Property Truths - The Inside Track

Review Of The Dambuster 2020 Property Market

rfrost1967@icloud.com (Robert Frost) — Thu, 14 Jan 2021 20:28:36 GMT

A Perspective On 2020 & What It Might Mean for 2021

Review of The Dambuster Property Market 20-21

On the night of 16-17 May 1943, Wing Commander Guy Gibson led 617 Squadron of the Royal Air Force on an audacious bombing raid to destroy three dams in the Ruhr valley, the industrial heartland of Germany. The mission was codenamed Operation 'Chastise'. The resulting devastation saw 1,200 people killed on the ground, the deaths of 53 aircrew and a considerable amount of property destroyed. Although it didn’t cause much damage to the overall German war effort it had a galvanising effect on the Allies and raised the morale of the RAF with the immortalisation of the legendary Dambuster 617 Squadron.

So what has this got to do with the English Property Market in 2020-21?

Just a year ago the UK had finally left the EU and was entering the 12 month transition period, the economy was booming, employment levels were at a record high, interest rates were extremely low, theatres were full to bursting, festivals were selling out like hot cakes, football stadiums were packed, the roads were congested and you were regarded as a lunatic if you wore a face mask in public!

Roll on 12 months, we have since witnessed over 85,000 unexpected deaths from Covid, our civil liberties have been restricted beyond all belief, unemployment has risen hugely, Brexit is finally done, the word ‘furlough’ is now understood, recreational pursuits are all but done for, tourism is on life-support and the housing market is apparently thriving.

Working as a residential surveyor I have seen what has been happening at the coal face first hand over the last year or so. Before I share my interpretation of the market it might be useful to have a quick look at some statistics:

• The UK Government's HMRC Monthly property transactions data showed that the number of UK home sales rose for the seventh consecutive months prior to November 2020.

• According to the Land Registry for England houses prices in Oct 2020 were, on average, up by 5.83% compared to the previous 12 months.

• In December 2020 the RICS (Royal Institution of Chartered Surveyors) index for new buyers’ inquiries slipped to 15 in December from 26 in November and down from a high of 75 in June. In other words, less people were looking to buy a property in December 2020 than they were in June.

• According to the Halifax House Price Index in the latest quarter (October to December) house prices were 2.6% higher than in the preceding three months (July to September) whilst house prices in December were 6.0% higher than in the same month a year earlier.

So, generally speaking, during 2020 we saw all types of houses experience a fairly high level of price inflation. It is nicely summarised by Russell Galley the Managing Director of the Halifax who said that “2020 was a tale of two distinct halves for the housing market. Following a strong start, the first half was dominated by the restrictions on movement due to COVID-19, and prices were subsequently down 0.5% at mid-year as the market effectively ground to a halt. However, when the market reopened, prices soared as a result of pent-up demand, a desire amongst buyers for greater space and the time-limited incentive of the stamp duty holiday”.

But what does this all actually mean for the person in street who is looking to move home or invest in residential property?

The way I see it is akin to bursting the dam. In early 2020 the flow of property within the market was a steady stream of generally predictable volumes with little volatility, somewhat like a lazy river flowing through the foothills. However, almost out of the blue, the government started to dam this river at an incredible rate and within a few days they had built a huge wall across the flow of the river, in other words they had dammed the property market.

Not only did existing transactions get caught up against the unbreachable dam wall but the river continued to flow towards it as people sought to find houses with gardens in close proximity to amenities, all being pushed along with the lowest interest rates ever.

As time went by the pressure on the dam wall increased to such an extent that by the time the government decided to explode the wall in July 2020 with not so much as a bouncing bomb but more like a guided missile; whilst simultaneously turbo boosting the river upstream with a reduction in stamp duty and massive injections of capital into the economy, the pent up demand was so high that the destruction of the dam wall effectively released a domestic housing tsunami much greater than the finest pilot in 617 Squadron could ever have predicted.

This demand wave washed through the housing market pushing up prices and filling estate agents pockets with silver whilst the conveyancers and surveyors rushed around furiously trying to keep the river on track with the of minimal collateral damage as possible. The first wave started in July 2020 and passed through until around October to be followed by a smaller second wave that is likely to have run it’s course by Easter 2021.

