We are gearing up for a busy start to 2016. There will be limited stock especially at the lower levels; at higher levels there tend to be more deals as there are less players in the market and therefore more room to breathe. The frenzy is expected due to the anticipated rise of 3% in Stamp Duty which is expected to occur in April.
In his Autumn statement in late November, the Chancellor outlined plans for an extra 3% stamp duty payable on buy-to-let investments and second homes in England, Wales and Northern Ireland. The detail has not yet been issued – the initial consultation is due to be published next month. Until this happens, it is hard to draw firm conclusions, but landlords will likely review their holdings in conjunction with the change of policy around mortgage interest relief which is
being phased in from 2017.
A 3% increase in cost should not sway your decision to invest in property, but for many who have been sitting on the fence this could be the push they need.
With this expectation it is increasingly more important how one identifies a deal. Here are a few pointers which will help your search for one. Broadly speaking there exist two avenues of sale: one is through the auction route which gives sellers certainty of sale and time. The other is through agencies where one may get more money but there exists uncertainty in terms of whether a sale will fall through or not and typically transaction times tend to be longer and uncertain. Auctions also provide transparency to the process, i.e. anyone can go and bid for a property. This is why this route is favoured by charities, trustees and public bodies. The risk of getting sued post sale is minimised.
In regards to auctions there are three points at which one can purchase: one is pre auction, the other on the auction day itself and the third is to pick up unsold lots post auction.
At times properties are left unsold, this can occur if the seller had set too high a price on the property. The auction will make a comment on their website ‘unsold but available at £X’. The X is the reserve price, which is the minimum the seller requires. This means the market was not prepared to pay this amount. Therefore in this scenario do not be afraid to offer less than the reserve figure as this was unrealistic, especially if the property was being sold by a public body as they can justify accepting a lower offer, since it has been through the auction process and hadn't sold.
At times you may find a property and want it so much you do not want it to go to the room, in case you lose control of the deal. One often has the option to bid prior to the auction, which many are unaware off. Depending on the lot auctioneers like properties to go to the rooms, as they like the activity and the buzz generated by this. However they like their commissions more, and so would be prepared to have a certain sale too. Properties owned by public bodies and trustees are more likely to be sold in the room, to ensure the process remains transparent, i.e. there does not exist the option to give the auctioneer a back hander, unlike the estate agency route. The pre auction purchase is more likely to be done where the vendor is a private individual.
In buying at auction you have the risk of uncertainty, all it takes is one other person who wants the property a little more than you do to bid the price up. There are however some signs to look out for which will increase the chances in your favour. There are properties which have been simply put into the wrong auction. I remember purchasing a property from a small auctioneer and reselling it with a larger auctioneer in the space of two months and there was a difference of £22k. If a landlord has a long standing relationship with an auctioneer this may blind him to giving the instruction to them. If the property is in the centre of town, and the auctioneer is not, chances are they may not be the best people to achieve the highest price. The other point to watch out for is certain auctioneers specialise in certain locations; at times properties are mismatched. An extreme example is a Welsh auction selling a Central London property. In practice this happens with the auctioneers within the London Area.
Another point to look out for when hunting a deal is repossessed property. These will be listed as the vendor being the LPA receiver. Often when a property is sold in this way the person who has been repossessed is not very forthcoming with the paperwork. In the event the property is tenanted it will be described as an unknown tenancy, as the receiver does not have access to the agreement. This means it could be an AST, which is an Assured Shorthold Tenancy or a more complicated one which means you cannot evict the tenant out in the normal fashion. The latter can devalue the property significantly.
We purchased a property in Maida Vale which came with five unknown tenancies. It was a freehold block and we purchased it at £1.1m; we traded it three days later for £1.3m without ever completing.
A shrewd person who has been repossessed will sabotage the deal and then try and buy the same deal back at a fraction of the cost. In fact in this way they could make more money than doing a plain vanilla deal. Withholding tenant information is not the only way to sabotage a deal, you can also add illegal alterations which may attract an enforcement notice from the council. Externally this may look complicated and problematic, but in actual fact there may be a very simple way to resolve it for the person who had instigated this. I knew someone who had his property repossessed in Paddington, he had employed such measures with precisely the intention to purchase this deal right back from the trustees. He had encroached into the space of the next door building whom he was in cohorts with to make the situation very messy.
The other aspect to look at is timing. It is not a good time to have an auction for example when the Olympics are going on. People are drinking, and sleeping late, they are in no mood to be purchasing at auction the next day. That is of course unless you’re a Gujarati, don’t drink, and just want to make money.
We have had firsthand experience of this and been at the wrong end of the transaction. We put a property in auction during the time when London hosted the Olympics as well as celebrating the Queen’s Jubilee. The property was a block in Shepherd’s Bush, it was freehold consisting of three flats. The property was unsold at the auction even though it was only on at £650k, we had some feeble offers at around £600k by some opportunists post auction which we refused. We were happy to take less as we had only exchanged on the property and therefore time was of the essence. Only a year later we sold the property for £975k, flat by flat.
The bottom line is people are motivated more by fear than the pursuit of pleasure. If there is uncertainty in a deal this causes paralysis in most investors, if you can unravel the problem or take a logical gamble on it you can exploit the situation.
We will examine some ways to spot deals on the estate agency side in the next issue, which will be out in 2016.