six months to two years. If you are planning on investing in serviced accommodations, you could potentially be looking at an even shorter occupation period, such as a weekly or monthly term. While this helps to reduce issues with non-paying tenants, the short tenancy agreements mean you are exposed to more frequent vacancy periods where the property has no tenants.
As mentioned earlier, finding tenants can be a more difficult task in the commercial market than residential. However typically commercial landlords and tenants have better and more professional relationships than those in the residential market, as essentially it is purely a business to business relationship.
With residential properties, it is a landlord’s responsibility to carry out repairs and maintenance for most parts of the building. However, this can get a bit more complicated for commercial properties as it is not always the landlord’s responsibility to do so.
For instance, in a serviced office the landlord is required to oversee the maintenance of the building, but in non-serviced offices, the leasing business is often expected to carry out any repair work. The responsibility and duty of a landlord regarding repairs and maintenance should be clearly set out when drafting the Head of Terms.
Stamp Duty Land Tax (SDLT)
One of the most commonly overlooked costs to consider when purchasing is the Stamp Duty Land Tax (SDLT), and many fail to realise how it affects the total price of the property.
Residential property has higher SDLT rates than commercial property and can go up to 15% including 3% surcharge for the portion above £1.5 million. Whereas the highest rate that commercial freehold sales can go up to is 5% (portion above £250,000) – there is no additional surcharge for non-residential properties.
For example, if you were to purchase a residential property for £600,000, the total SDLT payable would be £38,000, compared to £19,500 for a commercial property purchase of the same value.
With the number of active listeners across the UK growing exponentially, podcasts have revolutionised how we consume information – whilst bringing a much wider range of voices and ideas to the forefront.
Accessible for free to anyone with a smartphone, the growing number of podcasts specifically dedicated to the property industry has been particularly encouraging. Excitingly, as more property podcasters compete for listenership, content quality and production values continue to improve.
Below we have highlighted some of the more interesting “on demand” audio resources that are well worth checking out. However, before doing so, please read our disclaimer at the end of this post.
Aimed at property professionals “looking to be inspired by like-minded successful people”, experienced investor and trainer Rick Gannon provides a weekly dose of hints and tips on the more practical aspects of the business. The podcast also regularly features interviews with the likes of property refurbishment specialist Julian Maurice, planning consultant Linda Wright, leasehold expert and thought-leader Bernie Wales amongst others. New Era Property Podcast on iTunes | New Era Property Podcast on Blubrry | New Era Property Podcast on Listen Notes
Winner of the 2016 New Media Europe audience appreciation award, @PropertyHubUK‘s bi-weekly podcast contains news, weekly discussions, advice and useful resources for established and aspiring property investors. Recent topics covered include an extended series on buy-to-let taxation, how the “ripple effect” applies in property investment, finding the next regeneration area, due diligence on property development projects, how to achieve a high yield in buy-to-let, investing through a Limited company, funding deposits and wider discussions on mindset and motivation. The Property Podcast on iTunes | The Property Podcast on Stitcher |
Hosted by Rob Dix (@RobDix) of The Property Podcast, each episode has an interview with a property expert or experienced investor. Encouraging listeners to take a “hands-on” approach to investing, topics explored include how to pick the right type of funding for your property project, raising funds using joint venture partnerships, releasing locked-away equity from your portfolio with second charges, how to use peer-to-peer to finance your property projects and a series on Rob Dix’s own lettings and management lessons. Property Geek on iTunes | Property Geek on Player FM | Property Geek on PodTail
Hosted by surveyor and experienced investor Peter Jones, this podcast from @RobandMark (Progressive Property) is aimed at the “buy & hold investor, flipper, deal packager, or multi-letter”. In past podcasts, Peter has interviewed “no money down”, “rent-to-rent” and credit score experts as well as HMO investors, developers, experienced electrical engineers and CDM regulation specialists. Episodes are occasionally “hijacked” by Rob Moore of Progressive Property, more recently exploring joint venture partnerships and raising co-investor finance. The Progressive Property Podcast on iTunes | The Progressive Property Podcast on Stitcher
