Buying Below Market Value from Distressed Sellers and Sale and Rent Back by Lawrenson of LettingFocus.com

RISK OF BIG PROPERTY CRASH IS LOW
Last week I was speaking at the Birmingham leg of the Property Investors show at the NEC.
It was pretty quiet there and much less active than last year reflecting, I guess, all the negative news about the property market.
As you’ll know if you have read previous blogs, I don’t believe all the doom and gloom and whilst I think that property prices could fall up this year by up to 10%, I think that falls will be limited for properties and areas that are not oversupplied already or where serious local social and / or unemployment problems exist.
And since rents are rising strongly and unemployment has so far stubbornly refused to go up, there are indeed still many green shoots for the investor or brave property buyer.
In other words, this is a year when you can buy property cheaply, just as long as you have access to credit and can put in at least 20% of a property’s value as equity.

DANGERS IN BUYING BELOW MARKET VALUE
Whilst at the show I heard a few scare stories about Below Market Value (BMV). It seems some investors have got themselves in a bit of a mess with below market value purchases from distressed sellers - and here is how they did it.
I’ll just explain for those who don’t know that buying BMV can sometimes involve buying from indebted (and hence motivated) sellers who are about to be repossessed by the mortgage company.
BMV buyers will seek out and then buy from these kinds of “motivated distressed sellers” at a discount, sometimes using bridging loans to buy with “No money down” and then they rent back the property to the seller who becomes their tenant.
So far so good!
But one of the big dangers is that the kind of property seller who is prepared to do this type of deal - and sell their home at below its true price- will by definition have what we could call “a bad credit history”
In other words, they have defaulted on their mortgage already, so the chances are arguably higher that they will default on their new tenancy too than a normal tenant would.
Most BMV investors would say that if they do, well it is bad for them but by doing so, it will allow the investor to evict if the arrears are bad enough.
And that is true, though some will have ethical issues with all this – but let’s leave that aside for now

TROUBLE IS.....EVICTION IS NOT FAST
The only trouble with eviction because of arrears is that it typically takes about 5 months to go through if you have to ultimately enforce the eviction notice with a bailiff.
First, you need there to be 2 months before you can even start a possession action and it takes another 3 months for the court processes to slowly grind through.
Oh and don’t expect an evicted tenant to leave the property spotless – chances are very high that they wont. And we won’t even mention the stress that comes with having to evict someone
Property Investor News in one of their articles in their current edition, anecdotally report the cases of some BMV operators who are in difficulties because the investor is struggling with a many of these types of properties where he is receiving nil rent.
Some of the less reputable operators in the market sell BMV deals on the basis of “becoming a property millionaire overnight” with “nil (of your own money) down” using bridging loans and as by definition many of the investors who do this have a very high loan to value, the affect of tenant default can be crippling.
And that’s why we hear stories of BMV investors being repossessed themselves - leaving their tenants homeless.
This, of course, does nothing for the reputation of the Below Market Value business which is already being looked at by the regulatory bodies who would like to see codes of practice drawn up.
So, my message is, if you buy Below Market Value be aware of the risks, especially in sale and rent back type deals and don’t borrow too much.
Sure, you can do it using a closed bridge loan and hence with No Money Down but only do this only you have a stack of cash elsewhere to pay the mortgage - just in case your tenants default.
Pretty much all the more realistic advisors on BMV at the property shows do, to their credit, advise their investors of the risks and they caution having a pot of money aside for a rainy day.
However, there are some who don’t. You have been warned.

BEING A GOOD LANDLORD
I was quoted in the Mail on Friday and the Telegraph on Saturday. Here is the link to the Telegraph story which is all about how to be a good landlord: http://propertyclub.telegraph.co.uk/Page/View/222

ABOUT LETTINGFOCUS.COM and DAVID LAWRENSON
I’m David Lawrenson from property consultants lettingfocus.com.
I’m the author of “Successful Property Letting - How to Make Money in Buy to Let” the UK’s top selling property title buy the book
It is fully up to date with all the recent changes to tenancy deposit schemes, HMOs, licensing, capital gains taxes and it has new sections on buying below market value. I’m an expert on buying property below market value and a well known property investment blogger and I contribute to newspapers and a host of property websites, write a property investment blog, a number of columns in the press and I run a landlords help service.
I also work as a consultant helping banks, building societies, housing associations and web portals with their buy to let and property products and services and am a regular speaker at property shows.
You can read more of my blog & find details of my networking, advice, property investors networking programme at my website.What’s unique about lettingfocus.com is that we offer independent property mentoring because unlike most people in the buy to let and property “advice” business we are not linked to a property company, a developer, an agent or bridging loan financier and do not receive commissions from any of these sources.If a property investment is lousy – We’ll tell you straight and we will tell you all about buy to let and property investment - the good and the bad and we won’t make silly promises that you’ll become a millionaire overnight.
Copyright: David Lawrenson 2008. This blog is updated once a week. Permission must be sought before using the material in the blog.

