Mortgage on a property bought off plan with a re-assignment

by Readers Question

11:48 AM, 1st October 2014
About 4 years ago

Mortgage on a property bought off plan with a re-assignment

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Mortgage on a property bought off plan with a re-assignment

I put down the reservation fee to buy a property on a re-assignment basis (i.e. I am buying the right to buy from somebody else; not directly from the builder). I do not have any problem in putting down the 10% required to exchange contracts however, at completion (expected to be December 2015) I will need to have my mortgage in place for roughly 75% of the price I agreed the re-assignment. Mortgage on a property bought off plan with a re-assignment

I spoke with my solicitor and he advised me to check with a few banks if they are willing to lend the money on an off-plan property bought through a re-assignment. This is because some of his other clients had some problems with arranging the mortgage with the banks. He told me that 8 out of 10 banks would not lend me the money because I did not buy the property directly from the builder.

I tried to call Natwest and Clydesdale, the former told me that the seller of the re-assignment should have kept the right to buy at least for 6 months, the latter told me that it would not be a problem and they would base their lending decision on my circumstances and the fact that the rental income is at least 125% of the mortgage payment I will have to make.

I then called a Mortgage broker and he told me that as long as I got enough money to buy the contract (i.e. if I can pay the 10% of the agreed price) it should not be a problem arranging the mortgage when I need to complete.

I would like to know what is the general consensus and if there is anybody that has some sort of experience with these types of situations.

Thanks

Francesco Regis



Comments

Mark Alexander

11:51 AM, 1st October 2014
About 4 years ago

Hi Francesco

This form of speculation is an exteremly high risk strategy, especially if you are reliant upon mortgage finance to complete. This is because no mortgage lender will GUARANTEE the availability of funding so far in advance. Your financial situation could change, as could the value of the property, mortgage lending criteria, regulations, the availability of funding etc. etc. etc.

For these reasons, that's probably why the original speculator is looking to cash in now by selling on the potential rewards and associated risk to you - no doubt at a premium!
.

Fra Rex

12:47 PM, 1st October 2014
About 4 years ago

Thank you very much Mark, yes I know there are some potential risks involved but also some potential rewards. I know I might have problems if the value of the property fall but if I fix the price now and the value increases or stay the same I should be fine or better off. My personal expectation is that within the next year or so prices will stay pretty much the same or they will grow a little but they will not grow like they did over the last couple of years.

The only issue I can see is if the banks negate me the mortgage because for some policy reasons they do not lend to new built property that have been reassigned and that is what I would like to make sure maybe with somebody that found him/herself in a similar situation.

Over the weekend I went to look at the site and they started the construction of the building. The area is regenerating and a lot of developers are building new developments. I went to a showroom from a different developer and they were asking for similar prices (if not more) for flats with delivery in Dec/2016.

It would be interesting to see if somebody that read this post had (or heard of somebody that had) a similar experience. I read some posts from 2009 (i.e. around the financial crisis) with people that bought a reassignment and when it came to arrange the mortgage they had problems, however I am not sure if it was because the property prices fell during that time and the banks did not want to lend or because of the reassignment itself.

As things stand nowadays, the banks I spoke with seem to be happy to lend when the property has been built.

Nick Pope

13:03 PM, 4th October 2014
About 4 years ago

I don't think I would be speculating in this way at the present time and I've got 40+ years experience in the business. My last purchase was over a year ago before the market rose substantially (in my area at least).

As a surveyor/mortgage valuer (boo, hiss) I am getting the feeling that the market generally is quite fragile and that values have levelled out and may fall a little over the next year, particularly if (or more likely when) interest rates rise.

I don't know which area you are in but whilst re-generation is normally a good thing, it also means there are a number of sites competing with the one you are looking at and it only takes an adjustment in asking prices to negatively affect values. In addition valuers will look at availability of other new properties when making a valuation decision. If there are a lot then he/she would tend to be cautious (as required by lenders) because when you buy the property is immediately second hand and the new house premium is lost. Most lenders require that at least some of the comparable evidence used is for second hand properties in the same area

So far as lenders are concerned most will only leave an offer of mortgage open for 6 months before insisting on a re-valuation (probably at your expense) to confirm that the value remains the same. If the builder next door has just released a tranche of properties then the value might not come up to scratch.

You have not made clear from whom you are taking the re-assignment. If it is a so-called property club then it's possible that they are agreeing to buy a number on the development and taking a hefty profit because they have obtained a group discount. Many lenders are very wary of such arrangements as it indicates that other buyers are getting discounts and the Council of Mortgage Lenders disclosure of incentives may not show the true picture. One of the largest lenders specifically asks if purchase is via a property club or similar.

Your broker says that there will be no problem getting a mortgage when the property is complete - have you been reading the papers over the last few days about the possible application of mortgage review arrangements to Buy to Let Mortgages? In addition the Bank of England is getting involved and has powers to limit loan to value ratios on new mortgages. If your circumstances change you could end up in the difficult position of having exchanged and being unable to complete at which point your 10% deposit is at risk.