In addition to insightful economic monologues, property developer and co-founder of Progressive Property Mark Homer (@MarkProgressive) explores a range of topics including commercial to residential conversions / development (including real-time insights of ongoing projects), planning law, taxation, Section 24 of the Finance (No. 2) Act 2015, surveying, larger-scale build-to-let / House of Multiple Occupation lettings management, ongoing legislation facing the industry, raising angel finance and other fundraising strategies. Mark My Words on iTunes | Mark My Words on Stitcher
Billy Farrell, Paul McFadden and Stephen McKenna discuss recent property news and interview the UK’s leading property professionals and entrepreneurs. Topics recently covered include “Managing People Effectively in Your Property Business”, “Does your Property Business have a Mission?”, “How to Jump from Employee to Entrepreneur”, “Everything You Ever Wanted To Know About Tax But Were Afraid To Ask”, “Refurbishments: The Naked Truth” and “Due Diligence: Why The Numbers Must Always Stack Up”. This Week in Property in iTunes | This Week in Property on YouTube
The team at @Optimise_tax discuss a number of relevant topics including Inheritance Tax, estate planning, buying property through Limited companies (Special Purpose Vehicles), common mistakes during the incorporation process, Capital Gains Tax, Stamp Duty Land Tax and Mortgage Interest Relief (Section 24 of the Finance Act 2015). With a specialist team exclusively working with property investors and traders, even if you already have an accountant, it is always worth checking Optimises’ blog and YouTube channel for ongoing updates. Optimise Accountants Podcast on iTunes
Andrew Montlake (@MontysBlog), Founding Director and spokesman of one of London’s leading mortgage brokerages @Coreco (Coreco Mortgages), explores property-related topics of the day. Topics range from the first-time buyer lending market, political influences on the housing market, development finance to the realities of buy-to-let investing and the effects of regulation such as the Mortgage Market Review. Past guests have included Brad Fordham from Santander, Richard Tugwell from Virgin Money, James Bloom from bridging and development company Masthaven and James Bloom of Legal & General Network as well as Andrew’s own colleagues. The Coreco Property Podcast on iTunes | The Coreco Property Podcast on SoundCloud
A weekly call-in show with practical advice on one of London’s largest radio stations, hosted by experienced broadcaster Clive Bull – aimed at anyone with a “broad interest in the fast-moving property market”. In addition to regular appearances of senior partner at Oliver Fisher solicitors Russell Conway, more recent guests include Russell Quirk, CEO and founder of online estate agent eMoov; Ed Mead, founder of professional viewing service Viewber; Andrew Montlake, director of mortgage brokerage at Coreco and analyst and commentator Kate Faulkner. The LBC Property Podcast on iTunes | The LBC Property Podcast on Player FM
A monthly podcast presented by National Landlords Association (NLA) representative Richard Blanco. In addition to current affairs updates relevant to the private rented sector, Richard delves into a range of specific subjects. Recent examples include the first-time buyer market, houses of multiple occupation, the media’s portrayal of buy-to-let, ethical lettings / business practices, crime in the private and social housing sectors, managing maintenance and repairs successfully, landlord and tenant relations. Inside Property (with Richard Blanco) on iTunes | Inside Property (with Richard Blanco) on AudioBoom
This relatively new podcast is presented by Lincoln-based property investor and developer Ryan Carruthers (@RyanCarruthers). Previous interviewees include property investor Claire Norwood, Jonny Britton from Land Insight, entrepreneur and productivity expert Ari Meisel, Diksesh Patel from Lighthouse Capital Group, Thomas Eskebaek from Century Spaces, Rob Wilkinson from Crowd with Us, Vanessa Warwick from Property Tribes as well as Ryan’s own business partner Kim Stones. Venture Property Podcast on iTunes
Recordings of one the UK’s leading property commentators. Since 2007 Henry has been regularly featured across mainstream media to discuss a wide range of property-related themes. Budget day commentary, buying and selling property, London house prices, the leasehold homes scandal, first-time buying, issues facing landlords, taxation, interest rates, corruption / anti-money laundering are just a few examples. We would also recommend following Henry’s regular updates on Twitter @HenryPryor. Henry Pryor on iTunes | Henry Pryor on Player FM
