Auctions are now for selling rather than buying property

On Monday 6th February 2012 PropVestment paid a visit to Barnard Marcus residential property auction at Grand Connaught Rooms in London. We were in for a surprise as we were there as a buyer but soon found auctions are now for selling.
This was the first major property auction of 2012 in London. Thus it was pack out, many experienced and new property buyers in the hall.

Auctions are for buying not selling now

Lot 1 had guide of £800,000, a four bed house in Battersea, it went for £1.28m + 2.75% fees. This was the story of all the first twenty or so lots.
All the first 23 lots were in London, the average winning bid was over 30% above the guide price, taking out 5 where even at this level the Reserve was not met, the other 18 properties sold at over 36% above guide price.

A few other key high lights from this auction:

  • Most land only deals did not sell, reserve not met
  • A piece of land without planning permission for a possible 8 units went for £860k, that’s insane for the area, almost £110k land cost then planning then construction.
  • Most of the lots on by order of Mortgage companies got bids over guide however did not sell due to Reserve Not Met (RNM). This can only be the case as the lenders have over valued in the past and now face negative equity. Failures.
  • Properties in North England and Wales were the hardest sale, many RNM and a few with highest bids well under guide prices.

PropVestment Conclusions: Auctions are now for selling

Property Auctions have changed now, its a much more public affair and it seems that its no longer a place where you can pick up a bargain. The sellers use it to sell properties that otherwise will not fetch a similar price through traditional means such as local agents. This tell us something about the quality of the properties and legalities of them. There were many amendments to the information provided with particular importance on certain higher rentals, those properties were on the day changed to vacant possession. Therefore the guide rental was incorrect, how is one to know what the real rentability of a property is without doing thorough research.
Due to these pit fall, an auction is no longer a place for inexperienced or first time buyers to find a property to buy. Auction are now for selling.
Rather it is a place where landlords can easily offload not so good properties and rely on the ignorance or lack of research of bidders.

PropVestment Auction Advice
Buyers – Do your thorough research and get someone to look at the legal documents prior to bidding.
Sellers – Use auctions to sell unwanted properties, especially in London, everything sells

Have a read of our observations last year at Savills here

UK Property Market in 2012, the Investors’ perspective: Part one – House Prices

Looking at various property professionals and organisations we analyse the UK Property Market in this series of articles.

-UK property prices expected to fall up to 3% in 2012RICS

-House price Stagnation remainsNationwide

-Up or Down? Depends where you arePropVestment

House prices are always the primary topic when it comes to analysing the the UK Property Market. 2012 is no different. The question remains what component of house prices should be used in analysis, is it the asking price, is it the RICS or bank valuation or is it the selling price.

In my opinion it is the selling price that is all important taking in the UK property market in all dimensions without any bias. This is house prices, the real deal.

RICS:
Sales of UK residential properties may rise a little in 2012 but prices will struggle to follow suit. Prices at a headline level will edge lower by around 3% across the UK. However, the low level of supply should continue into the coming year, stabilising prices and preventing significant declines.

Nationwide:
“The average home rose in value by 1% in 2011 to £163,822, but fell by 0.2% in December compared with the previous month.
The economic climate was likely to lead to a similar situation for the housing market in 2012. There were geographical differences. Prices in Northern Ireland fell sharply by 8.7% in 2011 but rose in London by 5.5%.

Not enough homes are being built. In 2011 just 107,000 new homes were built. The government has forecast that every year from 2013 to 2023 an extra 240,000 new households will be formed, mainly due to the growing population. This means upward pressure on UK house prices.

However house prices are not only determined by the balance of supply and demand, but by how much money lenders are willing to lend. If prices were to start falling sharply, banks would be even tighter and there would be less and less mortgages approved and therefore less completions.

There may be eventual increases in interest rates further down the line, and no return to the days of easy lending, mean that house prices will fall for several years to come.
House prices have to keep falling until they get back to long-term norms of about three or four times earnings, they are still about seven or eight times earnings – they still have a long way to go.

Is London special?
Central London has been an exception to the rule, along with prosperous parts of the South East. Here house prices  have rise in the past couple of years and are now back to their peak levels. Property prices in London rose by 5.5% in 2011
Firstly many of the new jobs created in the past year or two have been in this part of the UK.
More interesting though is wealthy foreigners who looking for a safe home for their cash by buying a flat or house in central London, as well as your expected Middle East and Asian Investors there has been a significant rise in investors from Greece and Italy who are desperate to get their cash out of their country.

