Archive for October, 2009

Diary of a UK Property Investor – The great Lease Option miss-selling scam!

I have been speaking to many investors about Lease Options and I firmly believe they are a disaster waiting to happen.

What are lease options?  Simply put, instead of investors actually buying a property, with lease options they take control [an option to buy] over it and lease/rent the property out.  A vendor would move out of the property to their new home and the investor would pay the mortgage and collect rent from either a tenant or a 1st time buyer who wants to rent and eventually buy the property.  A 1st time buyer may pay the investor a fee and extra rent in order to get this opportunity to buy this property in future – maybe at a discount.

Investors use this strategy to obtain profits from the rent and also a potential future sale of the property.  They also avoid the costs/risk/necessity of buying the property themselves. 
Vendors accept the lease option usually because they have no other solution to move on and because they are told they will eventually get the price they want for their property. 

Sounds great?  In theory it is BUT in practice something often goes wrong! 

For example;

• An investor tight on cash flow [which seems to be everyone interested in LO's] takes over a mortgage so they can make a few quid on the rent and by selling a LO to a 1st time buyer.
• The vendor moves out and takes out another mortgage on their new property.
• Several months down the line, the 1st time buyer runs into trouble paying their rent.
• Not only that, but the cash-poor investor also runs into trouble with his other properties because he isn’t getting rent on them and because rates are increasing. Triple-whammy!
• So the investor keeps the whatever rent he is getting on the LO to prop up his own portfolio/debts and the mortgage doesn’t get paid on the LO property (after all, they have no legal responsibility or financial motivation to pay the vendors mortgage ahead of their own!)
• The vendor of this property cannot afford to pay this mortgage as well as their new one and so risks losing both homes and may definitely lose one if the mess isn’t sorted out in time!
• OR all goes well but the vendor decides not to sell the property [LO's are a waste of paper legally - you cannot force someone to sell a property even if they have exchanged] and the investor has spent all the extra rent and fees they pocketed from the 1st time buyer propping up their cash flow and so the 1st time buyer who now cannot buy is now owed £1000’s by the investor who has no money!!

At least with SARB the vendor only risked losing one home but now they risk losing 2, and investors are now also risking the 1st time buyer’s money and not just theirs!  Truly nightmarish stuff!

The risks with these deals will run into a high percentage and most investors will not have cash buffers to cover the loss-making eventualities.  This being the case, many vendors will be hurt by this in future.

I am sending out this newsletter as too many investors and too many courses are touting the benefits of this without explaining ANY of the pitfalls.  The strategy is not sustainable and it is not the investor who is at risk.  Don’t gamble with other people’s money!   BUYERS BEWARE!

Investors should focus on sustainable property investment strategies: buying, selling, letting, trading and investing in ‘bricks and mortar’ and in a sustainable way;  i.e.  ONLY invest in what you understand and in amounts YOU can afford to lose!

Source: David Coughlin – HBF Investments

First impressions are important, especially when you’re putting your property on the lettings market and want to attract tenants. Research suggests that potential tenants make their mind up about a property within 30 seconds of entering the property. To ensure your property makes a great first impression, here are 10 top tips on preparing your property for viewing.

1. Make sure the area around the front door, or entrance to the property, is clean and tidy, as this is what prospective tenants will see first.

2. Keep any garden area, hedges, shrubs or bushes well maintained. Having the grass cut and the hedges trimmed makes a good first impression.

3. If you’re redecorating your property, opt for neutral colours. Neutral colours are preferable for property lets, as it keeps things simple and streamlined. If tenants want more colour, it can be added easily by using furniture and furnishings.

4. If you’re furnishing or partly furnishing a property, then choose good quality, but affordable, items that will last well, but not be a major disaster if you have to replace them.

5. Choose flooring with ease of cleaning and durability in mind. Laminate flooring, for example, looks good and is easy to keep clean.

6. The kitchen is regarded as an important room by many tenants and you can never have enough storage, so make sure there are plenty of cupboards.

7. Give careful consideration to what appliances you put in the kitchen. Even if you’re letting it unfurnished, a cooker is a good staple to have.

8. Good lighting is important, especially when tenants are viewing. Pop in some well placed lamps if it’s a dark day.

9. Ensure the property is clean and tidy. When you’re letting it again after a tenancy has ended, don’t forget to get it thoroughly cleaned first.