James Dearsley (@JamesDearsley) and Eddie Holmes (@Eddie_Holmes), thought-leaders in the PropTech space, host this well-established podcast and speak with some of the most influential leaders in the emerging sector. In addition to special episodes on construction technology, sustainability, build to rent and coverage of the MIPIM property developer events, previous interviewees include Dan Gandesha from Property Partner, Rajeev Nayyar from Fixflo, Teun van den Dries from Geophy, Brandon Weber from Hightower, James Morris Manuel from Matterport, Daniel Hegarty from Habito, Christian Faes from LendInvest, James Townsend and Luke Appleby from Kontor, amongst many others.Prop Tech Podcast on iTunes | PropTech Podcast on SoundCloud
Produced by Inside Housing (@InsideHousing) magazine, the UK’s leading social and affordable housing publication, this podcast explores key issues in housing today, with input from the sector’s leading voices. Recent topics explored include homelessness, whether smaller homes are the solution to the housing crisis, the council housing debt cap, regeneration, fire safety and coverage of events such as MIPIM. The Housing Podcast on SoundCloud
Produced by the research organisation @ConsciousCities, this podcast contains conversations around the future of the built environment and how cities can be designed more consciously. Running in tandem with the Conscious Cities journals, conference series and blog posts, topics discussed revolve around exploring the complexities of urbanisation, human centric data analysis, artificial intelligence, the application of cognitive and neuro sciences in design and architecture amongst others. Conscious Cities on iTunes | Conscious Cities on SoundCloud | Conscious Cities on PodTail
Please note that The Property Investor Blog’s recommendations in this post are not direct endorsements of the individuals or any associated companies behind these podcasts (with whom we have no affiliation, financial or otherwise). In an age where property investment scams are rife, we strongly recommend undertaken comprehensive due diligence on courses, mentorship programme, crowdfunding initiatives or other offerings. We also strongly suggest speaking with a qualified accountant with demonstrable experience of working in the property industry.
The notion of entering into a property project with a partner may seem like the ideal way to combine individual skills or balance a funding deficit. Yet many of the realities and potential pitfalls are frequently understated. Further to her end of year commentary, experienced investor, developer and mortgage broker founder Lisa Orme of Keys Mortgages kindly took the time out to answer some headline questions for us.
We explore how investors and developers these days cannot expect to seek debt funding without inputting capital themselves. Lisa then runs through the importance of having a track record, crowdfunding’s impact on seeking debt finance, the meaning of ‘gaining a pecuniary advantage by deception’, due diligence. Further down, some eye-opening case studies are also highlighted…
What does ‘skin in the game’ mean in the context taking on debt to fund projects?
This varies by the lender, deal structure etc. – but for a purchase, lenders will expect all of the deposit funds to have originated from the borrowers. If you talk about refinancing soon after refurbishment or conversion, then a good measure is to leave in 10% of your money. So if you purchased a property for £300,000 and spent £100,000 on it, expect to leave in around £40,000 of your own money at the very least.
How much does having a solid track record play in securing debt finance these days?
It’s very important for anything outside of vanilla buy-to-let. Lenders do prefer to see experience in the sector you’re investing in. With Houses of Multiple Occupation (HMOs), for example, lenders typically want to see at least one year’s experience in buy-to-let (some as many as three). Move into commercial and lenders want to see a decent portfolio held for a few years if you can’t evidence specific experience.
It’s not impossible to get funding without experience, but expect those lenders to charge for the privilege.
It also doesn’t mean you always need experience in the same sector, though it’s preferable. A good-sized residential portfolio held for a few years would lead you to be fine for commercial property lending with most lenders.
You’ll be aware of equity crowdfunding’s growth in recent years, how do debt lenders generally perceive investors using funds sourced in this way? If ‘skin in the game’ is required, how would that be determined?