The BBC did a survey among experts, listed below, as you can see not a single individual is predicting an increase.

Property price predictions 2012

  • Ray Boulger – down 4%
  • Bernard Clarke – “a broadly flat market”
  • Jonathan Davis – down 10%
  • Martin Ellis – “unchanged plus or minus 2%”
  • Robert Gardner – “flat to modestly lower”
  • Henry Pryor – down 10%
  • Simon Rubinsohn – down 3%
  • Ed Stansfield – down 5%

PropVestment UK property market House price summary

House prices are a result of multiple market factors, interest rates, mortgage availability and amount, demand and supply etc… from all the data analysed there is not an optimistic outlook for 2012. However there is always opportunity, I very much doubt any significant falls in the South East and London. A drop on prices else where means for affordability that may kick start the market. From an investors perspective rents are also a vital part to any investment so keep watch for the other parts in the series.
Overall prices probably will not rise much but won’t fall significantly either, worry is if the Euro collapses what will happen to our mortgage market? How will our banks react? This is in my opinion the most important factor to keep the market ticking over.

Sources:
http://www.propertywire.com/news/europe/rics-property-prices-uk-201112225903.html
http://www.bbc.co.uk/news/business-16288438
http://www.bbc.co.uk/news/business-16356568


How to calculate your REAL return on Investment: 5% becomes 35%

The REAL Return on Investment

Traditionally property return on investment is calculated by rental yield, especially when it is being compared to returns of other types of investments. However I believe it is a much more exact science, and can vary significantly depending on specific properties and on how the investor structured the deal when purchasing the property. A traditional yield of 5% can actually be 35% if the deal is right.

Let me start with a simple example. A two bedroom flat, bought with standard Buy-to-let 75% finance, at 5% interest only for £200,000 that is renting out for £10,000 per year. Traditional yield will be 5% (rent/value=10/200=5%). Under the way I calculate it, the rent less the mortgage interest divided by initial money in, therefore for this deal ((£10,000-£7,500)/ £50,000) so its 5%. The “real” return on investment is still the same.

But wait, what about capital gains, this is still a form of returns even though they may only be realised at a much later stage when selling and that will be liable for Capital Gains Tax. Well that is not strictly true, if the investor remortgages again after a year with similar terms, 75% of the capital gain can be realised. So if we make a very conservative and modest assumption in present gloomy market conditions of a 5% increase in value that is £10,000 and if we take 75%, and add it to the surplus cash from earlier that is a total of £10,000 return, effectively 20% return on the deposit paid. That is an amazing return, which I can’t see any other form of investment where the risks are so low and the investor has so much control over the asset.

There are certain things we have not considered like remortgage costs, legal and stamp duty, maintenance, and tenants. These will of course change calculations. Also the reason I simplify with a interest only mortgage, because if it was repayment that add to the capital or equity of the property so in effect cancels out the cost, although in realisation it will only be 75% realised when remortgaged.

Let’s be a bit more adventurous now, and add a few more clever changes to the model. We have to cap the borrowing at 75% LTV because that is the realistic maximum in the current lending condition. Let’s say the purchase price was 15% BMV (below market value) but the Mortgage was LTV, and the investor used a £10,000 personal loan at 10% compounded with capital and repayment due in two years, to part gather the deposit. So the initial investment in, is £10,000, the rest is the personal loan and the BMV saving. Assuming rent is steady; let’s look at the situation in 2 years time.

Property value in two years is now £220,500, so a refinance would raise an £15,375, less the loan that needs to be paid back (£12,100), plus £5,000 rent surplus which means £8,275 cash inflow, or 82.75% over two years on what was invested, so that is 35% return on capital invested per year.

There are incredible deals available; you can look around yourself, internet sites, auctions, personal contacts. If all else fails, contact us, info@PropVestment.com. You have to be clever with the way you invest, market condition are against us so we must beat the system and be innovative in our thinking.

Please take caution in tricky deals and do all your due diligence, the figures I use are fictional but are close to what is really possible.

How do you calculate your return on investment?

QFKUDEMEN4KX

 

Part Exchange Properties: Genuine developer offers or WeBuyAnyHouse4cash scams?

For many years now it has been the norm that we take our cars to the dealer and part exchange them when upgrading to a newer or larger one, however this is a phenomenon becoming increasingly more occurrence in the UK property market.

What is Part Exchange or “PX”?

