Finding finance

[Harry]

Excuse my naivety about financial matters, but I'd be grateful if someone would explain how how individuals, apparently with few resources, have built property portfolios speedily with little capital.

In the Telegraph Money section on Saturday for example, there was a story about a guy who used a windfall fee as a deposit on a BTL property. He then, without any further explanation, bought another one, and he plans to buy 20 more in the next few years.

In my case, I'm just about to complete on my first BTL. I scraped together the 25% required by the lender, and much as I would like to repeat the exercise, I can't see any conventional route to finding a deposit for even one more property within the next few years.

[JustinFielding]

I'm in a similar or worse situation, looking to get in to BTL for the first time--getting together 15-20k for a deposit however seems nigh on impossible. Many people seem to get in to BTL with little initial outlay, I would also be interested to hear how.

[Poppy]

That’s right. To get started you need a cash outlay. There is no magic formula.

[rocket]

Harry

Im gald you mentioned this as ive been thinking the same lately. I feel as if everyones doing it but me.

[scampicat]

I suppose you could buy your first one using the deposit you'd saved, then after a year re-mortgage it for as much as you can, by which time it's gone up, and use the equity from it to pay the deposit on another one, and then keep repeating the exercise.

That's the only way I can think of doing it, anyway.

[divebuddy]

some use bridging - then a day one re-mortgage - only really works if you're buying below market value. Many investors build sizeable portfolios within months using this method.

[tenant29]

How does one find below market value properties ? and what is a day one re-mortgage ?

[mrtoca]

I notice these are all new builds. A word to others reading the previous post - be careful when buying new builds in the current market. There are still opportunities out there with genuine discounts (not "discounts" against inflated prices), but they are hard to come by. Be wary of "RICS valuations" confirming the original prices and "guaranteed" rent. And make sure you aren't buying into a development sold mainly to other investors - otherwise you may find you all come onto the market to either rent out or sell at the same time, which will depress the rent / price you can achieve.

I note there are similar posts from Jonny5 at http://www.landlordzone.co.uk/forums/showthread.php?p=18267&posted=1#post18267 and http://www.landlordzone.co.uk/forums/showthread.php?p=18266#post18266

[SteveP]

mrtoca

I don't disagree with what you say, but am unclear about what you mean by
Be wary of "RICS valuations" confirming the original prices and "guaranteed" rent.

If you mean a valuation on behalf of the purchaser carried out by a Chartered Surveyor then there is no real need to be wary. He won't "confirm" anything. He will carry out a valuation in accordance with the RICS Red Book and if he is negligent you will have his professional indemnity insurance to claim on.

The Red Book (or more properly the RICS Appraisal and Valuation Standards) are compulsory standards and are regularly reviewed and updated following consultation with a wide range of other organisation (the council of mortgage lenders and the accounting standards board for example).

Valuation is the most risky thing chartered surveyors do and consequently we tend to be a cautious lot.

[mrtoca]

Hi SteveP,

What I meant by my comment about RICS valuations was that it is not unheard of for surveyors to agree with prices developers quote as the full market value, even if local comparables don't agree with the price. I'm not for a minute suggesting all surveyors will do this, but I would encourage potential purchasers to do their own due dilligence.

The comment about "guaranteed rent" was not related to RICs and I should clarify my statement. What I meant was that buyers should be wary of guaranteed rent deals, as they will need to rent it on the open market once this period ends. Again, make sure you know what the market rent is through your own due dilligence. Also, iIf a lot of properties in the same block are bought by investors and they all come onto the market at the same time then this can reduce the rent you can expect to achieve.

Jonny5,

I see what you mean, but if the surveyor agrees with the developer about the price then you will be able to get a buy to let mortgage, as the lender relies on the professional indemnity cover of the surveyor. It doesn't necessarily mean the valuation stacks up against local comparables.

The problem is it's not in a surveyor's interest to down value properties. They are paid by the lenders who want valuations to hold up. The buyer wants valuations to hold up and the seller wants valuations to hold up. By all means use the surveyor's figure as a guide, but I'd advise everybody to make sure you agree with it. It will be the buyer who has to sell the property later on and then try to claim against the surveyor's PI.

The thing about multiple, similar posts is that it looks like spamming. It gives the impression that the poster works for the company they are posting about and that they are trying to make their posts appears as if they are a "satisfied customer". If you are a genuine satisfied customer then I apologise if I misread your postings.

[Stevie]

I'm not a big fan of these property companies helping you out to buy properties and paying this and paying that, if there is such good equity in these properties they would buy them themselves and sell them on, easy money.
But before anyone argues with this if it's worked for you, brilliant!