10. If the property has a garage or shed, make sure these spaces are clear and free from clutter. But if you want to encourage your tenants to cut the lawns, then do leave a lawnmower to hand!

If you want to invest in property, but perhaps can’t afford to make the full financial commitment yet on your own, one option is to invest with friends or family. It’s not an option that appeals to everyone, and can have its ups and down’s, but as long as you’re all clear of what’s involved and where you stand, it can work out successfully. If it’s a choice you’re exploring, then here’s a look at the key pros and cons of choosing to invest in property with friends or family.

The pros of investing with friends or family

* Being able to buy a better property than you could afford on your own. And hopefully making a good profit on it if you decide to sell!
* The extra financial support is good, but it’s also useful to be able to share other expertise too. For example, one of you might have good investing knowledge, whilst the other might have experience with letting properties.
* For first-time property investors, it can be beneficial to be able to share the responsibility, especially with big decisions.
* When things are tough, or you’re having a difficult period with letting the property, it’s good to have someone in the know to talk things through with and brainstorm new ideas with.
* It can help to able to be able to split the tasks between you, rather than one person having to do everything.

The cons of investing with friends or family

* Business doesn’t always mix well with friendship or families. It may put an extra strain on your relationship to enter into a business arrangement together.
* Any emotional attachments you have with the other investor can affect your business judgement.
* If they don’t have exactly the same property investing objectives as you from the outset, things could get tricky further down the line.
* Difficulties can occur when one investor wants to sell a property and the other doesn’t (and can’t afford to buy them out).
* Tension can be created if one partner owns a greater share than the other.
* If the other person defaults on payments, or suddenly pulls out of the deal, you’re left in the lurch.
* If anything goes wrong, or the property investing venture doesn’t work out, then you could end up losing a friend as well as a business.

Going into a business partnership like property investing, with a friend or family member, isn’t a decision to be taking lightly. You need to be clear from the outset as to what is expected from each of you, what your views are on managing the property and on long-term expectations. For some people, it can work well; for others, it’s disastrous.

What do you think? Would you go into business and buy a property with a friend or relation?

A concerted recovery in the UK residential property market is unlikely before 2012 but house prices will end the year 2% higher than at the start, according to analysts.

The real estate recovery will be lead by London and southern England but the mainstream UK market is likely to see modest price falls in 2010, they predict in the Knight Frank Residential Property Market Forecast 2009-2014.

Following an up and down 2010 the market is expected to see a limited rise in prices in 2011 and no sustained recovery until 2012, the report says, pouring cold water on recent optimism that the good times are on their way back.

‘The excitement caused by rising prices in recent months has hidden the fundamentals that have contributed to this performance, particularly the degree to which the affluent and equity rich have led the market,’ explained Liam Bailey, head of residential research at Knight Frank.

‘There are good reasons why we ought to expect a slow down in price growth, with prices even falling in 2010.

However we believe that this reversal will follow a more benign scenario, rather than a more cataclysmic alternative,’ he added.

The report predicts that a weak economy will feed through to lower household wealth and both the ability and willingness to bid up house prices. Continuing growth in unemployment, allied to wage freezes and tax rises, and a rise in average mortgage rates will force a number of sales which, in the absence of greater depth of demand, will see prices slipping back.

‘However we believe that price falls will be capped at around 3% in 2010. It would be wrong to expect a continuation of the current rapid recovery in the housing market, the economy is not in a position to permit this in the short-term.Similarly, it would be wrong to expect carnage,’ said Bailey.

Improvement in market conditions will continue to be led from London and southern England, particularly from the higher price brackets, the report adds, with strong demand from UK and international buyers ensuring that the central London property market, in particular, will continue to outperform in 2010.

However, the central London market will not entirely escape the future uncertainty and recent strong price growth is unlikely to be maintained.

But the positive factors underpinning the capital’s prime market should serve to ensure that price falls are avoided next year.

The report forecasts annual growth of 3% in central London prices in 2010, with a steady increase in this rate to 9% in 2011. The aggregate growth for central London in the five years to 2014 is 38%, compared to 19% for the UK mainstream market.

‘London will benefit from the global economic recovery which is likely to considerably outpace that seen in the UK. Sterling is set to remain relatively weak into the medium-term, encouraging international demand and the economic prospects in central London are brightening more rapidly than elsewhere in the UK,’ it concludes.