In a similar way to how it works for cars, you are looking to buy a new house, but can not sell your current house privately, and the agent/seller of the house you are interesting offers to take your existing house or old property as part exchange for the new one.
The biggest challenge is finding a seller willing to do this, and like cars it is usually only the big builders of new homes. They are keen to sell and often have a handsome profit margin from the construction to selling price.

‘PX’, as it is known in the property trade, allows greater financial and timescale certainty for sellers, especially in today’s dipping and uncertain market, where homes are taking  months just to find a buyer plus months more for paperwork to be finalised.

Developers are the biggest promoters of PX facilities, mostly to help shift homes priced between £200,000 and £400,000. They believe it tempts buyers into moving more rapidly, because in theory it can avoid delays incurred by registering with estate agents, arranging viewings for prospective buyers, and negotiating over offers.

But while it can clearly be helpful for sellers, there is a hitch. Those opting for PX must accept less than the market value for their old home in return for the certainty of being able to get it off their hands.
The developer typically offers around 90 – 95% of the market value of your current home, but it’s a guaranteed sale, it usually happens fast, and it avoids the need for estate agency fees.
Read more

Stagnant UK Property Market: Sellers’ Perspective

It has been widely reported that the current market conditions are such with very low volume of transactions, falls in mortgage approvals, and an overall stagnation in the UK property market.

House Price Crash shows very clearly the levels of mortgage approvals and the graph illustrates this with fine detail. Click on the link.

The amount of new mortgage approvals for house purchase, (but not yet lent), rose to 45,940 in May 2011 from 45,447 in April. However May’s approval figure was lower than the average for the previous six months despite the slight increase, according to figures released by the Bank of England.

Nationwide’s index has prices remaining stagnant since May, and down 1.1% annually, while Halifax has prices up 0.1 % in the same month and down 4.2% annually, while the Land Registry has prices down 2.3% annually. Overall there is clear evidence of stagnation in the market.

It is important to analyse the factors causing this and the mind set of Sellers’ and what is causing them difficulties.

Once again today the UK Base rate was held again at 0.5% for the 28th month running. It will be interesting to see the divide in the Bank of England committee when the minutes are released.

Lending to individuals

At PropVestment we sight two major problems causing this stagnation. Firstly Sellers are too over optimistic, thinking that their property should have risen along the same rise levels as seen before the credit crunch, and cannot come to terms with a possible drop in value, so they set their asking price above what is realistically achievable and representive of their property.
This means that many properties stay on the market longer, the few that are closer to realistic values and are lucky enough to attract attention of the buyers suffer from a secondary factor. Price agreed, next step acquire a mortgage approval.
When the bank valuer goes to value the property, its significantly undervalued relative to the asking price, the mortgage offer comes at a LTV of this valuation, leaving the buyer with a shortage to complete. Result, the deal falls through.

Why should a seller sell? Well with current interest rates, many PropVestors have mortgages around the 1-2% mark, they are enjoying a healthy surplus on rents and selling just means, realising Capital Gains Tax.

Therefore if one does not need funds else where, logic says to stay put, not sell and lose a chunk to the tax man and instead enjoy the cake of higher rental yields to mortgage installments.

Further as stated in our last article, it has been stated that rents, in particular in Central London, are expected to rise 8-10% in the year to come. Investors are well placed to get great returns. Especially where the mortgage costs are not looking to rise due to the base rate on hold.

The UK mortgage market is still quite inactive, even though data is showing an recent increase, from our personal experience and that of our clients, the lending criteria is very strict and stringent and only those that fall into a model profile, income base, age and credit history are the ones where mortgages are being approved. Further to this the LTV (Loan to Value) is still surprisingly low in comparison to boom times. Sellers do not want to accept the lower valuations and feel their properties hold more value so will not sell at current market prices.

PropVestment concludes that from a sellers’ perspective the primary factor why sellers are not as active as they would like to be is simply that the returns are just too good, and staying put is the best option. Even those looking to sell, find the potential buyers are not capable of securing the finance to meet asking prices.

LENDERS START LENDING, SELLERS & VALUERS GET REALISTIC

Last Month : Buyers’ Perspective
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Stagnant UK Property Market: Buyers Perspective

It has been widely reported that the current market conditions are such with very low volume of transactions, falls in mortgage approvals, and an overall stagnation in the UK property market.

Stagnant

Nationwide reported that house prices rose 0.3% in April but are still down 1.2% on last year.

