The Property Speculator » Property Market.

Understanding Property Auctions

Property auctions are one of the most popular places for prospective investors and developers to look for projects. There are many alternatives, but auctions remain very popular despite the current difficulties in obtaining finance.

The auction hall is often looked upon as the first step on the path to running a property business. However, auction day is really the very end of the first stage.

There are some terms that are used when describing auction lots that many potential bidders are not familiar with. It is so important to understand what you are getting into; auctions can be unforgiving to the unprepared:

“The vendor is a Mortgagee not in possession“.

Obviously the Vendor is the party who is selling the property at auction.
The ‘Mortgagee‘ is the bank or building society who originally provided the loan for the purchase of the property (the Lender). This is the opposite of the ‘Mortgagor’ who is the person(s) buying the property (borrower).
The term ‘Not in Possession‘ means that the party selling the property do not actually own the legal interest (whether this is Freehold or Leasehold). When a lender provides a loan (mortgage) for a person to buy a property, the lender has a ‘first charge’ on the property. This means that they retain the legal right to sell the property to recoup financial loss in the event of the borrower breaching the terms of the mortgage by defaulting on the repayments.

So, what the term above means in laymans terms, is

“that the party selling the property is a bank/building society who do not actually hold the legal title on the property, but who are exercising their legal right to get their money back by selling the property.” Essentially, it’s a repossession.

© Copyright Brendan and Ruth McCartney and licensed for reuse under this Creative Commons Licence

“Therefore the accommodation and any basis of occupancy cannot be confirmed”

This means that the parties offering the property up for sale at auction (the legal firm and the auction agents providing the details) will not offer any indication of the state of current occupancy. There could be (for example) 20-odd families living in it, or there could be a terminally ill old lady….. It’s absolutely the responsibility of the person intending to buy the property to reassure themselves and investigate the situation before they bid.
If you were to bid on a particular property and actually get the winning bid, you do not have much in the way of recourse if it turns out you’ve bought something not quite right. It’s only if a property has been falsely advertised and you believe something you are told in good faith that you can take action to legally rectify this (by suing someone for example). This is why the auction agents will not give any information in respect of anything they don’t know for certain, it’s because they know they can be sued for it if it turns out to be incorrect.
If you were to successfully bid on a property and it turns out someone is already living in it (legally or otherwise), that party often has some legal rights to stay there until you obtain a court-order to evict them.

Essentially, it’s up to the bidding party to investigate the current circumstances of the property. If you want to purchase an investment property with a tenant already in place, then it’s up to you to make sure that the tenancy and lease are all in order and no-one is living there who shouldn’t be. If you intend to buy a vacant property, then it’s up to you to make sure it is indeed empty before you bid. There is often hidden legal issues in property, especially at auction. However, there is usually every opportunity to make sure that nothing comes back to bite you on the a***. If you are offered a property without actually seeing and investigating it, then (to be realistic) you shouldn’t pay much for it because you’re exposing yourself to massive financial risk.

In respect of purchasing the property at auction, it is 80%-90% a legal process. You are purchasing the legal title to a property which means you will have ‘exclusive possession’ (unless someone else is living in it and also has a legal right to be there). You should be 100% certain that you know what you’re buying into before you bid.

When buying a property at auction, it pays to be suspicious about everything; so do your homework!

Nov 30th, 2011

13 Steps to Getting a Property Sold

If you are planning on developing a property, the very final stage is the sale at the end. No developer wants a long wait to sell the property, no capital or rent is coming in and meanwhile mortgage repayments have to be covered. The longer it stays on the market, the more the developer will financially lose out.

So, to ensure that you have the very best chance of getting the completed property sold, here is a checklist to run through so that you know you are less likely to miss out.