For very large developments it’s accepted that different levels of funding may be required but this really is the reserve of the big developer and, even then, there will typically be a large element of self-funding or significant assets behind them. For most investors using secondary sources for deposits and top up funds would not be acceptable.
What does ‘gaining a pecuniary advantage by deception’ mean, and why are lenders being particularly vigilant to how joint-ventures are structured these days?
Effectively this means that you have gained a financial advantage by deceiving the lender in some way. This could be something obvious such as lying about income, submitting dodgy accounts, etc. – but can also seemingly be less obvious such as implying you intend to live in a property when you are in fact going to let it out or, conversely, saying you will be letting out a property when you intend to live in it. Other examples would include saying that the money will be used for one purpose such as home improvements when it will, in fact, be used for something else such as paying a tax bill or using a property as an HMO on a single let mortgage etc.
The fact is that this is fraud by another name and there is the potential for recovery under the Proceeds of Crime Act and even a prison sentence of between 5 and 15 years.
One of the biggest myths I hear in property and mortgages is ‘that lenders don’t care as long as the mortgage is paid’. This couldn’t be further from the truth. As above, not only is this treated as deception/fraud but the impacts are far more wider reaching than people realise.
For example, banks and building societies who take deposits make assurances to their customers as to where these funds will be invested. If they breach this, lenders could lose their banking licences from the regulators. Other banks use funding lines from external sources such as investment funds and, again, there are conditions to these funding lines such as that funds should not be used for residential property, commercial property, HMOs or multi-units. If it is, they could lose their funding lines and imagine the implications of that for a lender? Imagine too the implications for us as borrowers and the wider lending community?
Lenders are vigilant of joint ventures as they need to see that the borrower is not only the person responsible for the asset they are lending on but also that it is their money they stand to lose if things go pear-shaped. If you have nothing invested in a deal, you’re more likely to run away at the first sign of trouble and lenders obviously don’t want to lend in this scenario. Also, if the JV partner isn’t on the loan the lender has no clue who is invested in the deal; there could well be reasons that the investor isn’t on the loan such as they are not mortgageable, have a criminal record, bad debts, etc. Again, this would be unacceptable to a lender.
What are the key due diligence steps that both sides of any joint venture agreement should take before moving forward?*
Firstly, I would not advise anyone go into a JV with someone they are not already very familiar with; family, existing business relationship, etc. I am astonished that people will enter into a 25 year ‘financial marriage’ with someone they have just met on social media or on a course!
Each party should be willing to share their credit files and all bank accounts with each other. Not only at the beginning but also on a regular basis so that any issues can be caught early on. Remember if one party gets into financial difficulty the other party will be impacted by this. Unfortunately, I have seen this happen all too often.
What have been some of the common issues you’ve noticed in recent years when investors enter into joint ventures? (Would be great to hear some specific case studies here)
You name it, I’ve seen it!
The most common things we have seen are due to the 3 D’s: death, divorce and debt!
In one case. one of the partners went to use the mutual bank account card to pay for some items at B&Q and the card was declined. They went to the bank and were told the account had been suspended and to speak to the business partner. It was then they discovered the business partner had declared bankruptcy without their knowledge!
In another case, two family members had joint ventures and one got divorced. The entire portfolio had to be unravelled as a result – with all parties losing significant sums of money.
In another example, two individuals had been investing together for many years. They had latterly identified the difficulties should one of them die and how the portfolio would be allocated to the other’s estate in order to ensure their beneficiaries inherited their portion – not to mention enormous sums in inheritance tax. They also realised that their wives had no interest in owning or managing the portfolio should the worse happen and certainly didn’t wish to partner with the other investor.
They investigated life insurance and unfortunately, due to having left this till quite late in their lives and the enormous sums involved, they were looking at monthly payments of several thousand pounds each which was prohibitive. As a result, they had to start to sell some of their portfolio to redeem mortgages now rather than upon death which was obviously not part of their plans and proved expensive with respect to capital gains tax.
The most common reason we see is simply falling out! JVs rarely put agreements in writing. It’s all great when you’re getting on but fall out and memories get clouded. Then the lawyers start making money!