Russell Galley of the Halifax explains it as follows;

“In the near-term, and with mortgage approvals still sitting at a 13-year high, there may be enough residual strength in the market to sustain prices up to the deadline for the stamp duty holiday and the scaling back of Help to Buy at the end of March. However, with the pace of the UK’s economic recovery expected to be constrained by the renewed national lockdown, and unemployment widely predicted to rise in the coming months, downward pressure on house prices remains likely as we move through 2021.”

Continuing the Dambusters analogy, the questions that are posed looking forward to 2021 are:

• How much demand is left in the Demand Lake now that the dam has burst?

• What will be the flow of property into the market and to what extent will this be supported by demand enabling factors?

In other words, will there be an adequate supply of property coming onto the market? Will this be matched or outstripped by demand given the uncertainty in the economy with things like increased unemployment levels, the likely increase in taxation, the removal of the stamp duty holiday and the effect on creditworthiness caused by the taking of mortgage and loan holidays during 2020?

One thing is for sure in 2021 and that is no-one has the definitive crystal ball. Clearly, there will be a financial impact from the lockdowns but who knows how strong the bounce back will be? Will it be S-shaped,U-shaped or a sharp V?

Will buyer confidence be dented by the uncertainties of the economy and the identification of new strains of the Covid virus? How much risk will buyers and sellers will be factoring into their own property prices to reflect their perceptions of the future is hard to tell.

It is my view, that given the economic damage, the unpredictability of the virus and the government’s responses, as well as the removal of the stamp duty holiday and a tightening of mortgage availability 2021 will see a gradual reduction in both supply and demand. In itself this should keep the market relatively stable but with a probable negative impact on house prices. Whilst the falls are unlikely to mirror those of 2007-2010 and the fact that the tsunami waves have now passed by it seems likely that, unless supply is artificially constrained again, there will be gradual reduction in upward price pressure leading to a plateauing and slight dip later in the year.

With this in mind, I will be exercising caution in relation to any investment properties that I may be considering purchasing. Each property will assessed using a cash flow forecast with sensitivity analysis to help understand the financial risk of each. Yield will continue to be a measurement of risk and as such the capital purchase values will be under greater downward pressure.

The challenge now is not to breach the dam but to determine the course of the river and to what extent it keeps flowing.

#property #propertymarket #residential

Property Valuation In A Covid World - Things To Consider

rfrost1967@icloud.com (Robert Frost) — Wed, 10 Jun 2020 13:27:04 GMT

Property Valuation - What Do We Know?

Are you thinking of buying an investment property in the Covid world?

Do you reckon prices will fall, go up or stay stable?

If you know the answer to the prices question then have you got a Crystal Ball and, if so, please can I borrow it?

Whenever we make property investment decisions we should be seeking to minimise the risks and maximise the returns. To do this we rely on facts, knowledge, experience and skill.

So let’s look at each of these in turn:

1. The Facts

As of early June 2020 the facts are quote hard to come by but here are some examples of what information is available:

a. According to the Bank of England, the number of mortgage approvals for house purchase was 15,800 in April, down from March’s figure of 56,100 and some 80% lower than February. This is the lowest level since the tracking began in 1993, and is about half the number of approvals seen during the lowest point of the 2008/09 financial crisis.

b. Robert Gardner, Nationwide’s Chief Economist is reported as saying that “UK house prices fell by 1.7% over the month in May, after taking account of seasonal effects–this is the largest monthly fall since February 2009,”

c. As of 10 June 2020 there is only one mortgage provider offering 90% LTV products on BTL investments and they are seriously limiting the availability of these funds to the market.

d. According to the Yomdel Sentiment Tracker New vendor enquiries remained at record levels, nudging up 1.03%, or 1.4% points, to 137.28, equivalent to 37% above the pre-Covid-19 average whilst buyers remained almost flat at their all-time-time record levels, dipping 0.78%, or 1.64 points, to 209.11, with demand now 109% above pre-covid-19 averages.

e. As of 01 June 2020 the cloud based estate agency software supplier , Reapit, has published statistics for the previous 13 weeks that shows Combined net viewings for sales and lettings are now only -26.36% below pre-Covid levels, whilst combined applicants registrations only have another 10.51% to go before recovering to February numbers.

f. The estate agency daily newsletter Property Eye reports the following, based on market intelligence data from Twentyea, that since the start of May, there has been the following activity:

i. New Instructions: 60,962 (up 62%)

ii. Fall-throughs: 21,268 (up 37%)

iii. Price reductions: 23,344 (up 54%)

iv. Properties re-listed: 6,981 (up 33%)

v. Sales Agreed: 38,124 (up 77%)

2. Knowledge

Working on the assumption that knowledge comes from the interpretation of the facts it is clear that we have a lot of facts but to interpret this usefully and turn into knowledge is somewhat difficult given the amount of variables involved.