© Copyright Carl Ayling and licensed for reuse under this Creative Commons Licence

Establish your position. You have to realistic about selling the property; if the market is currently flat in the area you are selling in you might well have to reduce the price at some point in the marketing process. If you are not in a particular hurry to sell, you might feel that reducing the asking price is not an option you want to consider. Don’t rule it out though.
Consider the purchaser’s aspect when pricing the property. Clearly it will depend on what the property is valued at but remember that houses are usually priced strategically just below the Stamp Duty Land Tax thresholds. This is not coincidence. If a property is priced just below the threshold and a competing one is just above it, the difference between them might only be a few thousand pounds but the cheaper one is likely to be on the market for a shorter length of time.
Consider your market. Much is made on TV property programmes of selling to ‘young professionals’; however there are occasionally people outside this category who buy properties. Of course, I recommend buying a development property with a particular customer in mind but you should certainly be selling it knowing who should be buying it. Students for example (or rather their parents), will be considering different things than a young family or a retired couple. Far better to cater for an existing local need than trying in vain to sell a property that’s being marketed to the wrong people. Speak to Estate Agents (several), they should be able to tell you where the local needs lie.
Ensure that the work that needs to be done, is actually done. If you’ve just had work done on the property then there shouldn’t be any excuse for leaking gutters, damp or mildew on walls or dodgy hinges on doors (for example). Not every developer will be carrying out a complete ‘gutting’ of the property, so if the turn-round is a rapid one to get it back on the market, make sure nothing is overlooked. If someone is having a viewing and looking round the property, if they find one obvious fault they might start to look for others.
Always have an idea of what the property is worth. Property valuation is not rocket science; it’s easy to get to know a particular area’s property market. After a few weeks you will probably be able to gauge neighbouring property prices to within around 5% of what a professional valuer would put it at. This will definitely help when it does finally get to the stage of accepting an offer, you will be able to distinguish between a silly offer and a realistic one. Having a look on a couple of property websites will help to get an idea of what neighbouring properties sold for (www.nethouseprices.com or www.rightmove.co.uk).
Choose the right estate agent. Some are good, some are bad but it’s highly likely you will be stuck with them for at least 6 months if the property does not sell. Word of mouth is a good way to get an idea of true reputation, and don’t be taken in by their sales pitch, remain sceptical! If you choose to put the property on the market with a single agent, there’s no reason why you should have to pay more than 1% (plus VAT) of the sale price. If you go with dual agents, it’s very likely you will be charged 2% (plus VAT).
Once the property is on the market, make sure it’s kept tidy inside and out whenever possible. Potential purchasers will do ‘drive-byes’, where they drive past a property to have a quick, discreet look and get a feel for the area without committing to a viewing. If there’s rubbish or builders waste left outside the property, it can be really off-putting for them.
If the estate agent has promised you that the property is displayed in their window and being aggressively marketed, periodically check that they’re telling the truth. Speaking from experience, an agent had stressed that the particulars of a house was in their window for all passers-by to see; but upon arriving at the shop, my wife and I found that not only was it not in the window it wasn’t displayed inside the shop either. They were poor agents and this was the final straw in making the decision to sack them.
Be picky about the property details produced by the agent. Their job is to get your property sold as quickly and efficiently as possible. If you feel that the details are not satisfactory, don’t be afraid of telling them. You will ultimately be paying for this service so they should always be acting in your best interests.
Pester the agent for feedback on viewings. Agents are not always the most communicative of people so they might need prompting occasionally. You might be fobbed off with a vague comment the agent picked up from the viewee, but after a few weeks of pestering them for accurate feedback, they’ll make sure they have proper answers for you. Some aspects of the property might be unavoidable, such as parking. However some things might be easily solved such as borrowing some furniture to ‘pad-out’ an empty property.
Consider exactly what you might be prepared to put in the property for the purchasers. For example you could throw in all the fitted carpets if the purchasers pay full asking price; they don’t know that you managed to get a load of inexpensive carpet from a friend. Same for curtains, you (as developer and vendor) might feel that putting up some (decent quality) curtains is of such little consideration as to be next-to worthless to the purchaser. This is not the case, buying and fitting good quality curtains and rails can run into thousands of pounds in some cases. If you can source them cheaply, you might well swing the deal in your favour.
When an offer does come along, you should have a figure in your mind that marks the border between what would be acceptable and what wouldn’t. This value has to be realistic though. In the current climate, buyers are looking for bargains and if you won’t consider dropping the price at all then it might be a while before the property sells. It’s a difficult market and sellers have to do what they can to keep their businesses running. Obviously a reduction in selling price over what you might have expected will reduce your profit margin, therefore consider this very carefully.
Do anything possible to increase the exposure of the property. Sarah Beeny’s website Tepilo is very good, and free. You won’t lose anything by making use of it! If you look around, websites and blogs can be free too these days (for example www.wordpress.com), give the property its own site! You have nothing to lose and it should not affect the arrangement you have with your estate agent.