To the first post, mate what you need is a good broker behind you, when you find a property speak to him and he will advise you what to do.
Basically the estate agent works for the vendor/seller, your broker should work for you.
The broker can negotiate gifted deposits which will save you making a deposit or not putting down such a big deposit, when buying a property you are looking for good deals i.e. BMV, Below Market Value.

Do your homework, find out which areas are hotspots for property, i.e. cities, near hospitals, near universities etc.

if you need any help please email me and I can put you in touch with a good broker who will help you for free!

[SteveP]

What I meant by my comment about RICS valuations was that it is not unheard of for surveyors to agree with prices developers quote as the full market value, even if local comparables don't agree with the price. I'm not for a minute suggesting all surveyors will do this, but I would encourage potential purchasers to do their own due dilligence.

It is not unheard of for solicitors and accountant to run of with peoples money. As Mr Shipman demonstrated it is not unheard of for doctors to intentionally harm patients.

Of course purchasers should always keep in mind the overiding principle of caveat emptor, but I would point out again that there are strict rules (and I have reffered you to where they can be found) governing valuations carried out by chartered surveyors. All chartered surveyors carry compulsory indemnity insurance so that clients are compensated (even if the surveyor is a man of straw) if they succesfully prove negligence. In addition all of us have an RICS compliant complaints procedure which costs clients nothing to use. Complaints can be taken to the RICS which can result in the surveyor being fined and expelled from membership.

The RICS disciplinary process is also constantly reviewed as RICS takes its obligation (set out in its royal charter) to protect the public very seriously. It is likely that the ombudsman scheme which has been piloted by RICS Scotland will be extended to England and Wales soon. In addition to that, recognising that there is potential conflict between its role promoting the profession and its role regulating the profession, RICS is shortly to split those functions with responsibility for the latter being given to a body with a majority of non RICS members.

In short, I don't doubt you can find examples of negligence and dishonesty in any profession. However you will also find that victims of either have a great deal of protection if they use a chartered surveyor. If one relies on ones own "due dilligence" alone that is very silly. Not only can you not sue yourself when things go wrong, but without proper training, experience and access to information things are more likely to go wrong.

and when you say


The problem is it's not in a surveyor's interest to down value properties. They are paid by the lenders who want valuations to hold up.

The problem appears to be that you don't understand who a surveyor is liable to. He is liable to his client. If you engage a surveyor to provuide a valuation his duty is to you and nobody else. If you rely on a valuation done for the benefit of a lender you must always remember that the valuer has no duty to your whatsoever and treat it as being for your benefit at your own peril.

Surveyors are, in fact, generally very cautious about valuations for lenders (if you want an example of how cautious, my firm will not work for lender). Lenders will not hesitate to sue surveyors for negligence if they overvalue and the borrower defaults.

The bottom line is your should be able to go to any "Chartered" professional as a client with confidence that you are dealing with a well qualified and carefully regulated person. You have no more to fear from them than you have from your doctor, lawyer, accountant, etc..

[Matt Churchill]

If you rely on a valuation done for the benefit of a lender you must always remember that the valuer has no duty to your whatsoever and treat it as being for your benefit at your own peril.

Quite right, hence the reason a lender will always want a valuation addressed to them, and in most cases will instruct them and in commercial cases pass the cost on to the client - a source of great contention, as the client invariably wants to claim some VAT back which they cannot do.


Surveyors are, in fact, generally very cautious about valuations for lenders (if you want an example of how cautious, my firm will not work for lender). Lenders will not hesitate to sue surveyors for negligence if they overvalue and the borrower defaults.

This is quite correct, having worked in banking for some 16 years and in business banking for 11 of them, I have often seen issues around valuations wher the amount thought/hoped for has not been achieved.

In my experience valuers doing work for lenders will (almost) always be on the conservative side, which ironically the opposite when they are working for a vendor ;).

Also, in reply to the comment about valuers and lenders wanting figures to go up, whilst in isolation this may be true, it depends on the amount concerned. I have witnessed valuers increase a valuation by a couple of thousand maybe so it hits the numbers, but as a %age of the property amount it is peanuts, so would never encur the wrath of a lender, but this has never been the case (in my experience) with larger amounts.

Matt

[mrtoca]

Of course purchasers should always keep in mind the overiding principle of caveat emptor, but I would point out again that there are strict rules (and I have reffered you to where they can be found) governing valuations carried out by chartered surveyors.

I agree entirely and my recommendation was not to rely entirely on the valuation and always complete your own due dilligence. I don't recommend doing just one or the other.


In short, I don't doubt you can find examples of negligence and dishonesty in any profession. However you will also find that victims of either have a great deal of protection if they use a chartered surveyor. If one relies on ones own "due dilligence" alone that is very silly. Not only can you not sue yourself when things go wrong, but without proper training, experience and access to information things are more likely to go wrong.

I completely agree.


The problem appears to be that you don't understand who a surveyor is liable to.