It seems relatively clear that there is still a demand for property and that supply remains restricted; conditions that would normally lead to a steady rise in property values over time.

What we don’t know is the following:

a. What the underlying health of the economy will be moving forward?

b. What the availability of finance will be, at what rates and what ratios ?

c. What appetite buyers will have for risk?

d. Whether there will be another lockdown?

These are fundamental questions that we just don’t know the answers to with any certainty and as such it would be fair to say that our knowledge in respect of the housing market moving ahead is incomplete.

3. Experience

We all have different experiences and these obviously play a part in our judgements. Some of us will have great memories of making a financial killing from the fall-out of the 2008 crash whilst others will have sad memories of losing virtually everything as the banks closed in without any consideration except their own balance sheets.

From my experience, I can see it both ways. I recall many people in the 2005-2008 period following the hype around property investing and borrowing and leveraging as much as they could with little regard for risk. Some of these were fortunate and rode the storm to retain what would now be considered fairly decent portfolios. A majority however lost pretty much everything; however they tried to batten down the hatches and ride it out the financial waves were just too powerful and they eventually sunk.

I also saw the more conservative investors refusing to be seduced by 110% mortgages and maximum leveraging due to ever-increasing house prices. These investors, by and large, rode it out. They didn’t make the large returns that some more risky investors did but neither did they expose themselves to negative equity and the threat of foreclosure and potential bankruptcy.

The third group of people is those who watched and waited. I would include myself in this group. Fortunately I never believed the hype and quickly realised that a lot of investments were being built on sand, so to speak, and that a large amount of BTL lending was irresponsible and simultaneously fuelling house price inflation. So, instead of borrowing to buy during the boom I arranged a finance facility to buy during the crash. I had a large pre-agreed amount put to one side and just kept available for when the market bottomed out and then I bought repossessions and distressed properties when everyone else had run out of cash.

4. Skill

The skill in property investing comes down to the ability to take all the information, analyse it properly, develop a plan and then execute that plan profitably. This will usually bring success.

Unfortunately, luck is sometimes mistaken for skill. There are some well known property ‘gurus’ out there whose fortune has come about more from luck than judgement and well done to them for being in the right place at the right time. The problem is that luck can’t be passed on or taught. Unlike luck, skills can be acquired and improved with experience and hard work.

So what does this all mean for valuing property in the Covid world?

It is pretty simple really, no-one really knows where the market is heading. The indicators look positive but there are some really important unknowns that could have the opposite effect. It’s just too early to tell.

From a valuer’s perspective this makes determining value uncertain. Sure, there is evidence of previous house sales to go on and based on the RICS standard of the valuation applying on the day of valuation only – not the day before, or the day after – it is reasonable to apply the market evidence, knowledge, experience and skill to the determination of value. However, any valuation figure from a chartered surveyor at the current time will more than likely carry a caveat along the lines that states the valuer “feels that the unknowns are so significant that the valuation produced would be less reliable than in normal circumstances”.

So what does this mean for a BTL investor?

Well, this is a tricky one but I think my view would be to approach the market with extreme caution.

As well as the uncertainty regarding capital values I would recommend looking at the market in the round. You will need to consider the likelihood or otherwise of increased unemployment in the areas you are investing in – this will impact the ability of tenants to pay the rent. You will also need to examine your own financial position – can you cover voids if your job is at risk?

Everybody will have their own approach which is ultimately a distillation of their perceived risk versus the rewards based on the knowledge, experience and skills they have.

One thing is for sure, those few with a Crystal Ball won’t be sharing what they can see!

Robert Frost MRICS is a Chartered Surveyor specialising in property valuation, sales and management. He works part-time as an independent mortgage valuer on behalf of many of the High Street banks and spends the rest of his time as a property investor and entrepreneur. His website http://www.propertytruths.com is the antidote to Get Rich Quick property schemes.