What kind of insurance policies should parties to a joint-venture take out to protect their individual interests?
Life insurance is the primary one to consider. As above unravelling a portfolio to pay taxes or give the requisite sums to your partner’s beneficiaries can prove extremely messy. However, life insurance can be very expensive for large sums of money. The later you leave it, the more expensive it gets. In addition, if someone has life insurance for their own home and family they may find it difficult to get another significant sum of insurance.
Lisa Orme is an experienced property developer, investor and mortgage adviser and specialises in financial services for new and established property investors.
If you’d like to discuss your property investment strategy or indeed any mortgage or financial requirements you can contact Lisa at firstname.lastname@example.org or call 02476 455445.
Keys (UK) Limited is authorised and regulated by the Financial Conduct Authority reference number 677568.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loan secured on it. Think carefully before securing other debts against your home. Not all forms of bridging finance, secured loans, buy to let and commercial mortgages are regulated by the Financial Conduct Authority. The information contained within this article is subject to the UK regulatory regime and is therefore primarily targeted at consumers based in the UK.
The Property Investor’s Blog would like to thank all contributors for their input and we hope it will be a useful resource.
Chief Economist at the Royal Institute of Chartered Surveyors (RICS), Simon Rubinsohn
“Housing market activity set to weaken again in 2019: The UK residential market has continued to struggle against several well-established obstacles over the past year. Affordability issues, a lack of stock, political uncertainty and the prospect of further interest rate rises have all been factors seemingly weighing on activity to varying degrees.
Sentiment has remained relatively subdued as a result, with new buyer demand tailing-off gradually throughout much of 2018. Sales volumes have also weakened during the past twelve months, while house price inflation has continued to cool at the national level. In the near term at least, we remain unconvinced that activity trends will break away from the recent sluggish picture.
Nevertheless, tackling the challenge around supply and affordability remains a primary goal on the domestic political agenda, with the prime minister announcing a scrapping of the local authority lending cap for housebuilding in the latest attempt to boost delivery. Just how effective the policy measure will be in lifting housebuilding remains to be seen, but, either way, the government still faces a huge task in
reaching their 300,000 new homes per year target 2022.
Rental growth to accelerate slightly: The challenge around supply is no less of a problem on the lettings side of the residential market, with policy changes in recent years not helping in this regard. The additional Stamp Duty surcharge payable for buy-to-let investments has certainly had a lasting impact on slowing numbers of landlords entering the market.
Furthermore, the phasing out of mortgage interest relief, with further reductions still to come over the next few years, is also being factored into investors’ decisions. As it stands, the RICS indicator tracking landlord instructions coming to market has already been in negative territory for ten successive quarters. This is the longest stretch of declining supply in the rental market since the series began in 1999.
On a more positive note, according to the British Property Federation, institutional development of purpose-built rental properties has picked-up. The number of completed build to rent units increased by 26% in the twelve month to Q3 2018, now standing at 26,000. The pipeline going forward also appears strong, with construction underway on a further 42,000 units while 64,000 are in planning. That said, considering there are an estimated 4.6million households in the private rented sector, these numbers remain on a pretty small scale.”
Partner and Head of UK Residential Research at Knight Frank, Gráinne Gilmore
“The political uncertainty thrown up by the lack of clarity around the UK’s future trading relationship with the rest of the world is having ramifications in all UK sectors, not just property.
However, when looking to the future, the Brexit noise can threaten to drown out everything else. It is worth putting in some earplugs to examine the other fundamentals of the housing market, as they will determine what happens in the years to come, once the Brexit dust settles.
Affordability, for example, is a key issue. Average house prices are around 22% higher than at the previous peak of the market in late 2007, but, in London, prices are 60% higher. In the South East, average values are 37% higher. This growth in house prices has pushed the ONS’s measure of affordability (house price to median residence-based earnings) to 13.2 in London, up from 8.4 in 2007.
The sales market has been thrown into sharper focus by slowing activity in some parts of the country. It’s no less of a factor in the rental market, however, where policy changes for landlords are affecting demand and supply dynamics, and pricing, in some parts of the UK.