Let's not get personal. I understand. I just think there are other factors at play.


The bottom line is your should be able to go to any "Chartered" professional as a client with confidence that you are dealing with a well qualified and carefully regulated person. You have no more to fear from them than you have from your doctor, lawyer, accountant, etc..

I agree.

[mrtoca]

Jonny5,

I see what you mean, but if the surveyor agrees with the developer about the price then you will be able to get a buy to let mortgage, as the lender relies on the professional indemnity cover of the surveyor. It doesn't necessarily mean the valuation stacks up against local comparables.

The problem is it's not in a surveyor's interest to down value properties. They are paid by the lenders who want valuations to hold up. The buyer wants valuations to hold up and the seller wants valuations to hold up. By all means use the surveyor's figure as a guide, but I'd advise everybody to make sure you agree with it. It will be the buyer who has to sell the property later on and then try to claim against the surveyor's PI.

The thing about multiple, similar posts is that it looks like spamming. It gives the impression that the poster works for the company they are posting about and that they are trying to make their posts appears as if they are a "satisfied customer". If you are a genuine satisfied customer then I apologise if I misread your postings.

I see Jonny5's account has been deleted. He was posting here as a customer of Capital Growth UK. Please see http://www.ukpad.com/forum/viewtopic.php?t=962 where he is posting saying he works for Capital Growth UK...

[pippay]

Funny you should say that .. I spotted his deiberate mistake - firstly posing as a customer and then stating he worked for them.

So I emailed him on his personal email address asking him to clarify and guess what ? I'm still waiting for a reply. No surprise there.

However, in general, poviding you do your homework and go in with eyes wide open, can these schemes help get someone on the first rung of a property portflio, if you get my meaning?

The reason I ask is that I was comparing it to when I bought my flat about 8 years ago. A new build (hardly started let alone built) when I put down my initial depositwith the offer of 5% cash back, if you used their recommended lender, plus legal and valuation fees paid.

Anyway, when it came to proceed with getting the mortgage, I went with their recommended lenders (who I banked with as well) as they DOWNVALUED by £5k. It turns out this particular valuer was notorious for downvaluing and as there weren't any comparables in the area at the time it was difficult to argue.

Naturally, I was a tad cross :) and I manaed to find a lender with a more "adventurous valuer. I got the developers to honour their publicised offer of 5% cash back and within 2weeks of completion I got it.

I purchased at £45k and sold 7 years later at £115k. (a little over 15% growth a year). And that was after the next phases were completed and investors were buying complete blocks of flats! And it didn't seem to adversely affect the market rents.

Are the two situations that much different or am I missing something?

The way I see it, is that if you enter something like this, it needs to be done for the long haul investment but the imperative part is to make sure you have done your homework properly.

Anybody's opinion would be gratefully received.




I see Jonny5's account has been deleted. He was posting here as a customer of Capital Growth UK. Please see http://www.ukpad.com/forum/viewtopic.php?t=962 where he is posting saying he works for Capital Growth UK...

[mrtoca]

Hi Robbyd,

There are various ways to do this, but you generally need to be buying quite far BMV (Below Market Value) or you need to be doing some work to the property to enhance it's value.

If you are buying BMV (say, 25% BMV) you can:

Use closed bridging at 80% to buy the property and the remortgage the next day to release 85% of the full OMV (Open Market Value)
Put down the deposit yourself for a short period, taking out a mortgage at 85% of the BMV price, then remortgaging to 85% of the OMV (not strictly no money down, but you can get your funds out the day after completion)
Use investor finance for the deposit (generally 1-2% per month on 15% of the BMV price) and then remortgage as above
Use investor finance for the whole purchase and then remortgage as aboveIf you are buying at a higher price, but adding value, you can:

Put down the deposit and costs yourself during the development, taking out a mortgage at 85% of the purchase price, then remortgaging to 85% of the new OMV once the work is completed (not strictly no money down, but you can get your funds out the day after completion)
Use investor finance for the deposit and costs (generally 1-2% per month on 15% of the BMV price) and then remortgage as above
Use investor finance for the whole purchase and costs and then remortgage as aboveHope this helps. I'm sure there are more strategies out there.

[Matt Churchill]

Thanks Steve, some nice pointers there. I had looked at bridge financing before but finding a burnt, run down, or blocked up house is not as easy as it used to be from what I have been told and found out for myself.

Unfortunately, this is the case more and more nowadays, guess it is down to the fact that everyone is a property developer at the moment. Years ago the industry was a lot less saturated and the deals were out there to find.

As Steve says there are a few ways around it. I would guess when he talks about investor finance, he is talking about private individuals who are prepared to take a punt on lending the money for the nice return they get.

AFAIK when using BMV prices, you need to have a understanding lender and solicitor, as generally speaking lenders will go for the lower of purchase and valuation.