Is It Really Worth What Someone's Willing To Pay For It....?

rfrost1967@icloud.com (Robert Frost) — Wed, 03 Jun 2020 13:31:00 GMT

Caveat Emptor (Buyer Beware!)

The property market is full of cliches. Some that I come along on a regular basis are “Location, Location, Location”, “Worst house on the best street” and “This property has potential”. However, by far and away, the one I hear most when carrying out valuations for financial institutions when I ask the homeowner what they think their house is valued at is “It’s worth what somebody is willing to pay for it”.

On the surface this may sound absolutely correct.

In most cases the seller puts the property onto the market with the aim of achieving the best price possible. If no-one is willing to pay the asking price then the property price is probably pitched a little high and downward price adjustments, if required, are made until the property reaches a level that someone is willing to pay for it.

What if the asking price is too low? How do you know whether the price you have achieved is the best you could have got? Would the market have paid more had the property been exposed for longer or was it actually pitched perfectly?

This is a common dilemma for estate agents. If they put a property on the market and get an asking price offered within a couple of days, instead of the client being pleased they will often get concerned that they undervalued it. The question then becomes do they wait for higher offers or do they go ahead with the one they’ve got? Is there someone else out there who would be willing to pay more?

A good estate agent, in my opinion, would do two things at this point. Firstly, fully qualify the position of the potential purchaser. Have they got clear funds? Do they have anything to sell? Is there a chain? Are they credible? Secondly, they should continue to market the property until these questions are answered. Whether or not the offer is accepted should then come down to the motivation of the seller and whether they think that a ‘bird in the hand is worth two in the bush’?

From another perspective however this logic doesn’t always ring true, particularly in the residential BTL marketplace.

Take, for example, a southern or overseas BTL investor that is seeking greater returns (yield) from their portfolio and they decide to invest in the northern towns where they can see returns of 10-12% per annum. They see a nice two up, two down terraced house for sale at, say, £50,000 with a potential rent of £450 pcm. This equates to an initial yield of 10.8%. They do a bit of negotiating and agree a purchase price of £48,000 taking their yield to a nice 11.25% return.

This is what someone is willing to pay for it.

BUT is this the market value?

Just because someone is willing to pay a price doesn’t mean that it is it’s value. Anyone can pay more than the market value if they think an asset will satisfy their own arbitrary goals.

More often than not in this type of scenario the buyer has been motivated by their single set of criteria and have often acted without ‘full knowledge’ and/or ‘imprudently’. Knowledge and Prudence being key parts of the RICS definition of value.

This basically means that Market Value is determined assuming that the buyers knew everything they should be expected to know and that they also acted as if the purchase at that price was the right thing to do in the circumstances.

This where the a local valuation surveyor’s skill, knowledge and expertise comes into play. Often BTL investors who are obtaining finance will have the property inspected and reported on by a surveyor instructed by the bank. However, many cash buyers will forgo this step as they are happy with price and the ‘bargain’ they think they are buying.

Having worked in this field for many years now I can comfortably say that I have come across a multitude of instances where the potential buyer has agree to pay too much for the property. The most common cases occur where the property concerned has been subject to a ‘Splash & Dash’ renovation by that reputable building company, Bodgit & Scarper Ltd!

In such instances the ‘property developer’ has typically tried to disguise common defects with a quick plaster skim and redecoration and a few new carpets thrown in for good measure. The chronic damp is still there, the rot is hidden, the roof is in a poor state and the collapsed drains have hidden under a cheap decking platform. The cost of rectifying the property running into many thousands for the unsuspecting buyer.

In this instance the property is not worth what the buyer is willing to pay for it. They have reached this point without full knowledge and prudence. Any reputable surveyor would take these defects into account and adjust the market value to reflect the cost and inconvenience of the costs.

A further word of caution in this vein. Don’t always trust the estate agent to provide an assessment of the property’s value and rental potential. Firstly, they have a legal duty to obtain the best price for their client and therefore, working on the principle of caveat emptor (buyer beware), it is not really in their interest to tell you more than they know; this ties into the second reason to be careful. Most estate agents are not really qualified or motivated to find out about the defects – in many cases, ignorance is bliss from their perspective!

So, is a property always worth what someone is willing to pay for it?

Who knows, you decide…..?

Let's Buy A Pub

rfrost1967@icloud.com (Robert Frost) — Fri, 29 May 2020 15:36:20 GMT

Anyone for a pint?