Jul 3rd, 2011

Investing in Ground Rents

It’s not easy to begin investing in property; there are very high costs involved which have the effect of barring many prospective investors from entering the market. In economic terms, this can be explained by the balancing of supply and demand. If supply remains constant, as demand increases, so does price.

This is not really of much interest to the person who is very keen to begin property investment but is having trouble finding the capital to invest. This is where ground rents can prove to be worthy of some consideration as an alternative. The term is used mainly in England, Wales, and Ireland. The USA has similarities to this system but differs on some points. In Scotland, the term ‘Ground Annual’ is used instead, this system in basically similar to the ground rent one as the interests can be assigned and sold fairly freely.

A Ground Rent is the freehold interest (which is the outright ownership) on a parcel of land where a second party (the Leaseholder) owns a long-leasehold interest. The Leaseholder will be the owner of any building on the land and subsequently will be the recipient of any associated rents generated by the building through a tenancy agreement. He will pay the ground rent on a regular basis to the freeholder for the continued use of the land. A Ground Rent can be on both Residential and Commercial property. As the term suggests, it is rent payable for the use of the ground. The Freeholder will not be the owner of the building that is situated on the land.

Ground Rents are valued in a similar way to most other investment properties. They will have a lease in place of between 21 and 999 years. A period of 99 years is fairly common. When the lease interest is approaching expiry, the Ground Rent value will tend to increase because when a new lease begins, the ground rent might be set at a higher rate (due to inflation) making it more desirable to potential purchasers. The leaseholder is also very likely to have to pay the freeholder a premium to extend or renew the lease. Any likelihood of the leaseholder defaulting on the ground rent payment will have the opposite effect though, so a purchaser will be looking for what is known as a ‘strong covenant’ (meaning the leaseholder is unlikely to default on the payment). If the leasehold interest is not due to expire within the next 150 years, the ground rent value will be quite low in comparison to agreements with less than this to run.

A Ground Rent can be purchased at a property auction (Savills and Cushman & Wakefield in particular, often auction ground rent investments). In common with other property auction lots, a guide price is provided prior to auction. The value of the ground rent investment is likely to be around 10-20 times the value of the annual rent paid. This would be an initial yield of around 5%-10%. So for example if the annual rent payable to the freeholder is £350, then a guide price of £7,000 might be set. This would provide a yield of 5% (yield is calculated by expressing the annual rent as a percentage of the capital value). Often, an investor has the opportunity to purchase a set of ground rent investments, for example on an apartment block with many units. The leaseholder will be obliged to pay ground rents to the freeholder for each individual apartment.

As with almost all investments, a return of between 5% and 10% is typical. Purchasing a Ground Rent investment will not make you rich overnight and is not likely to provide a rate of return that is greater than most other investments. What it will do however is provide a method of property investment that allows the investor to purchase property interests in far smaller ‘units’ than a whole house or flat. A ground rent can also provide an excellent way of diversifying an existing portfolio.

