Buying and selling for a profit used to be ‘easy.’ Through the millennium, you could buy a property and be guaranteed it would make money in a few years and, in some cases, a few months. Unfortunately, some people (and mortgage lenders!) seemed to think house prices would continue to rise; others warned of a housing bubble but didn’t seem to be able to predict when it would burst accurately.
However, burst it did, starting in the States and hitting the UK very hard. The recession appeared to start in the property sector, and within months, we saw sales drop by 50% prices fall by 20% from a 2007 peak. Rental income which normally rises when house prices fall has suffered from year-on-year falls of 5% or more, voids have increased, as have tenant rent arrears.
At the moment, we seem to be in a strange state of flux. No one seems to know what’s going to happen next. No one can quite believe that such a sharp recession, within less than 12 months, can appear to be ‘over.’ Yet, reports of green shoots in the property market and the wider economy seem to be talked about daily. The private sector is claiming their order books are growing again, and recent figures even suggest unemployment is slowing.
But are things really starting to turn around? What about the huge debt we owe as a country, estimated at £13,000 per head of our population*? Is it true that business has taken the brunt of the credit crunch, and the public sector has yet to be heavily squeezed? If this is true, what effect would public sector job cuts and pay being frozen (or cut) have on our economy – and the property market – next year?
More importantly, as property investors, what does this mean for you? What’s the good news? What’s the bad news? And most importantly, if you have money to invest, are there any ‘safe’ properties to invest in? Are short-term profits from property possible, or is it only possible to make money out of a property in the long term?
The good news
Many investors who had pulled out of the market back in 2006 (or before) have been buying heavily since October 2008. Those that bought within the first six months of the crash benefited by snapping up bargains from the huge oversupply of property for sale and a massive rise in repossessions. Buying ‘below market value’ became the ‘favorite phrase’ of the property investment industry, and canny investors were buying properties up to 50% below their true value.
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The bad news
However, the credit crunch meant that investing in these bargains was only for cash-rich buyers as buy to let, commercial, and development finance became difficult and in some cases impossible to secure. Moreover, the return of 25% deposit requirements, higher finance costs, and recently a dramatic fall in the supply of property in many areas has made even ‘below market value’ deals have, in the last few months, been difficult to fund and find.
Added to the financing difficulties is the six-month re-mortgage rule, which stops an investor from buying a property ‘below market value’ and then re-mortgaging it immediately to take cash out to invest in the next property. Although some still claim this can be done, most investment experts believe it’s only possible if, during the process, someone commits mortgage fraud.
So, if you can access cash, is this a good time to invest?
Currently, there are two schools of thought. The first believes that we are in an ‘artificial state of recovery. This is because interest rates are artificially low, help from the government is currently stopping repossessions, and we have yet to see the effect of reducing public sector costs. As a result, one school of thought predicts property prices falling further and staying low for some years. The impact of unemployment and a return to normal interest rates continue to depress the economy.
The second school of thought is that although low demand and supply are causing the current signs of ‘green shoots, the likelihood of lots of properties coming back onto the market is small. Some predict that interest rates will stay low for many years (CEBR estimate interest rates will only increase to 2% by 2014). As a result, they predict that property prices will remain stable, and in areas where there is a shortage of supply, such as the South East and London, prices may even show small rises.
Whichever of these scenarios you believe will happen, one thing is for sure, that spotting the ‘bottom of the market’ is impossible. You will only know it’s been reached AFTER it’s been recorded! For example, for those hoping to pick up repossession bargains, the latest statistics from David Sandeman at the EI Group show that the ‘bottom’ of the repossession market (i.e., when repossessions sold through auction houses were at their highest) was Quarter 4 2008 – nearly a year ago!
However, good investors will always be able to make money – in good and bad markets. And, although you may have missed some of the bargains that have been around in the 12 months, there are still plenty of areas and properties that are worth considering investing in, as long as you’ve:-
1. Carried out extensive research
2. Considered different ways of making money from property
3. Accurately valued the property you are buying
4. Identified potential future capital growth
Research, Research, Research
In my view, few people carry out enough research when buying an investment property, especially in unfamiliar areas. Those that don’t visit a property before they buy shouldn’t be investing at all unless they have previously tried, tested, and trusted independent people who carry out valuations independent of any property clubs or sourcing businesses.
When researching an area or property, it is essential to:-
1. Visit the street and surrounding areas, research current supply and demand from a buyers/tenants perspective.
2. If the property requires updating, make sure you have accurate quotes, and refurbishing the property will deliver a 20% return.
3. If you are planning to rent the property out, check the rental value from an agent that specializes in rentals rather than an estate agent/letting agent that may have a conflict of interest or have only just started a lettings business to help survive the recession.
4. Check what properties are in short supply now for buying or renting. Areas that seem to be recovering from property price and rental falls already are likely to be the ones that will deliver good capital growth in the future.
5. Secure feedback on potential sales value from estate agents and an independent RICS surveyor acting on YOUR behalf.
6. Check out the future supply of other properties that might affect demand for your property. If you are buying a two-bedroomed flat, what if another 1,000 are planned to be built? What planning permission has the local authority already given?
7. Find out about the future population changes. For example, if you are buying a large property to rent out to students, will there be enough families who can afford to buy a big property when you want to sell it?
8. If you are buying a three-bedroomed property and are planning to turn it into a five-bed, make sure the cost of the additional space will be covered by a real rise in the value of the property.
Consider different ways of making money from property
Many people look to buy to let or renovation to make money from property. However, you can also invest in:-
1. Buying land and build to let or sell.
2. Commercial as opposed to residential property.
3. Develop mixed-use property, such as buying a shop and a flat above and renovating to sell or rent at a profit.
4. Property funds and syndicates.
5. Working with developers to buy properties below market value via a ‘part exchange scheme.
Accurately Valuing Property
When we used to value properties at a professional part-exchange business, we spent approximately three full days and use five professionals to help value the property accurately. And we had to. To make money from the part exchange, you have to buy a property at a discount of between 10-20% and then sell the property (typically via agents) within a three-month period, or you’re likely to start losing money.
To value a property, you need to:-
Understand what is happening in the local market
Use Hometrack and then visit local estate agents that have been selling similar properties. Hometrack will show you how many weeks and how many viewings properties require to sell, as well as what the average offer price is versus the asking price. Use this information to check with local agents how accurate it is and what their market experience is currently.
Identify previously ‘sold property prices’:-
1. Go to a property portal, for example, Rightmove, and click on ‘sold prices.’
2. Put in the property’s postcode.
3. Select a distance first time of 1 mile, then if few or no results, select up to 3 miles.
4. Put in your type of property.
5. Put in 10% below the minimum price of the property valuations you currently have.
6. Put in 10% above for the maximum price of the property you have.
7. Then tick the box that says ‘include sold, under offer, subject to contract.’
8. Find properties that have just gone under offer/sold and then follow up with the agent who sold the property.
Find comparables of similar properties which have recently been sold
A recent comparable is vital in understanding a property’s likely value. It is defined as a property sold recently in a similar location, ideally in the same road or very similar property in a nearby street, e.g., 1930’s semi, detached, or Victorian terrace.