Who doesn’t love the idea of owning a pub? A nice selection of beer and wines available for you whenever you fancy a tipple and a fun place where your mates come and actually pay you for the privilege of drinking at your bar!

Unfortunately, it is not always rosy in the beer garden if you are a speculative property investor and here's why....

According to the ONS (Office for National Statistics) the number of small pubs i.e. those with less than 10 employees, fell from 38,830 in 2001 to 22,840 by the start of 2019 and, given the effect of Covid19, it is probable that this number will continue to fall at a relatively high rate.

From a property investor’s perspective this could been seen as more of an opportunity than an issue as redundant pubs are usually fairly decent in size, well-built and sometimes they come with a good outside space for parking or recreation purposes.

For an unseasoned property investor looking for something a bit bigger than another terraced house then a pub may have great appeal.

As they are usually good size properties they appear, on the surface at least, to be ripe for conversion to flats or an HMO (house of multiple occupancy). They are connected to all the utilities and, if they have only just closed, usually are in a reasonable state of repair.

Indeed, I have previously bought a redundant pub at auction from a brewery. I have also seriously considered buying another couple but after I have exercised the due diligence based on what I learnt from the first I have so far not ventured down this path again.

So what did I learn?

Firstly, most pub purchases attract VAT on the gavel price in addition to the auction fees. ‘How’s that’ I hear you say, ‘Aren’t properties exempt from VAT?’ Well, yes they are, UNLESS the owner has opted to make the property a VAT qualifying property.

‘Why would they do that?’ The main reason is to claim back VAT that the brewery has spent on the property. Pubs regularly undergo refurbishments, updates and improvements and by being VAT registered they can offset this against their VAT bills. Unfortunately the VAT qualification stays with the building when it is sold and hence VAT is due on the agreed price.

It doesn’t end there. Whilst the VAT can be claimed back by the buyer if they have a VAT registered company this still keeps the building VAT eligible when sold on.

This creates a multitude of issues then when calculating the Return On Investment (ROI) for the purchaser. The rules about not charging VAT are pretty strict and you need to give it some real thought and get expert advice when it comes to converting to residential use. There are ways to minimise the VAT to zero but it is extremely easy to get caught out and remain liable. What this means, of course, is that the selling price of any conversion may attract VAT and your profits are reduced by 20%.

Secondly, most pubs are really well constructed with thick walls and heavy duty materials. Just knocking through a wall can become a major structural challenge which adds to the cost of conversion.

Thirdly, there is the issue of business rates. If the pub has been closed for any period of time it is more than likely that the seller has used any empty business premises allowances up and that when you purchase the property you may well be hit with an business rates bill from the day you own it. This could be substantial! There are ways to minimise this but you will need to seek professional advice.

Fourthly, there is the challenge of planning consent. Historically most local authorities have placed obstacles in the way of the change of use from a business premises to residential dwelling(s). Not surprising really given the cost of the business rates. However, this seems to be changing and this is becoming increasingly easier.

Finally, but not lastly, beware of the barrels! When I bought my pub I thought I had discovered a little gold mine in the cellar. At least 35 aluminium kegs, some empty some part full but a few quid in scrappage at least, so I thought. Little did I know that I was to hold onto those barrels and hand them on when I sold the building a couple of years later! Unfortunately aluminium beer barrels have some kind of special protection by the law which means no reputable scrap dealer will take them and even the less scrupulous roadside scavengers will leave them behind in preference for a rusty bed frame and a 20 year old dishwasher!

Cheers!

Homes Under The Hammer

rfrost1967@icloud.com (Robert Frost) — Thu, 21 May 2020 18:42:03 GMT

The Modern Method Explained

Whoosh.....and there you go. From a dump no one wanted to sparkling new house fit for a king, thousands in profit and all done within budget. How easy is that? It works almost every time! In fact, certainly enough to justify a daily morning TV slot and endless reruns on multiple channels.

The premise is simple: go to your local auction, buy a property lower than what you would normally pay through an estate agent, do it up and make a profit. That can and does work in some cases but in others it’s really not that straightforward!

Before you decide to buy a home under the hammer, you really need to know what type of auction it is. Most people think they know how auctions work; you register to bid, make your bids, pay a deposit and a relatively small fee (or percentage) to the auction house and bingo it’s yours. This is dead right for a traditional auction. However, beware of the new type of property auction often referred to as the ‘Modern Auction Method’.

