Buy to Let Catch-22 Situation

by Readers Question

9:21 AM, 29th July 2014
About 4 years ago

Buy to Let Catch-22 Situation

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Buy to Let Catch-22 Situation

I have been attempting to buy a Buy to Let property now for some time now (at least six months) but have hit an impasse.

I and the vendor have agreed a price and I have had a 75% LTV buy-to-let mortgage application approved. However, the property needs renovating – new GCH, kitchen and bathroom in order for it to be rentable and, the loan will not be advanced by my mortgage company until the work is carried out to their satisfaction.

I was initially led to believe by my solicitors (who are also acting for the mortgage co.) we could conditionally exchange contracts, I would then have 6 to 8 weeks to complete the work to so it would be in a rentable state. Once they were happy with the work, the mortgage company would then advance the loan and I would pay the deposit and complete the purchase.

However, I’m now being told by my solicitors this is not something they would recommend, but more importantly, the vendor will not agree to any work being done prior to completion. This of course means my mortgage company will not advance the loan as the works have not been carried out!

My only option according to my solicitor is to make cash purchase but I have not got enough funds.

Any advice would be appreciated.

MHS22



Comments

Neil Patterson

9:40 AM, 29th July 2014
About 4 years ago

Ah yes this is a very common scenario, and is the reason why when talking to readers about BTL finance one of my first questions is always asking if the property is currently in rentable condition.

If you are applying for a standard BTL mortgage and the surveyor reports that the property is not in rentable condition the lender will normally hold a full retention. This means no funds will be released until the works are complete, but you are then left in this catch 22 situation, because you can't do the works until you have purchased the property.

If you are do purchase the property for cash without a full retention offer from a BTL lender first you then have to remember that most lenders (not all) will not allow you to remortgage until you have owned the property for 6 months.

There are a few specialist "Light Refurb" buy to let products usually available at a slightly lower LTV such as 70%, but if more than a little work is required you are looking at commercial refurb loans with a higher costs and often lower LTVs 65-70%. Plus you will still face the cost of remortgaging to a BTL at a later date if you are not intending to sell.

Therefore if you are reliant on a higher LTV and do not have a great deal of working capital it makes sense to find a property that is rentable straight away even if you would still like to do a small amount of decoration yourself.

If you would like our help finding a suitable finance product just email me on info@property118.com

Howard Reuben CeMap CeRER

10:03 AM, 29th July 2014
About 4 years ago

Good advice Neil, alternatively, short term lending (aka bridging finance) is an excellent financial tool to help property owners secure a property opportunity in it's current state (ie unmortgageable), then to have the breathing space time to do the required works and then of course be able to switch on to a new BTL (or resi, depending on circumstances) afterwards.

As Neil says, most lenders will require a property purchaser to have owned that property for at least 6 months (some are longer) but there are a handful of lenders who do not have any such time restrictions at all.

And amongst that mix there are even lenders who offer funds for and at both stages, ie 1st stage bridge and then 2nd stage BTL mortgage, all under one roof, keeping the whole process smooth and efficient.

John Constant

10:26 AM, 29th July 2014
About 4 years ago

Reply to the comment left by "Howard Reuben" at "29/07/2014 - 10:03":

Just a little more regarding the light refurb mortgages that are available, 75% is likely to be the max; however there is one lender with a 80% light refurb product that is about to be withdrawn on Friday, I believe. Not sure if it will be replaced. This particular lender will need to see that you have got 3 months savings to fund the mortgage while the refurb is being carried out.

I also believe that another lender will allow light refurb on their standard BTL products, so long as it does not exceed 3 months.

Martin Gardner

11:35 AM, 29th July 2014
About 4 years ago

Just looking at something similar, a property that is otherwise rentable and has central heating its just that the boiler has been taken by previous people before it got repossessed, though all the pipe work in place, my advisor said sometimes best to leave these alone as I have to get an agreement for a 'key undertaking' before completion to go in a fit the boiler otherwise they won't lend, if the seller wont agree then I can't get it in the normal way.

Austin Langtree

13:59 PM, 29th July 2014
About 4 years ago

It's a long time since I've been involved with this sort of thing but lenders used to make an advance for properties in poor order but make a retention to be redeemed on completion of the work. Say £15,000 which would cover quite a lot of work.

Perhaps if you know who the surveyor was (at least the agent probably will) you could ask him if he would make such a recommendation to the proposed mortgagee and follow that route. Alternatively try other lenders on the same basis/

Neil Patterson

14:08 PM, 29th July 2014
About 4 years ago

Reply to the comment left by "Austin Langtree" at "29/07/2014 - 13:59":

Hi Austin this would make sense, but unfortunately now most lenders will normally only entertain very small retentions.

Jireh Homes

19:42 PM, 29th July 2014
About 4 years ago

Lenders are getting much tighter on BTL loans where the property is not immediately habitable. We had a property on which the survey report noted hign damp readings and we were unable to gain a mortgage. Luckily we were able to raise alternative funding to be able to buy "cash" but now have to wait till owned 6 months before applying to "remortgage". The damp was not significant, but goes to show how strict are some lenders.

The days of lenders applying a retainer appear to have long gone (in the distant past this was typical for roof overhaul).

Stephen Lesley

10:13 AM, 30th July 2014
About 4 years ago

This might be a daft idea but is it possible for you and the vendor to agree that he or she fit a mutually acceptable bath suite and kitchen and add the cost to the price of the purchase. You could then increase your deposit and so not increase your mortgage.
There's possibly reasons why that won't work, but it sounds as though it might.

Neil Patterson

10:44 AM, 30th July 2014
About 4 years ago

Reply to the comment left by "Stephen Holmes" at "30/07/2014 - 10:13":

The problem is that you cannot assume someone can or will complete on the purchase or the vendor will not pull out.

Hence solicitors are not happy for anyone to commit to anything until the deal is done.

Stephen Lesley

11:29 AM, 30th July 2014
About 4 years ago

Reply to the comment left by "Neil Patterson" at "30/07/2014 - 10:44":

Agreed. In my thinking the vendor is going to come across this every time a buyer needs a lender. So whilst he cannot be sure the buyer will follow through isn't it worth while him/her doing this for the sale of the house? At the same time with addition of a kitchen and bathroom there's a risk of the property value going up and a new offer coming along. So there's risk on both sides.
I suppose there's got to be an element of trust and a persons word meaning something......

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