A ground rent can provide a very secure investment. If the leaseholder defaults on the rent, the freeholder has the right to take possession of the land and any buildings upon it (depending upon the agreement terms). However, investors usually simply want a passive rent income, not the hassle of trying to get a new occupant for the property.

Ground rents are not without their shortcomings though. One of the major attractions of property investment is that the freeholder has a tangible investment, the value of which can be increased through improvement. A ground rent does not allow this as it amounts to an interest in property that cannot really be physically observed. Improvement to the ground itself is not particularly possible; the building belongs to the leaseholder so what can the ground rent holder do to increase the value? Nothing really.

Another shortcoming of Ground Rent investment is the scale of administration involved when running a substantial portfolio. The work involved in rent collection and any legal obligations that the freeholder might be obliged to carry out can seem disproportionate to the amount of annual rent collected making ground rents one of the most illiquid investments imaginable. Property investment companies that specialise in ground rents will have rent collection and billing as automated as possible for the purpose of improving cost-effectiveness.

Jan 9th, 2011

Why a packaged-up property investment does not work

When I was studying to become a Surveyor and learning about property investment and valuation in particular, I remember seeing a large development of flats being constructed and a banner caught my eye. It read ‘12% yield, guaranteed’. I thought about this for quite some time because the subject of yields was very fresh in my mind.

The term ‘yield’ within the field of investment means the sum of money that your investment returns to you on a regular basis. It is in effect your payment for letting someone use the asset it is based upon. If this were a bond or a company share, then the yield would be the payment for lending/giving a corporation or government your money (the purchase price). In the case of property investment, it is the return (in the form of a rent payment) for allowing a tenant the use of your property.

The equation to calculate the yield figure is simply the return over 1 year, as a percentage of the capital value. So for example, if the annual return for a particular investment was £5,000; and the capital value was £100,000 then the yield would be 5%. As the yield figure is based upon two figures (annual return and capital value); if one changes, then it will alter the yield figure. So using the example above, if a property is returning £5,000 per year (this is written into the tenancy agreement and subsequently cannot be changed easily) and the capital value rises to £120,000, the yield would become 4.2% (£5,000 is approx 4.2% of £120,000). Likewise if the capital value dropped to £80,000, the yield would become 6.25%.

Most investments, (property included) provide a yield of between 4% and 8% (very approximately). Residential property tends be lower yield because the capital value is higher and investors look upon it as long-term and low risk. A realistic yield for residential property might be around 4%-5%.

At the other end of the scale, retail property tends to be highest yielding because the investor will be anxious to recoup the initial purchase price in as short a time as possible because these properties represent a higher risk to him (retail property is extremely sensitive to economic influences). So the rent will be set fairly high, but the capital value will be quite low. A realistic yield figure for retail property might be around 8%.

With this information in mind, why would a banner advertise that a return of 12% is guaranteed on a residential development?

Many developments are planned from the outset to rely heavily on buy-to-let investors. Obviously the development I saw was one of them. The developer will be keen to sell as many units as possible to achieve his planned return. An investment company might partner up with the developer and seek to sell individual units to private property investors. The appeal of this arrangement is that the investment company will manage the property, including finding a tenant. At the end of each month they collect the rent and pay you your share. Sounds good doesn’t it? Investors get to receive a return on their outlay and don’t have to do anything for it. However, it really isn’t that simple.

To be completely honest, I really do not know how any company can provide an investor with a 12% yield. Let alone guarantee it. However with the benefit of experience, I can make a couple of assumptions:

1. That the contract between the private investor and the management company contains some very onerous smallprint that in effect makes the initial promise of a guaranteed return worthless.

2. That the property’s capital value is manipulated to reflect a much lower figure. This has the effect of increasing the yield rate.

The market in residential property ensures that if a particular development is overpriced, customers will simply go elsewhere.