The Modern method has a variety of forms but the most common theme is that the seller’s cost of sale is passed on to the buyer, more often than not this particular fee is a non-refundable ‘reservation fee’ and not necessarily an exchange of contracts between the seller and buyer as is the norm in traditional auctions.

Why does this matter? Well, in the traditional auction model when the gavel falls an unconditional contract is formed by the ‘bang’ of the gavel. You’ve agreed to buy the property based on the conditions in the legal pack and that’s it! You’ve normally got 28 days to complete and an agreed deposit is paid there and then.

However, in the Modern Method of Auction the gavel falling usually strikes a conditional contract between buyer and seller based on the terms in the legal pack. A deposit is typically paid as per normal PLUS a Reservation Fee. The important thing to note is that the Reservation Fee does NOT contribute to the price of the property AND it is often considerably higher than a traditional auctioneer's fee. Generally speaking, the Reservation Fee is around 5% plus VAT of the selling price with a minimum of typically £4000 - £5000 plus VAT. To put this in context a traditional auction buyer's fee is usually around 1%-1.5% with a minimum of £750-£1,250 plus VAT.

Why is this the case? Well the modern method is all about getting the properties to auction, helping agents get the property sold quickly and for decent fees. With a normal private treaty sale (i.e. via an estate agent following some negotiation) there is often little financial commitment on behalf of the buyer or seller until contracts are exchanged, the price might be renegotiated at the last minute and the estate agent’s fees are normally around 1-1.5% of the selling price, which are normally paid by the seller.

In the modern method, the seller usually pays no fees for selling the property. The Reservation Fee is used to pay the introducing estate agent and the auction house, with anywhere from a 33% - 66% share going to the introducing agent. In other words, the cost of sale flicks from the seller to the buyer. The estate agent makes more money and the vendor pays nothing to sell their property.

Why is this important? It matters because as the seller’s fees are no longer paid by the vendor they don’t need to build such fees into the selling price and can therefore offer a lower guide price to the auction house, which will in turn makes the property seem more appealing to the market.

To be fair, most decent auction houses make the type of auction conditions clear on their websites but there are few who don’t make it as clear as they could. This why reading the legal pack is absolutely essential before bidding on any property at an auction. Never make the assumption that the property you are bidding on is being sold using the traditional method or you could be in for an expensive surprise with a nasty bill of an additional several thousand pounds on top of the gavel price.

So, before you hear the whoosh and see the money from a potential auction purchase check to see what type of auction it is and do the calculations. Is it really a good deal or does it just seem like one?

Now, where’s the remote? I’ve some TV to watch!!

Robert Frost MRICS is a Chartered Surveyor specialising in property valuation, sales and management. He works part-time as an independent mortgage valuer on behalf of many of the High Street banks and spends the rest of his time as a property investor and entrepreneur. His website www.propertytruths.com is the antidote to Get Rich Quick property schemes.

Guaranteed 8% Net Returns. What's Not To Like!

Wed, 13 May 2020 11:50:04 GMT

Student Accommodation - Best Deal Ever?

Every day my inbox receives countless messages from generous souls only too willing to share with me how I can make a fortune working from home with minimal risk and little effort. The generosity of the senders is incredible given that I’ve no idea who they are!

Today, for example, I received an email from ‘Investment’ with the header ‘Luxurious Student Buy To Lets with 8% Net Returns’. There is a guarantee of at least 8% net for the next five years with a minimum price for a studio apartment starting at £85,000.

My first thought was, does this development actually exist and is there a record of any planning application where they say the property will be?

Surprisingly, when I looked it up there is a valid planning consent for a student block where they said it will be. The next question then is, has it been built yet? No not yet, but no worries it’s an off plan development and this is simply a pre-build marketing scheme.

And this is where the warning bells start.

It is a fact that recently student accommodation has become a vehicle for some unscrupulous developers seeking to get rich by to exploit their investors with what seems like a great investment on the surface.

An example of a typical student accommodation scam goes something like this:

• The developer buys some land near to a further education establishment, usually a smaller town that happens to have a ‘University’ facility (often a satellite building of a larger institution some miles away).

• The developer gets planning consent for a student building housing, say, 120 students. All good, so far.

• The developer creates a marketing pack and starts selling off plan. This raises the capital to complete the build. Once completed, all monies are paid and the property is ready to be occupied.