The credit crunch means it is time to make offers in the UK property market says Lawrenson of Letting Focus

Ah, the credit crunch continues to spook the market!
The number of house buyers on estate agents’ books dropped from an average of 276 registered per agent in January to 243 in February 2008, the lowest recorded since the survey started. And the difference between asking and sales price has risen again this month – to 4.5%.
Today, if you want to buy a property either for yourself or to let out and you have not got a decent deposit to put down or you have a bad credit record things will be looking a bit bleak for you.
In fact, things have become quite a bit tighter for everyone.
Just 2 weeks ago Lloyds TSB, their C&G subsidiary and the Royal Bank of Scotland (RBS) reduced their maximum loan to value back down to 90%.
And Alliance & Leicester and the Britannia have pulled their 95% loan to value mortgages. These moves follow hard on the heels of the Halifax who have just raised their interest rates again.
Lenders are “pulling” mortgage offers suddenly and without warning proving how hard it is for them to get funds.
So, it seems the days of cheap money have disappeared for a while and we can see the back of six times income multiples at least for a year or two.
Does it matter –well, yes.
The problem is made worse because about 150,000 people in 2007 borrowed over 90% of their property’s value. So, this clampdown on loan to value really does have the potential to reduce demand for houses and could hit prices harder than we have seen so far.
Naturally, the best deals in the standard residential market are available to those borrowers who have to borrow the least. Nationwide has said its best mortgage rates would now only be available for borrowers who put in at least 25% of a property’s value!
So far, we have only seen a gentle tailing off in house prices. The Nationwide said that February marked the fourth month in a row of house price falls with annual growth down to just under 3% annually.
Mortgage approvals are also low - at 75,000 for January - which is the second lowest figure for 12 years.
Also, a lot of people - most estimates put it at 1.2 million - are coming off fixed and discounted deals taken out two to three years ago and are facing big increases in their mortgage rates this year.
Sounds bad?
Well, yes it does, but so far, whilst repossessions are going up, they are still only at about one third of their 1991 peak and less than they were at any time in the 1990s.
But it is possible that things will get worse and property values could fall more sharply. We will see!
It has also got tougher for buy to let borrowers. Moneyfacts.co.uk recently calculated that UK landlords need to find about £5,500 more of their own money to buy the average buy to let property than they would have had to one year ago.

BUY TO LET LOANS
Also, buy to let borrowers will now have to find at least 15% of the property value -the days of 10% have long since gone.
Woolwich, never the most gung ho of lenders, has just cut the amount it will lend landlords to 75% LTV.
Most other lenders are also now demanding 125% or 130% rental over interest and many brokers I spoke to think that this will soon be the norm (again)
A survey by Savills said that about a quarter of landlords would be unable to make further purchases because of this tightening in credit criteria.
But despite all this, recent Council of Mortgage lenders showed buy to let lending continuing to grow fast, no doubt chasing the increasing rental returns caused by so many would be homebuyers becoming tenants.
And what do I think?
Well, I viewed some properties during the Easter weekend and have put in one offer.
So, I’m not scared.
I figure that whatever happens over the next few months, we will still have a shortage of the right kind of housing.
The fact is that we simply don’t know what further bad credit crunch news awaits us.
And we may not know fort a long time yet.
So, sod it, I’m jumping back in and making offers.
If you need more advice on investment property or buy to let investments in general please ask me.
I’m David Lawrenson from property investment mentors http://www.lettingfocus.com/
I’m the author of the buy to let book “Successful Property Letting - How to Make Money in Buy to Let” the UK’s top selling property title.
Buy the new edition here: http://www.amazon.co.uk/Successful-Property-Letting-Right-Plus/dp/0716030195/ref=sr_1_1?ie=UTF8&s=books&qid=1203933977&sr=1-1
It is fully up to date with all the recent changes to tenancy deposit schemes, HMOs, licensing, capital gains taxes and it has new sections on buying below market value. I’m an expert on the UK property market and a well known property investment blogger and I contribute to newspapers and a host of property websites, write a property investment blog, a number of columns in the press and run a landlords advice service.
I also work as a consultant helping banks, building societies, housing associations and web portals with their buy to let and property products and services.You can read more of my property investment blog and details of my networking, advice, buy to let networking programme at my website http://www.lettingfocus.com/My next London property investors networking meeting is coming soon. Click here for details: Property Investment Advice
What’s unique about lettingfocus.com is that we offer independent property mentoring because unlike most people in the buy to let and property “advice” business we are not linked to a property company, developer, agent or bridging loan financier and do not receive commissions from any of these sources.If a property investment is lousy – We’ll tell you straight and we will tell you all about buy to let and property investment - the good and the bad and we won’t make silly promises that you’ll become a millionaire overnight.Copyright: David Lawrenson 2008. This blog is updated once a week. Permission must be sought before using the material in the blog.