Putting it all together – The what, the why part 2

by Kelvin Kingsley

15:27 PM, 27th February 2012
About 7 years ago

Putting it all together – The what, the why part 2

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Putting it all together – The what, the why part 2

Read part one of the what the why

Armed with your investment budget you are ready to go in search of property bargains. You must look for areas of value where price corrections have been overdone, areas where prices have been dragged down by a greater number of bank repossession properties. Today such areas mainly occur in greater numbers in the North.

Property value is best illustrated by looking at The Nationwide first time buyer gross house price to earnings ratios.

Northern East Anglia London South West Wales Scotland
2007 Q2 4.4 5.2 6.9 6.0 5.2 4.2
2008 Q2 4.0 4.7 6.5 5.5 4.6 3.9
2009 Q2 3.2 4.0 5.7 4.7 4.0 3.5
2010 Q2 3.3 4.3 6.5 5.3 4.1 3.7
2011 Q2 3.0 4.4 6.5 5.1 4.0 3.3

It can be seen from the 2nd quarter of 2007 to 2011 that, the first time buyer gross house price to earnings ratios has dropped by 15% East Anglia, just 6% Central London, but in the Northern areas it has dropped by a whopping 32%. In reality if one shops around and looks at repossession properties and below market value properties in the Northern areas, this ratio can drop by 50% on 2007 Q2. Therein lays the latent value and the greater number of opportunities for value investing.

The route of the M62 connecting Liverpool and Manchester with Leeds and Hull is a good area of search. This is where a high percentage of homeowners have had the value of their properties cut by surveyor “down-valuations”. This is where a surveyor instructed by a mortgage lender cuts the estimated value of a property following a mortgage application.

In many cases the “down-valuation” has been overdone with surveyors sighting too few or no comparable sales data as the reason. This has led to surveyors using repossession sales and discount sales to investors as their new yard stick for residential property valuations.

On the one hand this is slightly negative for refinancing later on, but on the other hand for initial purchase it creates a greater number of opportunities to buy at a reduced price, otherwise known as below market value.

But wherever you buy you must make sure you buy below real market value, secure an instant equity gain on day one of purchase, secure a substantial positive rental cash flow on day one of purchase, ideally using 4.99% as a mortgage interest rate and secure a cash flow break even “Interest rate cushion” in excess of 2%.

With reference to day one of purchase, it is better to buy a property with a greater equity gain and a lower rental yield than a property with a lower equity gain and a greater rental yield. Another £50 to £100 per month more in rental income is a no substitute for an extra £20,000 equity banked on day one of purchase. Also, such property purchases can form the ‘buy and sell – quick profit’ part of your PIE property investment strategy.

Having discussed here to buy, let’s now look at the how. There are several routes to uncover a property deal a) Auctions b) Bank repossessions c) Desperate sellers d) Discount new-build.

Auction deals – Buyer beware deals. Many properties are put in auction because they have a problem either with title, structure or a negative untold story that is not readily disclosed to an unsuspecting buyer. But true bargains do exist in auctions as long as you know what you are doing. Remember when the hammer goes down you are legally bound and could lose more than the 10% hammer price if you pull out. Furthermore, you have only 21 or 28 days to complete so not having your finance ducks in a row will have devastating consequences.

In short auctions are best left to the more experienced property investor. From my side I have found property auctions to be time consuming with greater competition from other property investors.

Bank Repossession deals – From late 2008 to late-2009 I managed to pick up a good few property repossession bargains in Manchester city centre. However, it wasn’t long before many other investors started to chase down the same bank repossession properties. Consequently I found myself being gazumped and losing many properties that I thought I had secured. After a few months of this and losing two properties in succession to gazumping just days before exchange I stopped seeking bank repossession properties. The time and costs versus the success rate turned sour when too many other investors climbed back into the market.

It is important to note that a bank repossession property remains on the market until legally exchanged. As a rule the price you have offered is advertised like a moving target on Rightmove visible to other investors. Furthermore when you lose a property to gazumping after paying out for survey, search and legal costs it’s a bitter £700 pill to swallow. Be aware of this risk, you must exchange as quickly as possible. But never exchange without a mortgage offer unless you can afford to buy the property for cash in the worst case scenario.

Desperate Seller deals – Desperate sellers tend to tip their hands in adverts stating their intention with words like “Offers considered” or “A quick sale required”. Speak to the estate agent and check the original price paid with the use of nethouseprices.com or landregistry.gov.uk. This will give you an indication if they can take a substantial reduction on the asking price? Maybe they are in danger of bank foreclosure?

You could even offer a purchase and lease back solution or an option to purchase solution. Try to be creative once you know what the seller’s objectives are. In any case don’t expect the bargain of the century. Repossession deals generally offer better opportunities in terms of being more below real market value.

In the case of auction, bank repossession and desperate seller properties you can do most of your searching on Rightmove. Auction properties are listed as auction properties with a guide price. Bank repossession properties stand out because of the comparatively low asking price.

With repossessions you will see in the pictures red and white tape wrapped around the electrical and plumbing appliances in the kitchen and bathrooms.

New build discount deals – Sourcing highly discounted new build property is a lot trickier. Firstly, only some national home builders offer such deals and when they do it’s all very low key. Secondly, they only offer such discounted deals on certain sites predominantly in the North where their sales targets are not being met. Thirdly, they only like to deal with known investors of proven track records.

Without a proven track record you will have a hard time convincing a national home builder area sales director to give you a substantial discount. Furthermore, to get a substantial discount you will be asked to purchase at least four properties simultaneously.

Why do some developers do this? Just like any other company they have sales targets to meet. If sales targets are not being met on a certain site then it makes no odds to developers if they sell 1 out of 10 completed properties at their cost price. It is more important for them to meet sales targets and to keep the site moving forward towards the scheduled completion date.

This situation creates the ideal opportunity for investors to secure brand new properties at a price that in most cases is +/- £10,000 or 10% less than a comparable second-hand property sold on bank repossession. “Wouldn’t you prefer to buy a brand new property that’s cheaper than a second-hand bank repossession property?”

Another benefit of buying new build property is the removal of burdensome maintenance costs for at least the first 5 years of ownership. Thereafter on-going costs will be minimal compared to older properties. Buying new build properties make good sense if acquired at the right price i.e. well below real market value!



Comments

5:51 AM, 28th February 2012
About 7 years ago

Anahin (www.anahin.net) gives you a complete Ben Graham (Warren Buffet's teacher) "value investing" and "margin of safety" analysis for all 4000 NYSE stocks. Use Anahin as a preliminary shortlisting and analysis tool to manage your own investments.


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