The number of houses sold in May was up 4.7% on the previous month’s figures and reached the highest level seen since May last year.
House sales were 2.0% fewer than May 2010 but significantly up 14.7% on May 2009 and 18.6% up on May 2008. The recovery was led mainly by activity recorded in the North of England and the Midlands. This is very encouraging.
There was positive news for the number of new ‘For Sale’ instructions received in May. In the UK they were up 1.7% eradicating the -0.5% drop seen in April.

It is important to analyse the factors causing this and the mind set of Buyers, and there finally seems some light at the end of the tunnel.

Just today the UK Base rate was held again at 0.5% for yet another month, all indications suggest that there will be no drastic upwards movement. Therefore many home owners and investors are content with staying with existing properties where they are enjoying very low interest rates often just a fraction over the base rate, if they were to sell off current properties and find new ones, it is almost impossible that they will be able to gain similar rates. They conclude it is better to stay put and use the extra savings to pay off capital rather than buy or sell into new properties.
However with such a low base rate saving rates are also very low, which with current inflation figures mean that real return is actually negative.

PropVestors are better placed to either put extra cash into paying off capital or reinvesting in property rather than having money thats losing money in ISAs or savings accounts.

Investors are seeing much better returns on rentals rather than the negative real return of having money in a savings account.

In other property news today it has been stated that rents in particular in Central London are expected to rise 8-10% in the year to come. Investors are well placed to get great returns. Current renters should also think about becoming FTBs (First Time Buyers)  to avoid high rent increases and instead use the low base rate to get on the property ladder. With these factors there should be upwards pressure on demand and property prices, so what is holding back the market?

The UK mortgage market is still very inactive, even though data is showing a recent increase, from our personal experience and that of our clients the lending criteria is very strict and stringent and only those that fall into a model profile, income base, age, and credit history are the ones where mortgages are being approved. Further to this the LTV (Loan to Value) is still surprisingly low in comparison to boom times.

PropVestment concludes that from a buyers perspective the primary factor why buyers are not as active as they would like to be is simply that the lending is just not available and with prices especially in the South East remaining so high. Even those lucky enough to secure finance, they just can not make the deposits needed to buy when the LTV offered is as low as it is.

LENDERS START LENDINGNext Week : Sellers Perspective
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FirstBuy – Does it help “PropVestors” or just another government gimmick?

  • First Time Buyers

    Help for 10,000 FTBs

  • Shared equity means, shared losses
  • Help only for a few FTB and only New Builds

What is it?

1. FirstBuy will be offered on selected properties across a range of new build schemes following an assessment of offers submitted by developers.

2. Eligible purchasers who need assistance to buy will be offered an equity loan of up to 20% of the purchase price. The equity loan will be funded equally by the HCA and the developer. Potential bidders should note that it is an absolute requirement of the programme that developers must provide matchfunding equity.

3. The maximum property price expected for FirstBuy is £280,000, based on the affordability assessment for purchasers.  On an exceptional basis, depending on location, a purchase price of up to £300,000 will be considered.  We expect that most bids will be for lower priced properties which will be favoured, taking account of location.

4. Purchasers will be required to raise funding, (a mortgage plus any deposit where available) of at least 80% of the purchase price. The buyer’s mortgage loan is secured as a first charge on the property in the usual way and ranks ahead of the equity loan charge.

5. Both the developer and the HCA will take an equal second charge over the property to secure their interest. The equity loans are secured as second charges on the property and are on an equal footing between the HCA and developers.

6. The form of equity mortgage will be prescribed by the HCA (and will follow the form of equity mortgage used for HomeBuy Direct, which is familiar to lenders and solicitors, and to the market).  Both the developer and the HCA will lend on the same terms.  The use of a standardised charge will simplify the conveyancing process, make the product more attractive to lenders and help with marketing the product to individuals. Each equity loan term is 25 years but repayment is required on sale of the property. Read more

What does 2011 have in store for the PropVestor: Part one – House Prices

Happy New Year PropVestors

As the new year has arrived, its only fitting that we start analysing the market and try to figure out what we are to expect from the market in the year to come and then we may be able to form a suitable strategy to make it a successful year. There are a few conflicting opinions in the the media and altogether many factors that need to be considered. Here is a few main ones covered from sources and opinions in the media, let’s try detangle and make sense of the information.

House Prices

Hometrack:

House prices to drop 2% in 2011 on ‘weak demand’,  UK house prices fell for a sixth month in December and will extend their decline in 2011 on “weak” demand and tighter mortgage-lending conditions.
The average cost of a home in England and Wales dropped by 0.4% during December , according to the housing intelligence group.
The drop was driven by the ongoing shortage of buyers, with estate agents reporting a further 4.8% fall in the number of people registering with them in December, the sixth consecutive monthly decline.