The housing market, as with all markets, can absorb and adjust to change. Uncertainty is the most challenging factor of all, so sooner is better when it comes to a Brexit outcome.”
Director of Savills Residential Research, Lucian Cook
“Brexit angst is a major factor for market sentiment right now, particularly in London, but it’s the legacy of the global financial crisis – mortgage regulation in particular – combined with gradually rising interest rates that will really shape the market over the longer term. That legacy will limit house price growth, but it should also protect the market from a correction.
On London: House prices have risen by 72 per cent over the past ten years, well ahead of any other region. The average home buyer with a mortgage now pays just under £429,000 and has a household income of almost £76,000 (58 per cent higher than the UK average). Even with borrowing at over four times that income, these households still need a deposit of £123,000.
Small falls (-3.5%) are expected in London’s mainstream market next year, before values bottom out in 2020 and tick up steadily from 2021. Price growth over the next five years is forecast to total 4.5 per cent.
The prime London markets are less dependent on mortgage borrowing and will outperform the mainstream. The UK capital is expected to remain an attractive place to live, work and own residential assets, supporting12.4 per cent price growth in prime central London by the end of 2023.
On the Regions: At this point in the cycle, the highest price growth is expected in the lower value markets much further from the capital, which have seen nothing like the 10-year price rises seen in London – just 1.9 per cent in the North and 5.8 per cent in Scotland.
The Midlands, the North of England, Yorkshire and Humberside, Scotland and Wales all have the capacity for borrowing to increase relative to incomes, even allowing for higher interest rates, and this will support price growth ranging from 17.6 per cent to 21.6 per cent across these regions.
Key regional economies – most notably the metros of Manchester and Birmingham – have the capacity to outperform their regions attracting both local and investor buyers.
Wales will perform in line with the Midlands as it has done in previous cycles, but it is a hugely diverse market. There may be increased housing demand crossing over from Bristol once the Severn bridge tolls are abolished.
Scotland, which has only recently returned to pre-credit crunch peak, is performing strongly, particularly Edinburgh and Glasgow, which have seen prices rise 8.9 per cent and 7.0 per cent over the past year, respectively.
Rental Market Trends: Rental growth is expected to track house price growth, averaging 13.7 per cent over the next five years. Tightening access to mortgage finance and limited social housing supply is driving demand for privately rented homes at all price points. This is particularly true in London, where rents will rise by 15.9 per cent.
Until the market sees a significant injection of build to rent stock, rental demand will outstrip supply and rents will rise. Investor buyers requiring borrowing are expected to focus on higher yielding markets and this will put further upwards pressure on rents in some of the most expensive rental locations.
Transactions: Transactions have fallen from 1.619 million in 2007 to around 1.145 million this year, but are forecast to remain stable over the next five years, though the market mix has changed.
Cash remains king and cash buyers now account for almost a third of all sales (31%). The bank of mum and dad has provided important support to first-time buyer numbers and, judging by receipts from the three per cent surcharge for additional homes, cash is also an important component of investment demand, Savills says.
Mortgaged first time buyers, the only buyer group to have expanded since 2007 – from 359,000 to 370,000 this year – continue to be supported by Help to Buy and the bank of Mum and Dad. Numbers are expected to remain robust despite the prospect of a less generous, more targeted Help to Buy, with a fall of just -2.7 per cent anticipated by 2023.
Mortgaged home mover numbers have fallen dramatically since 2007 as existing home move home less frequently. Numbers are down from 653,000 to 370,000, but having adjusted for stress testing of borrowing, are expected to remain constant over the next five years.
Buy to let buyer numbers will continue to come under pressure. Stamp duty and mortgage-interest tax relief changes have led highly leveraged investors to rationalise portfolios or pay down debt.”