All in all I would say Beware! If it looks to be too good to be true it almost certainly is.

Fra Rex

11:46 AM, 5th October 2014
About 4 years ago

Thank you Nick, I would buy the title from another person not a property club and the intention is to complete on the property and rent it out not to resell the title.

The development is in Tower Hamlets in East London not too far from Canary Wharf.

I think as well that house prices will level out next year but I do not think they are going to fall unless the Bank of England raises the base rate substantially that I do not think will happen. In my models I considered a 4% interest rate (higher than the current market levels) and in my affordability scenarios I considered a 5% decrease in the property values and I still should be fine.

There are not too many second hand properties sold in the area apart from some ex-council flats that are generally sold at a lower price; the few second hand flats in a relatively new 19 floors tower block nearby were sold in June and March 2014 at a higher price.

There is another development nearby with new flats delivered this month and their price is about 10% higher.

The asking price for some other off plan flats in the area with delivery December 2016 are also sold at a price about 5% higher with the price list released on 27th September 2014 (i.e. around the same days my offer was accepted).

Therefore, after all, I think the price is fair if not slightly under comparable properties.

Overall, I am sort of comfortable with the risks of buying an off-plan property, what I would not be comfortable with is if mortgage lenders say that it is their policy not to concede mortgages to off plan properties that have been exchanged with a reassignment.

From what I could gather so far mortgage lenders might not be happy with reassignments because:

- In 2009 property developers were found to have been operating a major scam by using these 'sales' to value the rest of the units. Once everything was sold, the sham sale units would go back onto the market at firesale prices causing a collapse in valuations everywhere in the development.
- When the property is completed there will be similar flat sold at different prices and the mortgage providers might not be happy with that.

No, I do not know about possible application of mortgage review arrangements to Buy to Let Mortgages, I tried to search for news on the internet but I could not find what it is about.

Ideally I would like to also hear also from somebody that purchased an off plan property with a reassignment and see what was their experience with the mortgage lenders when they had to complete.

Many thanks again

Nick Pope

13:05 PM, 5th October 2014
About 4 years ago

Here is a link to an article about BtL mortgages - vague now but obviously the Bank want to be able to curb lending and therefore house prices.

http://www.bbc.co.uk/news/business-29457607

Nick

Fra Rex

23:19 PM, 5th October 2014
About 4 years ago

Thank you!

Renovate To let

8:58 AM, 6th October 2014
About 4 years ago

Just recognise and think about the fact that you are speculating, not investing. There is no market value for something that is yet to exist.....to have one, the item needs to have been exposed to the open market and found a proceedable buyer.

Then make sure your solicitor scrutinises what will happen to your deposit and therefore any risk you are also taking there.

He should also find out and document the premium you are paying the middleman for the assignment.

Fra Rex

10:16 AM, 6th October 2014
About 4 years ago

Thank you I will definitely do that, in particular these are the things that, so far, I noted to check:

- How many times the title has been sold (the seller should have kept it for a reasonable period of time: i.e. at least 6 months)

- How much the last buyer paid for it (sell price should be no more than 10% per year higher)

- Check what it says about final liability (i.e. if the contract is subject to funding)

I got a few weeks to decide and probably at the moment it is more a no than a yes as it all seems to be more of a headache than else.

PS for those of you interested I built an Excel model to value the feasibility of a property investment and its returns; happy to share it with you as a thank for your assistance, it consider things like: Property Price, Service Charge, Ground Rent, Rental income, Cost of fittings and furnishing, Agency fee on rental income, Deposit %, Stamp duty %, Solicitor Costs, Mortgage Fee, Mortgage Rate, Yield Target, Marginal tax rate, Opportunity cost (i.e. return you would get in not buying and leaving the money where it is) and it calculates several measures of yield (including gross yield, yield after taxes, the yield with the leverage generated by the difference between rental income an mortgage rate), mortgage payments (with or without capital repayments) and other measures, I will not take responsibility on how you use it or what you do with it, but I think it is a fairly good model I tested it with some other properties and I was getting a yield around 4% (before taxes) that seem to be norm nowadays and it could also be used to adjust the offer price to reach your yield target.

Mark Alexander

14:23 PM, 6th October 2014
About 4 years ago

Reply to the comment left by "Fra Rex" at "06/10/2014 - 10:16":

Your spreadsheet sound a lot like our "Landlords Calculator" - please see >>> http://www.property118.com/calculating-rental-yields-and-returns/

It is does extra/different things please email it to me - mark@property118.com
.

Fra Rex

15:28 PM, 6th October 2014
About 4 years ago

Hi Mark, yes, they are similar.

The one I put together is maybe more geared to value an investment opportunity; I also calculate the impact that the marginal tax rate has on the yield and I calculate several measure of yield based on the gross investment (Deposit + Stamp Duties + Furnishing + Solicitor) which however they could probably be calculated and considered in the property value. I also consider a measure of the opportunity cost with alternative investments.

On the other side I did not consider some periodic costs like the one for the gas certificate and maintenance in the annual running costs.

I will send it to you one of the coming evenings so that you can have a look at it.

Cheers

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