The Truth About Buying Repossessed Property

by Frazer Fearnhead

5 years ago

The Truth About Buying Repossessed Property

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The Truth About Buying Repossessed Property

All the property “gurus” (and I’ve really started to despise that word) advocate buying BMV property – “you make your money when you buy the property not when you sell it” as Robert Kiyosaki (the guru’s guru) says.

One of the best ways of doing that is buying repossessed property at below market value. Given the state of the economy, you can find plenty of these deals through estate agents and auctions and, if you are buying large numbers direct through the asset management companies. It helps enormously if you are a cash buyer and at the very least you need to have funding already in place as the seller will always want to see proof of funds before even considering an offer.

So, in theory at least, buying repossessions (or “corporate sales” as the agents euphemistically now call them) can be a lucrative property investment strategy enabling you to buy at a bargain price, renovate it and sell to the open market at a decent profit or rent it out and obtain a very decent yield.

But you need to be fully prepared for what’s in store. Here are a few examples of the issues we have encountered in the last few months which are (apart from the last one) fairly typical of what you will experience if you start buying repossessions.

Ask Yourself: Is it really a bargain?

Just because it’s a repo (ccmph, sorry… corporate sale) does not automatically mean it is a bargain. Doing your due diligence on the internet/ telephone is one thing to establish previous property sale prices and comparables, but you absolutely must do a site visit to establish whether it is truly a bargain. Repos, by their nature, tend to be in a fairly appalling condition. You need to calculate what you will have to spend to bring the property up to scratch. It may well be that whilst the 2 bed terrace for sale at £35,000 looks like it is a great deal at £15,000 below comparable properties, it may actually need £20k spending on it and there is little margin for profit. Many estate agents won’t tell you that over the phone, even if you ask them, as they like to get as many viewings as possible even if it should be obvious from what you’ve told them that it won’t be suitable for you – I think it gives them something to show their client as evidence they have been doing some work!

A more unusual example (but one that is becoming increasingly common) is Japanese Knotweed. In quick succession, we found two properties that looked like great deals until we realised the gardens were riddled with Japanese Knotweed. This is a notoriously invasive weed, which can cause serious damage to property. It also makes the property un-mortgageable and can be an expensive problem to clear up, taking many months. All of which can of course represent an opportunity, if the buyer will reduce the price accordingly. But many sellers, even in this market, are extremely stubborn and in neither of our cases would they reduce the price, so we had to walk away. Presumably, some unsuspecting person with an incompetent surveyor bought them in the end, as they are no longer on the market.

Tip: You must do a personal viewing and work out your refurb budget allowing a 15-20% contingency before making an offer.

Public Notice

It is the duty of the bank in possession to obtain the highest price possible. They will never agree to take a property off the market. This means even if they accept your offer, you can be gazumped at any time up to exchange of contracts, losing survey fees, structural engineer fees, search fees and legal fees in the process. Quite an expensive business, and if it happens a few times it will eat up a high proportion of any profit you hope to make, especially if you are dealing at the low end of the market. It’s especially galling when the other side has caused the delays and allowed time for a rival purchaser to make an offer.

Whilst being a cash buyer has its advantages, as an investor you are looking to make a profit. There is a ceiling to what you can pay and still retain a realistic chance of achieving this and, as you may well be competing against potential owner occupiers who are not so like minded, and likely to be prepared to pay more, expect to be gazumped – frequently.

Tip: Speed is of the essence. Emphasise to the seller (if true) that you are a cash buyer and will pull out the stops to complete quickly. Make sure you use a solicitor who will proactively push things forward as quickly as possible.

Vandalism

The fact is people are not going to be happy about being kicked out of their home. It’s common for people to blame someone else for their troubles and likely that people being repossessed will become vindictive. They not only frequently leave the place in a dreadful mess, but will often actively vandalise the property and steal anything they can. Examples we have experienced include taking all bathroom fittings, removing boilers, copper piping, cutting and sabotaging the copper wiring (labour costs to replace £1200!), sabotaging the water tank – which meant the newly re-plastered walls despite using all manner of industrial heaters and dehumidifiers took over 2 months to dry, massively delaying what should have been a 4 week refurb.

Tip: Do not expect a survey to reveal all the potential damage. Build in a generous contingency fund to your budget.

Utilities

Chances are the gas and electric bills will not have been paid and the supply will have been cut off. It may even have been de-energised from the main street power source. The seller will have no information about who the suppliers are and you will need to set aside a good few hours to indulge in Kafka-esque dealings with utility companies to find out who supplies it and how you are going to get it reconnected. Not anyone’s idea of fun.

Tip: You have two choices to deal with this and retain your sanity. 1. Outsource it to a person who you don’t know (as they will probably never speak to you again after 6 excruciating hours of banging their head against a wall) or 2. Order a large supply of Valium and try not to smash your phone into tiny pieces – not that I have ever done that of course. Maybe once… Or twice. Definitely no more than thrice.

Block Management Issues

There are apartment blocks up and down the country that have been sold to investors at the height of the market.  Many investors’ motivation, I suspect –given the ridiculous prices recorded at the Land Registry, was some sort of dodgy cash back incentive rather than a long term rental income. These investors showed no commitment to paying their mortgages and as they bought whole blocks of flats with 100% finance to maximise the cash they could immediately get their mitts on, when they defaulted on their mortgages, whole blocks have been repossessed. They also in may cases have avoided paying their service charges which means the block management companies (which subsequently gone bust) stop maintaining the communal areas and they are often in a state of disrepair.