“Things are going to get worse before they get better. In Q1, the run-up to our actual divorce at the end of March there will continue to be people who have to sell. Death, debt and divorce – the three D’s as we call them in the industry will continue to drive the sale side but how many people ‘must’ buy? The only ones I think who will be confident doing so will demand something for the risk they will think they are taking which in most cases will be a discount on the price. Housing market statistics are based on deals done three or four months earlier, on average 60 days before the sale completes so regardless of whether we crash out on 29th March or enter a new golden era the statistics in May, June and July will show prices falling. This may result in buyers panicking that prices are still falling after Brexit resulting in more uncertainty and the cycle gathering its own downwards momentum.
I don’t think that the housing market is going to test the Bank of Englands models by crashing by 30% but I do expect prices to slip by 10-15% – the discount that most buyers I imagine will demand if they are going to commit to what for most will be their most expensive single purchase. Savvy sellers will need to remember that they can make up for this by negotiating similar discounts on what the go on to buy.
As always there will continue to be regional disparity, prices in some parishes will rise whilst others will fall further. As Phil & Kirsty remind us, it’s about location, location, location. Best in class will always sell and will always be sought after.
London and the South East have seen the real house price growth over the last decade, they stand to lose the most but I expect rental prices to slide back too. Brexit is just one iceberg that we need to navigate a way past in 2019 – politics, the economy and confidence, in general, will all have a significant part to play on prices. If I’m honest, I don’t know what’s going to happen to prices in the medium to long term but one thing you can be confident of is that a house will always be worth one house.”
Land, Planning & Development Expert and CEO at Millbank, Paul Higgs
“In terms of my personal approach, I’ve always been risk averse and detail orientated – which is fundamental in property development as it really is a super risky business, even at the best of times. With any deal, I spend a lot of time researching every aspect thoroughly and exploring all the exit options given various scenarios. Ultimately, I want to create maximum value from the start and a decent ‘buffer’ regardless of where the market is heading.
Over the last few years, I’ve taken an even more cautious attitude to anything I want to get involved with. Obviously, no one can predict the market or know what’s really going to happen – but as I’ve been through a few crashes, I’m well aware of the signs, potential triggers and where things might end up.
Prior to the Brexit vote, for example, I suspected that if we did vote to leave there would be a great deal of uncertainty in the market. The market obviously hates uncertainty and in development everything is exacerbated further because of the long timescales involved in the process. I didn’t want to be in the middle of building and selling if the vote was made to exit, or worse still when the time approached to actually exit – i.e. now. As a result, for the past couple of years I’ve been focusing on adding maximum value to land, which is always my strategy actually, but with a view to flipping sites with planning rather than holding them to build-out.
London and South East prices have plateaued for the last year and a half in reality so I’ve also been a bit more involved helping-out JV Partners on bigger sites in areas like Birmingham, Liverpool and Leeds, where the market has largely continued to move in the right direction.
Obviously the more traditional strategies like buy-to-let have become harder (due to the SDLT changes, Section 24, increased regulation etc.). As a result, many property investors have shifted into development thinking it’s the ‘next best thing’.
What’s often forgotten is that property investment and property development are massively different things. People think that if they have been in property for a while and maybe have a large portfolio of single lets or HMOs, then jumping into development makes logical sense when, in fact, there’s a very steep learning curve.
As a result, there have been lots of new entrants coming into the development space in recent years who are buying sites on the market, bidding too much, overpaying and generally getting their figures wrong. Often, people can get into a mess and the market comes to the rescue. But where we are now in the market, many of these people won’t be so lucky. These questionable deals are starting to hit the market and come to light. The units are not selling for as much as originally hoped or quickly enough. With highly-leveraged deals some funders having already started pulling the plug. My expectation is that these trends will continue big-time into 2019.
Therefore, my advice is to be careful who you listen to as many out there really do not have the necessary experience to get involved in what is a complex business. Property development can be very high-reward because it’s very high-risk.”
CEO at Inspired Asset Management and Inspired Homes, Martin Skinner
“We expect 2019 to continue in the same vein as it is currently until Brexit is resolved. Whilst we remain confident the UK will agree a deal, as long as there is uncertainty, some buyers will postpone their purchase. Once a deal is struck, we expect confidence to return to the market, however, price growth will be moderate, linked to wage growth, as the market continues to be owner occupier rather than investor led.