• So the first part of the scam – the question of whether or not the student studio apartment is worth the £85,000 and whether or not it is even mortgageable on the open market? Many high street lenders won’t lend on studios or apartments less than a minimum area or even on student accommodation per se. This means that the only potential buyers are the building freeholder, other investors or cash purchasers. Often the original investors are people who are reinvesting their pension pots and so an original mortgage is less of an issue.

Why is this part of the scam? The freeholder knows that after the five years when you are not receiving the promised rent you may wish to sell the investment but to who? At this point the freeholder will offer to buy it back from you for a fraction of what you paid. Once they have done this they can then afford to let it out for less than they needed to pay you under the guarantee and they are quids in.

• The second part of the scam relates to the 5 year guarantee. Given that they are making a good profit on each studio apartment and that at least some of them will be rented out the developer will have enough cash to pay the 5% per annum for the next five years – in other words, you will get 25% of your investment back. This leaves 75% with the developer plus the rent.

What happens next is that in year six the return will be based on the rent of YOUR studio apartment. If it’s not occupied then the you will get no rent. Remember, this is secondary student accommodation in a secondary town where demand is likely to be low as well as rents. This means that what apartments are rented out first are likely to be those owned by the developer and not the investors. So, when the five years are up guess which will be rented out first?

This then ties back into the first part of the scam which is the over valuation of the original investment and then plan to buy it back cheaper later.

• The third part of this scam is the cleverest part. This is when two to three months into the guaranteed payments turning up in the investors bank accounts the same investors get a call from the marketing company to confirm you are receiving the guaranteed payments as promised. All is working as you were told they say and aren’t you pleased with the decision you made?

After another month or so you they ring again and reconfirm the brilliance of your investment and recommend that you buy another apartment in the block or in another new scheme they are building in another town. This time though why not buy a couple instead of one given the returns so far? And this is where it goes…

For the first couple of years everything is great until the guarantees fall away. After a while the investor is left with several apartments that instead of generating 8% a year net are more likely to be generating a fraction of that or even making a loss after the management fees, ground rent, maintenance etc are taken into account.

And then back to the beginning……..buy it back cheap and start again. The original investors are thousands out of pocket and the developer has a fully paid for scheme generating an income for them using other peoples’ money.

Unfortunately, student accommodation has been hijacked over the last few years by many unscrupulous developers that raise the cash to build the properties and then use the same cash to promise returns higher than the market rate.

Over time the developer will seek to repurchase the apartments for fraction of their original price or hammer the owners with punitive charges. The developer will seek to own the whole property over the medium term and eventually rent the apartments themselves. Alternatively they may bleed the management company dry and eventually put it and the property into administration having taken massive fees from the investors.

This is just a simple analysis of the type of student letting scams out there. There are more sophisticated versions where complex ownership structures mean that the investors are unwittingly at the whim of a third party and they could end up ultimately with no-one to sue if the promised returns do not materialise.

This is not to say that all student investments are bad ideas. Indeed, they can be a very good investment if done properly. However, if an unsolicited email lands in your inbox offering a guaranteed net yield for a fixed period you might just want to think long and hard about whether this is the type of deal for you?

If it is then, like all property investments, make sure you do your due diligence. Employ good property specialists such as solicitors and surveyors. Use your own broker. Research the company selling it and their directors. Establish the ownership structure and who your contract is with. Establish your rights to redress. Know the limits of your liability. Find out about all possible running costs.

Needless to say, today I sent the email from ‘Investor’ to my junk box to join the hundreds already in there. Can’t wait to see my email tomorrow, perhaps I’ll get some bitcoin scheme endorsed by the Queen or a Bulgarian airport car parking investment with 12% guaranteed returns?

Robert Frost MRICS is a Chartered Surveyor specialising in property valuation, sales and management. He works part-time as an independent mortgage valuer on behalf of many of the High Street banks and spend the rest of his time as a property investor and entrepreneur. His website www.propertytruths.com is the antidote to Get Rich Quick property schemes.

Sun, Sea & Dreams....

Mon, 04 May 2020 12:36:50 GMT

It Can All Be Yours.......Can't It?

The sun is shining, the sky is blue, beautiful people in exotic locations driving fast cars and flashing Colgate smiles without a care in the world. How fantastic! Well, this can all be yours if you learn the secrets to property investing. If I did it, so can you!