To guarantee a yield figure to an investor seems to me, madness or just lies. The tenant is highly unlikely to pay such an inflated figure for so long that to offer any promise of such a high return is simply not possible. The management/investment company would have to heavily subsidise this return, and that is not a very smart business model at all is it? There isn’t a landlord or investment company in existence that can guarantee a tenant in occupation (even in the case of social housing, governments, policies and budgets are always subject to change). Risk, to a greater or lesser degree is part of investment. It is the element of risk that provides you with your return.

The point I wish to make, is that the concepts of being a ‘remote’ investor, and expecting the venture to pay for itself are not really compatible with each other. Guaranteed yields aside, off the top of my head there are at least 3 reasons why these packaged up investments are unlikely to make you much money:

The initial purchase price is highly unlikely to be negotiated down beyond a certain percentage (most ‘sales suite’ staff have the authority to agree a certain price reduction, but this will not be volunteered!). Remember, as a purchaser you will be expected to pay a fairly high price because it’s your cash that makes the whole thing worthwhile and profitable for all parties before you, and it’s likely that there’s quite a few! This situation immediately rules out your opportunity to make a profit on the capital value. Remember, you are helping to provide the developer’s profit!
If you wish to sell the property at any point in the future, any increase in value will be absolutely dependent on the development as a whole. There is a general rule that all properties are different in some way, whether that is location, size, layout or appearance. That said, these large developments of flats do look very homogenous. So the value of your investment will remain exactly in line with the values of all the other individual units, regardless of what you do to it.
As the properties tend to be new-build, you are extremely limited in what you can do to add value to the property. You will be limited by the layout of the building as a whole, planning laws and no doubt, the covenants within the property deeds.

These 3 aspects form the very basis of how investors and developers make money from property. The fundamental process being:

Buy the property at a discount, carry out work that increases value, and sell at a price that provides a decent profit.

So there you have it, these packaged up property investments might look very tempting. However, scratch the surface and you will see that they manage to one-by-one, eliminate all your opportunities to make a profit.

I believe I can say without fear of being contradicted, that anyone who really makes money from property has done it through being heavily involved in the whole process. It is only possible to delegate the work once you have people working for you.

Oct 15th, 2010

What is the Best Time of Year to Sell a Property?

If you are planning to put a property on the market soon, you obviously want to give yourself a fighting chance of obtaining the best possible price. Timing is important when selling property, but is it quite as important as many would have you believe?

Traditionally, the best time to sell a house is between January and July. This is because buyers feel generally optimistic because of the approach of spring and summer. Houses can look very attractive when the gardens are in full bloom, and potential buyers tend to spend more time outdoors and so tend to ‘notice’ properties for sale. Make sure that your property is listed for sale by April to take advantage of this.

The summer holiday season then slows things down. This is because buyers are more concerned with holidays and looking after children who are off school. Sales that are already going through during this time will also be more likely to ‘drag’. Members of staff of Estate Agents, Solicitors and mortgage companies are likely to be off work at some point during this period. Your case is unlikely to be looked at during their absence.

September then typically displays a small surge as buyers start thinking about spending Christmas and New Year in a new home. This ‘blip’ will tail off around October as buyers know that the purchase is unlikely to be completed by Christmas.

Although this market behaviour is generally typical, will it really have an effect on the property’s value? Obviously more potential buyers will result in a more competitive situation; this has the effect of supporting a strong price. The fact of it is that there are certainly more buyers around at certain times of the year, but likewise there are always people who are looking to buy regardless of the time of year.

An associate of mine indulges in what is known in the U.S. as ‘flipping’ homes. This is simply buying a scruffy property at a discount and living in it while the property is lightly renovated in preparation for selling on again. He placed it on the market in November and received very little interest. He waited patiently through December with similarly scarce viewings. However, literally 4 days after New Year, the market went (his words) ‘ballistic’. The deal was done in a matter of weeks.

Housing is currently in short supply; subsequently many buyers are resigned to waiting many months or even a year or two for the ‘right’ property to come along. As long as you know the type of buyer you wish to appeal to, you might be able to market the property accordingly to good effect.