2019 will most likely continue to be a buyer’s market and competition between developers will mean there are deals to be had such as solicitors fees paid and free furniture packs. For this reason, and with mortgage rates still very low, it’s actually a good time to buy if you’re an owner occupier.
If you’re a first-time buyer, you’ll also benefit from zero stamp duty on the first £300,000 of a purchase up to £500,000, meaning you’ll only need your 5% deposit to become a homeowner when using Help to Buy.”
Founder and Director at the TrustLand Directory & The Developers Boardroom, Alex Harrington-Griffin
“In terms of land and planning, there is no doubt that access to quality site opportunities around the South-East has was a struggle in 2018, as most vendors without motivation that had access to the outside world will know that if they’re looking for best returns, they won’t get it now. Therefore, I certainly expect a dramatic shift, as we pass through Brexit and banks tighten purse strings, that site acquisition strategy, and type, adapt dramatically for
forward-thinking and astute buyers.
More distressed site purchases, more developer-developer and landowner-developer Joint Ventures to mitigate risk and embrace transparency. I expect small and medium land buyers will be looking at areas of the market and site variations not previously considered, creating products that are somewhat out of their usual remit, or that break the mould in terms of design and style, to ensure that their product stands out and certain buyers will pay extra for
that unique product.
The widespread adoption of technology and mapping tools by both experienced and new developers to access land opportunities is growing rapidly, with buyers taking it upon themselves to contact owners. However, the smart ones will listen to vendor feedback in terms of the volume of contact, and start to consider innovative ways to help their brands and bids stand out, and hopefully use transparency and trust to win opportunities, through collateral and open book appraisals. The world is becoming more transparent, not less, and a lot of vendors are now wise to this and what they can find online.
Finally, I would expect we see a move by SME resi developers, in line with the monthly discussions held within Developers Boardroom, into areas such as build-to-rent, retirement, co-living, micro-flats and even industrial/commercial, as established teams look to utilise their skills and experience in emerging active sectors where a long-term potential, such as baby-boomer accommodation, and to be looking at longer-hold, cash flowing asset creation.
Managing of the Property Developers Academy, Brynley Little
“2018 saw the market softening in many areas in the UK which triggered the acquisition phase for those experienced within the land and new build sector. This will firmly continue into 2019.
Uncertainty and a softening of the market has reinforced our focus of acquiring sites for both socially and locally affordable homes. Affordability is a growing issue in many areas and working with Local Planning Authorities to combat this issue could see great relationships built and great deals to be done.
Sites with high value properties continue to carry a large amount of risk in the current climate. They are becoming less desirable for experienced developers and funders alike. ‘Modular’ certainly seemed to be the buzzword in development in 2018, and I’m sure it will continue to be spoken about throughout 2019. Will 2019 see Modern Methods of Construction gather significant pace from a delivery point of view rather than the spoken word, I’m not so sure. There is still a way to go for modular homes to displace traditional methods in my opinion.
There are two growing trends to be aware of that I believe will open up opportunities and potentially bring focus to those looking to either start or scale their new build business in 2019; The Rise of the Millennials and the Coming of Age of the Baby-Boomers. These two demographics represent opportunities for increased rental demand, affordable homeownership and downsizing to more appropriate accommodation.
My recommendation for 2019, if you haven’t already, is to shift your focus to acquiring land and obtaining planning for deliverable schemes for both the rental and affordable for sale markets.”
Director of Real Estate Policy at the British Property Federation, Ian Fletcher
“It looks like we are going to start 2019 with the same Housing Minister in post. Possibly wishful thinking, given so many political scenarios that could unfold as a result of Brexit, but we sense a steely determination on Kit Malthouse’s part to hang around, and a wish to stop the housing minister merry-go-round.
The overall supply of new homes will likely reach 240,000 homes annually – once seen as a significant milestone, but now just a stepping-stone towards 300,000 homes per annum. In addition to much-needed firepower behind other housing sectors, I am fairly confident..