Source: www.propertywire.com

As our previous post discussed, the Google Earth satellite mapping tool can offer huge benefits to property investors, as it lets you get another perspective on particular properties and areas.

Here are some more practical ways in which you can use Google Earth to help your property investing process and decision making.

Google Earth can be used to assess the area demographics

As Google Earth lets you zoom in on a specific area, it’s really useful to look at the other types of property close by and get an idea of what the demographics area.

There’s no point in you investing in a property and aiming at it the student tenant market, only to discover that it’s actually primarily an area where families or elderly people live. The types of properties available can give you an idea of what the likely demographic is and help your property investing research.

Google Earth can help identify property problems

Looking at a property on Google Earth can sometimes help you spot potential problems too and identify the good investments from the bad.

For example, if there’s a new development very close to the property, if it’s right next to a main railway line with noisy high speed trains or if there’s no parking available near the property, then these could be warning signs. These are all issues that could affect the rental potential of your property and it’s best to know about them before you part with your cash.

Google Earth can help highlight geographical issues

By using Google Earth, and also Google Maps, you can highlight any potential geographical issues that could pose problems.

For example, if the property is located near a river, then it could be at risk of flooding, or if it’s located near old mines, then could potentially be the danger of mine shafts.

These are just a few of the ways in which you can use Google Earth to aid your property investing. It’s a valuable tool, so if you’ve not explored it, it’s definitely worth having a look.

The Google Earth satellite mapping system might not, at first mention, seem all that relevant to property investors. However, it’s an invaluable tool to have and there are many benefits to be gained by property investors who take the time to explore its potential.

The Google Earth system lets you view satellite images, maps, buildings and terrain anywhere in the world. This means that you can hone in on a certain area, such as a town, street or even a house that you’re interested in and get to view it up close online.

For property investors, Google Earth is a really useful tool to be able to use, as it means you can suss out properties you’re interested in purchasing, see neighbouring homes and explore what the local area has to offer.

It doesn’t necessarily mean you don’t need do these things in person too, but it does give a very useful alternative perspective on things, as you can see the size of a house from above and in 3D.

There are a lot of ways in which you can use Google Earth to your advantage when you’re thinking about investing in property. Here are two of them.

Google Earth can help you look at a specific property

Google Earth is great for honing in and getting a much closer look at a specific property. Although you may well have already got property specs, the 3D imaging allows you to see the property from another perspective.

You should be able to see the property, any extensions that have been built on the property, the size of the garden and access points, plus look at in relation to neighbouring properties. For example, if you know the prices of other properties in the same road, you can compare visuals of their size, access, garden etc. 

Google Earth can help you study the area

It’s always important to look at the property location and look at what the area has to offer, and you can get a reasonable idea using Google Earth.

For example, you should be able to see what shops, schools, supermarkets, pubs, leisure facilities or railways are in the location and how near or far they are from the property you’re interested in.

Or you can see what large businesses are in the area, such as factories or major employers, that may need properties to house workers, or organisations where key workers would be based, like large hospitals.

The price of development land in the UK has stopped falling and there could be a shortage in the long term if the property recovery is sustained, experts are warning.

The latest research from property consultants Savills shows that the value of residential development land rose by 3.6% in the third quarter of 2009 after two years of falling prices that halved values across the UK.

Prices have stopped falling in most regions with the only exception being the North of the country.

Overall greenfield land values rose 3.6% and urban land went up by 0.2%. London saw the biggest rise of 8.6% followed by the West Midlands and the South West at 6.3%.

‘Improved sales prospects for housebuilders mean that the market for good, oven ready sites is active again’, says Yolande Barnes, head of Savills residential research.

She pointed out that there is a noticeable difference between the performance of urban land and greenfield.

‘There is demand for the most easily developable sites but urban sites for flatted development are not often among them.

Similarly, small, oven-ready sites are vastly preferred to large, infrastructure-intensive ones,’ she explained.

There is a noticeable difference too in the Savills indices between the land markets in areas of high housing demand where developers are now keen to build and those where of demand is still suppressed, and where the supply of residential stock has been more plentiful.

The northern region, for example, has seen falls of nearly 12% in urban land values this quarter, bringing total falls from peak to nearly -70%. Meanwhile, the West Midlands and South West rose by 6.3%, meaning that total falls from peak are just 50%.

‘The land market is driven by the confidence of housebuilders.