Capital Economics:

The major lenders’ indexes are likely to end up showing house prices dropped between 1% and 2% in 2010,  how severe the drop will be – they put it at a whopping 10% next year.

Chesterton Humberts:

prices will manage to rise slightly as the wider economic recovery continues, up 1.2% in London and 0.8% elsewhere. They are also more positive about the past year, calculating prices were up 1.8% by mid-December.

Office for Budget Responsibility (OBR):

The independent fiscal watchdog predicts that prices will fall 2.7% in the coming financial year.

PropVestment:

In London and the South East it is difficult to agree to major price drops, sellers will hold out at higher prices, suggesting activity will stagnate however prices won’t drop significantly, especially due to continual foreign buyers in the market. However in the wider country as people get desperate to sell or move due to new jobs etc…prices will inevitably drop.

Look out for the the rest of this series of article: Rentals, Lending, Market Activity, Interest rates

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A new rental concept: SpareRoom+eBay= airbnb

the eBay of rentals

Airbnb is a fresh concept at the rental market, an innovative service that brings the industry in line with the world of Facebook, eBay and YouTube.  What does this kind of service mean for the real property investor and how does is change the industry? Is it applicable to a major portfolio or just limited to the vocational landlord with a spare room under the room? In this article I’d like to introduce this innovative service and discuss the implications for landlords and how best to make use of such a service and adapt it to your investments and property portfolio.

apps are the new way

Airbnb was founded in August 2008 and based in San Francisco, California. Airbnb is a trusted community marketplace for people to list, discover, and book unique spaces around the world online or from an iPhone device.  In April 2009 it received $600k from Angel investors and has now raised $7.8m through venture capital.

It brings the Ebay concept of how to monetise items in your house, airbnb aims to help people monetise space in their property. Whether the available space is a castle for a night, a sailboat for a week, or an apartment for a month, Airbnb is the easiest way for people to showcase these distinctive spaces to an audience of millions. By facilitating bookings and financial transactions, Airbnb makes the process of listing or booking a space effortless and efficient. With 50,000 unique listings available in more than 8,000 cities and 167 countries, Airbnb offers the widest variety of unique spaces for everyone, at any price point around the globe. One founder Mr Chesky has no permanent home, instead is a client of his own business, moving from property to property.

Airbnb requires compulsory reviews, this ensures people respect the system and builds a profile; one bad review can damage your reputation so one must have trust and respect and be honest. It helps create a social network style environment.

The procedure

The procedure

  1. Sign up, create a profile and list
  2. Get booking
  3. Airbnb takes credit card payment in advance and releases to hosts a day after client checks in, to ensure quality assurance and make sure client is happy with the condition. Airbnb charges a 6-12% commission.
  4. Compulsory review

The more reviews the better your profile and more prospective business.

It is clearly a promising option, nearly 100 hosts made $50k last year, so it is a viable alternative. A couple in California rents out their tree house, and made $29k in one year. They never got a good response from traditional listings to fill their property.

Listings for host and clients are getting even easier with the launch of mobile phone apps for the site.

But now back to the serious property investor, is this a viable approach and alternative?

I think it comes down to the type of property and location. It is very appropriate for spare rooms and extensions to existing owner occupied properties where the landlord can host and provide the hospitality. Also the higher premium for the short term lets is a great option for exclusive spots, say in city areas, or areas where there is a short-term explosion in demand. It is clearly not worth it for your suburban apartment; one must remember the type of client searching on this site and the other options available to them. To be successful the property has to offer something different, a unique experience that another hotel or bed and breakfast does not.  Competing on price alone will not be sufficient especially as it is a new way and will be perceived riskier.

Some research and data that can be collected over time as this service becomes more prominent, and then we will be able to analyse with empirical evidence.

For the time being watch the space www.airbnb.com . It is going to have some impact on the industry and may just spring a new range of innovative services and companies that take the market into a new dimension, for the traditional market I do not feel it is a threat yet.

 

PropVestment in Daily Mail: Wise councils: Spacious and solid, ex-local authority houses can be a very good deal

By Graham Norwood.   Original article http://bit.ly/cjK5J9
Last updated at 9:56 AM on 5th November 2010

Thirty years ago, in October 1980, Margaret Thatcher introduced the right for council house tenants to buy their homes.

Millions took her up on the offer, and there are now around two-and-a-half million former council flats and houses in the private sector.

Read more