No mortgage company will finance the purchase of a flat where there is no block management contract in place. It can therefore represent a great opportunity for an investor who can buy for cash and wait for all the flats to be resold so that a new management company can be appointed to sort out the mess.  But it can be a complex situation to establish whether the purchaser will be responsible for unpaid service charges and it can even be an issue as to working out who has the right to receive that service charge. It is definitely not for the faint-hearted.

Tip: It is essential to ensure you have a very good and experienced lawyer. It may well be the difference between getting the deal done or not and also ensuring you are not held liable for thousands of pounds worth of accumulated charges.

Solicitor’s Not Completing –

In 18 years of property investing, I had never heard of this happening – until it happened to us. Essentially, our solicitor left a junior in charge of the completion whilst he was on holiday. He informed us that we had completed on the property – a fantastic bargain where we acquired a 5 bed house in Bolton and a 2 bed flat on the same title for £50,000. Open market value was well over £100,000. We collected the keys and sent the builders in. Two weeks later, after racking up over £20,000 of building costs, I received a call from the solicitor telling us there was a problem and they hadn’t actually completed on the property (despite having transferred the money to the seller) and the seller now wanted to sell to someone else. I can feel my blood beginning to boil just thinking about this again, so I won’t go in to any more details. Suffice to say after protracted negotiations to try and rectify the situation, we had to concede and are now suing our (ex) lawyers for the losses incurred.

This last problem is highly unlikely to ever happen to you, but the point is totally unpredictable things can and will happen at some stage.

Tip: “hope for the best prepare for the worst” (thanks, Grandma).

So, in conclusion, the truth about buying repossessions is things are never as easy as the gurus make out in their seminars – if they were everybody would be doing them. When investing in repossessions, the maxim “caveat emptor” (I knew 3 years of Latin would come in useful one day) should always be borne in mind – buyer beware.

 

Comments

John Maynard

5 years ago

Well said Frazer, I've bought renovated and sold over 20
properties in my time and am the veteran of over 35 renovation projects in
total, and without doubt every project throws up something somewhere that’s
hidden that surprises you and your wallet! Repos definitely included.

I've also had some good repo deals over the years too-although
my most recent purchase in Sept this yr though was a case in point as I was
outbid by 5k a week before exchange so up went my bid accordingly…(I did go
back to the property and superglue the locks to prevent the agents getting in for
any more viewing in the short term after that! But that’s just between you and
me!)

Puzzler

5 years ago

I would like to hear more about "no lender will finance without block management in place" as I own 2 flats in a small block of four in which the freehold is jointly owned between the flats. There are no leases as such and we manage it between ourselves. I had no problem getting mortgages in 2008. Has the situation changed or is this a different case?

Oprul

5 years ago

i read an article about that the other day, where if you don't register the property the owner can sell to someone else. non that uncommon.

Matt Wardman

5 years ago

>Chances are the gas and electric bills will not have been paid and the supply will have been cut off. It may even have been de-energised from the main street power source. The seller will have no information about who the suppliers are and you will need to set aside a good few hours to indulge in Kafka-esque dealings with utility companies to find out who supplies it and how you are going to get it reconnected. Not anyone’s idea of fun.

Easy peasy, I think:

Gas.
Meter Number + phone Helpline on 0870 608 1524

Electric call:
Scotland North 0845 0262 554
Scotland South 0845 270 9101
North East England 0845 601 3268
North West England 0870 751 0093
Eastern England 0870 196 3082
Southern England 0845 0262 554
South West England 0845 601 2989
South East England 0845 601 5467
London 0845 601 5467
Yorkshire 0845 330 0889
Merseyside and North Wales 0845 270 9101
South Wales 01752 502 299
West Midlands 01384 343 838
East Midlands 0845 603 0618

http://www.uswitch.com/gas-electricity/guides/who-supplies-my-electricity-and-gas/

Don't forget that the EPC Register now has a postcode search:
https://www.epcregister.com/reportSearchAddressTerms.html?redirect=reportSearchAddressByPostcode

ML

Joe Bloggs

5 years ago

the agent would just order a lock change.

Neil

5 years ago

Always good to read a sensible, realistic article about this awful business. His comments on the 'Gurus' and the 'Gurus Guru kiyosaki' who we all followed, are excellent.

Steve J

5 years ago

Some good comments there Frazer - I might be able to help with the utilities side of things. You can find the supplier for any property with valid reason from MPASS on 08453300889 - I haven't used the number in a few months but they can certainly sort out supply issues...
Cheers

Steve @ Skylight Properties (Yorkshire) Ltd
Suppliers of Landlord Certificates
http://www.skylight-properties.co.uk

Steve J

5 years ago

I too am interested in how to set up a management company for a small development if one has gone 'pop' previously. With only 4 flats to go at in this particular development, an outside agent would be too expensive and I don't wish to be director of another Ltd company that may go 'pop' through no fault of my own...? Can a new lease simply be drawn up if everyone agrees or is it the Freeholder who is responsible for setting up the new managemnt arrangements?
http://www.skylight-properties.co.uk

Steve J

5 years ago

I think I'm right in saying if the flat is freehold then there are only a handful of lenders who will touch it - problem. If you own the Freehold between a few of you and lease it back to yourselves then this is less of a problem as there would be no absent landlord to let the building fall into disrepair...
I'm not a mortgage advisor tho - so keep looking into it...!
http://www.skytlight-properties.co.uk

Mike

4 years ago

I have enjoyed reading this article. I have purchased a couple of repossessed properties. I had to renovate all these properties and one or two of the projects were very challenging.

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