There is also a theory that suggests completely contradicting the conventional approach. When better (in theory) to sell a property than when there’s hardly any competition? Also, winter buyers are less likely to be flaky and pull out of the sale.

There are many who believe that the seasonal cycle of the residential property market is vital to maintain its health (which seems very logical to me). And that house prices will tend to fluctuate between about +3% and -1% of the average according to the season. On the website www.houseprices.uk.net, historical data is provided to strengthen this concept:

“House prices vary seasonally between -2% and +1% in a way that reflects seasonal changes in demand – it leads to a sharp dip at Christmas and the New Year with a broad peak during June-July.

This can make it difficult to interpret the monthly changes in house prices in terms of either trends or irregular volatility, so it is standard practice to report house prices seasonally adjusted, or SA. The correction shown is the % change added to the NSA prices to get the SA ones. The level of seasonal adjustment is an excellent indicator of the annual ‘breathing’ cycle of the housing market, and hence its health.”

Seasonal Adjustment
Ultimately, much depends on your property. If it is in a sought after location, you should have no problem selling at a reasonable asking price regardless of the time of year or market conditions. Then again, if there are strong reasons that may put buyers off the property, these are likely to be valid objections regardless of demand level. But it does no harm to maximise your chances of success.

There is much you can do to increase the likelihood of a prompt property sale. A well-kept garden, pathway and fence, plus a freshly painted front door are immediately appealing, whereas a scruffy outdoor space with a litter bin outside the front door may turn many prospective buyers away.

It is important to reduce ‘clutter’ in the house and present a clean property. Natural colours and lamps (rather than bright, stark overhead lights) are very effective at making the property feel ‘welcoming’. All minor maintenance jobs should be completed. The individual rooms should be ‘defined’ properly. This means that it should be obvious that the room has a specific purpose.

The rules to stick to when selling property are:

1. Put the property on sale at a realistic price
Most property owners have an idea of what their houses or flats would fetch on the open market. However, be aware that the asking price and the actual sale price are very often different sums.

2. Put the property on sale at the right price.
If the property is placed on sale at too high a price, many potential purchasers won’t even consider it because they assume that the price will not be reduced by a great deal. Also, many people simply feel uncomfortable negotiating a big reduction in price. If the property goes up for sale at too low a price, then financially you’ll lose out.

3. Try to avoid being in a chain.
The longer the chain of vendors and purchasers, the more likely something will go wrong. This might be a seller withdrawing a property higher up the chain or even something happening further down the chain. Either way, things will normally grind to a standstill.

4. Choose your estate agent carefully.
There is seldom a reason why you should have to pay more than 1% of the selling price for the estate agents fees. Try to avoid a period of exclusivity that seems too long, you should be able to give a week’s notice in writing to end the contractual period. Speak to the agent about the area your property is in. They should know it like the back of their hand. If they don’t, then it does not bode well.

5. Make sure the property is well presented.
A well-painted front door and a tidy garden go a long way to ensuring the property makes a good initial impression.

6. Adopt a pro-active approach to selling the property.
Make sure that you know exactly what type of purchaser the property should appeal to. If it is a family home, carry out some research into local schools and transport.
Make regular contact with your estate agent, remember they are working on your behalf and should always be acting in your best interest. Feedback from viewings can be a very valuable source of information. There might be something putting off buyers that are quite easily rectified.

Transactions can fall through at any time, so your property should be marketed right up until a fairly advanced stage of the deal. If it falls through and marketing has ended, you will have to start all over again.

7. Try to exchange contracts as soon as possible
This is the point where both parties are legally bound to adhere to the transaction. When the contracts are exchanged, both parties are committed.

Ultimately, no one really knows what the property market is going to do. If you hang on for what you think might be a good season to sell, the market could have dried up even more.

Jul 29th, 2010