The internet property “gurus” (and I’ve really started to despise that word) all 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.
And it’s true – you do.
One of the best ways of doing that is buying repossessed properties at below market value. Despite what we are told about the economy improving, you can still find plenty of these deals through estate agents and auctions and, if you are buying large numbers direct you can also access them through asset management companies. Cash is king and it will helps you to get the best deals if you are a cash rich buyer or 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. If you need to arrange a mortgage to buy then this is probably not going to be a great strategy for you as you will find all the best deals going to cash buyers who have ready funds and can move quickly.
So, in theory at least, buying repossessions (or “corporate sales” as estate agents euphemistically call them) can be a profitable strategy enabling you to buy at a bargain price, refurbish and sell or let the property and make a healthy yield.
But you need to be prepared for what’s involved. Buying repossessions has an additional set of problems and has more pitfalls than buying as a private sale.
Here are a few examples of the issues we have encountered over the last couple of years (apart from the final 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 (sorry… corporate sale) does not mean it is necessarily a bargain. Banks need to get the best price they can for a property and may well not be realistic in the price they initially ask for it.
Doing your due diligence on the internet/ telephone is one thing to establish previous property sale prices and comparables, but you absolutely must also undertake a site visit to establish whether it is a genuine bargain.
Repossessed properties, by their nature, tend to be in a dreadful condition. You need to calculate what you will have to spend on refurbishment to bring the property up to standard. It may be the case that whilst the 2 bed terrace for sale at £45,000 looks like it is a great deal at £20,000 below comparable properties, it may actually require £30,000 spending on repairs and there is no profit margin left.
Top Tip: You must do a personal viewing and work out your refurb budget allowing a 15-20% contingency before making an offer.
Public Notice
As noted above, 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 just because they have accepted your offer. This means that you can be gazumped at any time up to exchange of contracts. If that happens you will lose what you have spent on survey fees, search fees and legal fees. If that happens a few times it gets very expensive and will cut into the profit you make from any property you do end up buying, especially if you are dealing at the low end of the market.
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 that you can move quickly and will pull out the stops to complete. Make sure you have a good solicitor in place ready to go who will be proactive and drive the deal through to completion.
Utilities
When you buy repossessed property it is very likely that the gas and electric supply will have been cut off. They may even have been de-energised from the main power source. The seller in all likelihood will have no information about who the suppliers are and therefore you will need to set aside a good few hours on the phone with utility companies – where the right arm never knows what the left arm is doing – to tray and establish who actually supplies the gas / electricity and how you are going to get it reconnected.
We have members of staff who spend hours and hours a week doing this – it’s not much fun.
Tip: 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 do your best to not to smash your phone into pieces out of sheer frustration as you go round in circles for the umpteenth time.
Block Management Issues
There are apartment blocks around the UK where large numbers of apartments were sold to highly leveraged investors between 2005-2007.
The investors’ motivation, I suspect –given the ridiculous prices recorded at the Land Registry, was probably some sort of semi-legal cash back deal rather than a long-term rental income. These investors bought whole blocks of flats with 100% finance to maximise the cash they could immediately get their mitts on and when, subsequently they defaulted on their mortgages, the banks have stepped in and repossessed large proportions of the flats in these blocks.
In most cases these investors also avoided paying their service charges which means the block management companies (which subsequently went bust as they weren’t being paid) stopped maintaining the communal areas and after years of neglect require substantial sums on them to bring them up to scratch.
No mortgage company will give you a loan for the purchase of a flat where there is no block management company in place. On the plus side, it can represent a great opportunity for a cash investor who can afford to wait for all the flats to be resold so that a new management company can be appointed to sort out the mess. Once that is done there will be a huge jump in value as buyers can then get mortgages. However 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 an inexperienced risk-averse investor.
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 making sure that you will not be held liable for thousands of pounds worth of accumulated service charges.
Vandalism
People who have their home taken away from them are rarely going to be happy about that. In all likelihood they will blame the bank and the subsequent purchaser for their troubles and may well become resentful and vindictive. Not only will they frequently leave the place in a dreadful mess, but also may actively vandalise the property and steal anything what they can. This includes ripping out all bathrooms / kitchens, stealing boilers and central heating systems cutting and sabotaging the copper wiring, breaking windows spray painting walls and sabotaging the water tank. All of which we have experienced.
Tip: Do not expect a survey to reveal all the potential damage. Build in a generous contingency fund to your budget to deal with unexpected items.
Solicitor’s Incompetence –
In 20 years of property investing, I had never heard of this happening – until it happened to us. Essentially, our solicitor informed us that we had completed on the property – a fantastic bargain where we acquired a large five bed house and a 2 bed flat attached to out for £50,000. The market value when refurbished would be well over £130,000. 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 as it happened we 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. Suffice to say after protracted negotiations to try and rectify the situation, we sued our (ex) lawyers for the losses incurred and (thankfully) won.
This is unlikely to ever happen to you, but the point I am making is that unpredictable things can and will happen at some stage.
Tip: “hope for the best prepare for the worst” (thanks, Grandma).
So, in conclusion, buying repossessed bargains is never as easy as the gurus make out in their seminars. If it’s something you still want to do, then bear in mind the maxim, “caveat emptor” (I knew those Latin lessons would come in useful one day) – buyer beware!
Frazer Fearnhead
Frazer Fearnhead is a multi-award winning entrepreneur with over 20 years of property investing experience. He has helped investors buy over £40M worth of property In 2012 founded The House Crowd, the world’s first property crowdfunding platform: www.thehousecrowd.com
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