……and so the story goes….

…..or does it?

True, some people have made some serious money from property. They are at the very top of their game, know what they are doing and have worked for it. However, it is very unlikely that they made millions in a few months from nothing.

Unfortunately, there are many so called ‘mentors’, ‘gurus’ or ‘property experts' out there telling people that they can achieve such a lifestyle with nothing more than a couple of quid and some inside knowledge.

Come to our free property seminar they shout, it’s endorsed by a wealthy celebrity they proclaim, he’s made millions and he’ll show you how. No obligation, it’s free and so is the lunch.

A free lunch now that is unusual. All this is for nothing, surely there’s a catch? Nope, they assure you, no catches just the chance to learn from the best because we are really nice guys that want you to be rich like us. Oh, there might be the option to sign up for a course but that’s completely your choice and, yes, you may have to sign up to our contact programme but why wouldn’t you?

Property, the easiest game in town. All you need to know is how to gamble with other peoples’ money, how to reinvest your profit and buy below market value. If you can learn how to do this then surely riches are guaranteed and you can achieve the financial freedom you deserve. For a small fortune, unqualified smooth talking salespeople masquerading as property experts will train you to be as rich as you want to be with the only barrier to success being you. Easy, right?

Each weekday morning there is a brilliant TV programme on the BBC where amateur property investors go to the auction, buy a property for a knock-down price, give it a light refurbishment and make thousands of pounds profit almost every time. Whooosh….from a dump no-one wanted to a palace fit for a king in just 8 minutes of TV time. Swooning estate agents declaring that the house is amazing and declaring a massive uplift in value as they stroke the egos of the successful investors. This can be you, surely?

Then there are the YouTubers. These guys are phenomenal. They live in huge mansions, drive new Aston Martins and sexy red Ferraris. Their property portfolios are worth millions. They are self-made property millionaires who left school with nothing but their blazers and yet they have built fortunes with no money of their own. Who needs a formal property qualification when you can learn from these guys?

So, roll up, roll up and enjoy the fun of the fair. Play the property game, guaranteed win every time. Look, I’ll show you how to play! What do you mean, loaded dice, dodgy darts and fake winners? That’s because you’re not playing right, pay me a bit more and I’ll show you how to win big!

Does any of this sound familiar?

If it does, then good. If not, then please be aware!

Property investing can be a profitable business and lead to a good long-term outcome if it’s done carefully, with full knowledge of the facts and an approach that consistently assesses risk versus reward in line with your realistic goals and pragmatic approach.

Yes, there have been some people somewhere who have done very well ‘flipping’ property but this is extremely rare and is often combined with other factors besides the single property deal.

In reality, property investing is a medium to long-term thing. Property is a very illiquid asset (i.e. cannot be turned into cash upon demand), with significant costs attached and often bound by tight regulation. For every bargain there will be at least 10 dogs that you would be well advised to walk away from. The ability to distinguish from the two is key to successful property investing.

Due to the large amounts of money involved property attracts the charlatans. These are those that are there to part you from as much money as they possibly can through dubious promises, back-hander deals, worthless misinformed training, poorly drafted one-sided agreements and dodgy joint venture deals to name just a few.

If you are serious about becoming a property investor then stop listening to the hype. It’s there to create a noise around the fact that property investing is actually quite a difficult route to financial freedom. It can be done, of course, but you must tread carefully to avoid getting your feet burnt.

If you want to learn and become successful then make sure you are learning from those who really are qualified to teach you. It takes at least three years at University, two years on the job experience and an Assessment of Professional Competence to become a Chartered Surveyor, a similar type of system applies to lawyers and accountants. These people are required to keep up their CPD (Continuing Professional Development) with a certain amount of on-going formal training each year so that they can keep working as professional advisors.

Beware, be very aware, of those who advocate Get Rich Quick property schemes when they have no recognised property qualifications. They may be driving smart cars with villas in Dubai and Colgate smiles but it’s almost certainly not been achieved in a year from their property investments. Just think how they got their money and then think again whether you really want to give them your hard earned cash?

Robert Frost MRICS is a Chartered Surveyor specialising in property valuation, sales and management. He works part-time as an independent mortgage valuer on behalf of many of the High Street banks and spend the rest of his time as a property investor and entrepreneur. His website www.propertytruths.com is the antidote to Get Rich Quick property schemes.