Generally speaking the more you want to borrow, the more you will pay for it. For example, some lenders will do bridging finance of 65% of purchase cost, but 100% of the development/refurb cost and whilst this does not mean you need no money, it is good for those with little cash (naturally depending on the splist of cost between purchase/development cost). However, as soon as the development/refurb is done you remortgage at 85/90% of OMV and repay the bridge (and get your money back). A nice way of doing it but, you could be paying 1.5%per month interest.

Others will fund purchase and development costs upto 85% of the end value of the property, which again depending on the way you do it, could easily pay for the purchase and refurb.

As an aside a new thing I came across yesterday for this first time, is a scheme some accountants have devised to mitigate 85% or more of your Stamp Duty Land tax, which looks rather cool.

[mrtoca]

As Steve says there are a few ways around it. I would guess when he talks about investor finance, he is talking about private individuals who are prepared to take a punt on lending the money for the nice return they get.

Yes, that's right.


AFAIK when using BMV prices, you need to have a understanding lender and solicitor, as generally speaking lenders will go for the lower of purchase and valuation.

True. The Building Societies Act stipulates that lenders lend against the lower of purchase price or valuation. However, a lender recently told me they are considering lending against valuation, which will be very popular if it comes off.

In the meantime, the quickest way to get your funds out is to take out a mortgage for the purchase and then immediately remortgage with a different lender against the full market value.


As an aside a new thing I came across yesterday for this first time, is a scheme some accountants have devised to mitigate 85% or more of your Stamp Duty Land tax, which looks rather cool.

Sounds interesting. Can you share any more information about this scheme?

[Matt Churchill]

Doesn't sound a lot to refurb it.

I guess anyway you get the money solves the problem. I would imagine that a lender might not want to lend for that purpose, so it may be worth saying you want it for something else, or at leats say it is for your own house. They may feel that doing a different house is a business and look at a business loan.

At £10k, it is a small amount, so even the higher rate you'd pay on a loan, will mean a negligble difference in interest charges.

[mrtoca]

If I were to buy a property @ £50 000, total start up costs and maybe £1500 to fix it up is around £10 000. Now if I were to take out a personal loan of £10 000 PLUS enough to cover the personal loans shortfall for 12 - 18 months, would this be viable?

A personal loan is another way of funding the deposit and costs. When you say "personal loans shortfall" I guess you're referring to the payments are you? If so, you could do this.

The thing to remember is the more you gear up the bigger your return, but the bigger your risk. Say you have £15k invested in a £100k property and you borrow the other 85%. If the property goes up by £15k then your £15k equity has doubled to £30k. Whereas, if the property goes down in value to, say, £92.5k your £15k equity has now halved to £7.5k.

Coming back to your question, it all depends on the numbers for the deal really. If you are buying a £50k property for £50k (plus costs and repairs) and it will only be worth around £50k when you've finished then you are banking on prices going up to get your money out, which is a risky short term strategy, but will probably pay off in the long term, as prices generally go up over time. However, if the work you do adds value and the house will be worth, say, £70k when you've finished, you could either sell or refinance to get your cash out. Or, better still, if you're paying £50k, but the property is worth, say, £70k already because you've negotiated a £20k discount then you can immediately refinance to get your cash out.

[Matt Churchill]

With prices being so low at £50 000, have you ever noticed in the market that this sector drops or does it always continue to rise due to it having only one way to go comparing to surrounding areas?

Sometimes in this sector the best thing to do is try and by in an area which may see some improvements in the future and thus push your property up at a faster rate.

[mrtoca]

Yes, the risk may be worth it. That's really the nub of the matter and something you need to decide before you continue.

There are deals out there which will make as much money but without as much risk, but they are harder to come by. Not many people will sell to you at a low enough price to reduce your risk significantly, but they do exist.

[Matt Churchill]

The banks are a funny bunch.
Tell me about it, I worked for a high street bank for 16 years and most of it in the business side. As with everything, it is down to who you deal with at the bank.

I know from experience, that you could put the same deal to 2 different bank managers (even at the same bank) and you'll get a completely different deal, assuming you get one at all!

[JamesGovan]

Having seen the discussion in this forum, the following may be of interest.

Active Securities provide fast bridging finance solutions for investment property purchases and lend based upon the market value of the property, not purchase price.

- Funding up to 70% of market value *
- No minimum financing term
- Loans from £30,000 upwards
- No upfront fees or hidden charges
- Flexible repayment solutions
- First / second charge
* Subject to criteria

Please contact me on 020 7038 3500 to discuss your financing requirements, or visit our website at www.activesecurities.com


Regards,
James Govan
www.activesecurities.com

Your home may be repossessed if you do not keep up repayments on your mortgage.