They have seen some activity return to certain of their markets. Most noticeably, demand has increased for houses in the equity rich markets of the South and housebuilders are looking for small, less risky, easy to develop plots for this type of housing,’ said Barnes.

‘They want plots that they can start, build and finish within a year, without recourse to expensive and difficult-to-obtain debt finance.

The search is on for these small plots with planning permission, for houses in high demand areas.

Anything larger, needing extensive infrastructure provision and costly section 106 agreements is often still in mothballs and unviable given today’s market values,’ she added.

She concludes that the outlook for development land is mixed. ‘Any further stalls in the housing market will reflect in housebuilder confidence and could again suppress demand even for the small sites.

But in the longer term a lack of suitable sites in areas of highest demand will be a very real issue,’ she aid.

Source: www.propertywire.com

First-time and would-be property investors may think the property investment world is easy to break, but all too often they don’t do their homework and make silly mistakes.

Here are five of the common mistakes made by first-time property investors.

1. Not choosing the right location 

Getting the location right for your property is crucial if you’re going to rent it out.

But new investors often assume they should buy property in an area they know, or get distracted by the look of a particular property.

However, there’s no point in owning a lovely property in an area where no-one wants to rent it, so you should abandon any pre-conceived ideas about where you should buy, and look to the market to find areas where people want to rent.

2. Not treating property investing as a business

If you’re going to succeed as a property investor, then you need to treat it as a business from the start.

Your key focus should always be on which property investments will give you the best capital growth and rental yields, and won’t cost you an arm and a leg in the first place.

3. Getting too emotionally involved in the property

If you’re going to make a go of it as a serious property investor, then you need to leave your emotions about a property behind.

It’s not going to be a house that you’ll live in, so there’s no point in getting carried away with interior decorating ideas or wanting to stamp too much of your personality on the property. You’re buying it to rent out, so it’s best to stick to neutral interiors and colours that will appeal to everyone, not just you.

4. Not using a property management company

Many first-time investors look at property management options and see it as an expense which they could save on.

However, it’s usually only a small fee, it’s tax deductible and you gain the huge benefit of having experts to handle tenant problems. With the best will in the world, not all rentals run smoothly all the time and it offers great peace of mind to have a company handling the rental business side for you.

Not only will they be experienced at dealing with tenant problems, but they’ll also have a maintenance team ready to handle leaks, repairs and unexpected problems.

5. Buying an expensive property

Would-be property investors may think that buying an expensive property automatically means they can charge higher rent and make more money.

Although high end rentals can work well when the economy is buoyant, it certainly doesn’t mean that you can make more money. You may well have to work harder to find the right tenants and they’re not a good option during an economic downturn.

In the long run, it’s better to invest in an average property, where they’ll be far more potential tenants, than splash your cash on a high end investment.

Extra rules to regulate “sale and rent back” property deals are going to be brought in by the Financial Services Authority (FSA) next year.

The FSA will ban “exploitative advertising and high-pressure sales techniques”, it said.

It wants to protect financially troubled home owners who consider selling their homes and becoming tenants in them instead.

The FSA started regulating “sale and rent back” firms in July 2009.

An enquiry by the Office of Fair Trading (OFT) last year found that some firms offering these deals were devious and dishonest, luring people into selling their homes at a discount, only to evict the former owners within months so their homes could then be sold at a large profit.

“Many of the people typically targeted are financially vulnerable and have been badly hit by the experience,” said Ed Harley, the FSA’s head of mortgage policy.

“We want to prevent high-pressure and inappropriate sales, and help consumers understand sale and rent back products, so they only enter into sale and rent back where it is an appropriate and sustainable solution for them.”

New rules

Firms offering these sorts of arrangements, typically aimed at people under threat of repossession, are required to be authorised by the FSA and to be run by people who are “fit and proper”.

The extra regulations, which will come into force on 30 June 2010, will:

• bring in a cooling-off period to give consumers more time to make decisions

• ban cold calling and prohibit firms from dropping promotional leaflets through letter boxes

• prohibit the use of emotive terms like “fast sale”, “mortgage rescue” and “cash quickly” in promotional literature

• ensure consumers have security of tenure; and

• require that in every sale, firms check that the consumer can afford the deal and it is right for them.

So far, just 80 firms have applied for FSA authorisation, even though the OFT found there were more than 1,000 companies selling these deals last year.

Firms or individuals that break the rules can be fined or prosecuted, with individuals facing possible imprisonment.

Source: news.bbc.co.uk