Acquiring property in the private-rented sector
Entering the buy-to-let market
Some landlords enter the sector as the result of a conscious business decision, yet it is worth remembering that many of us discovered the private-rented sector in a less deliberate way and discovered by doing the job well that it was an attractive and satisfying way to invest money and time.
Unintentional or ‘accidental’ landlords, some of whom will be reading this article as relatively new members of the NLA, enter the PRS for a variety of reasons, including marriage (where a couple each owning a home opt to live in one and let the other), inheritance and work – moving to another location and letting your own place.
However landlords enter the buy-to-let market, whether by deliberate business decision or through circumstances including those described above, once you are a landlord it is important to take on the challenge professionally. Informed, professional landlords will avoid falling foul of the law or simply making expensive (and avoidable) mistakes. Taking a professional approach to running a lettings business will bring financial rewards and the pleasure of doing a job well and providing a valued service to tenants.
The thrill of the chase: How to buy at auctions
Auction rooms can be intimidating places for the novice, but with a little research and the right strategy in place, they can also provide opportunity to pick up a bargain – an important opportunity for any professional landlord keen to watch the bottom line at the very start of the landlord cycle.
There are a number of advantages to buying at auction, especially for developers who want to purchase run-down property in attractive locations and then invest in bringing them up to rental standard.
Auctions in the UK tend to be the marketplace of choice for housing stock that needs to be improved or redeveloped. Certain types of stock tend to only be available at auction, for example RSL sales (Registered Social Landlords), repossessions, tenanted properties, freeholds with multiple units and mixed commercial/residential properties. However, more conventional residential properties do come up for auction as well
NLA London representative, landlord and developer Richard Blanco, uses auctions to buy rental property and told UK Landlord that the auction procedure is swift: “You have two weeks to view, you exchange on the date of the auction and then complete 28 days later. There's no negotiating with an estate agent and you don't run the risk of the buyer withdrawing or being gazumped!”
Whereas 20 years ago auctions were rarefied events attended by hardened developers, Richard has noticed that auctions are much busier nowadays no doubt due to the introduction of buy to let mortgages and a plethora of television programmes about good deals from converting property.
Preparing for battle
Before going into any property auction, it is absolutely essential to visit the property you are interested in. Although this should be common sense, it is often quite hard in practice, because viewing dates a fixed in the auction world. When looking at the property, some specialist knowledge will also be required; Richard recommends reading 'The Construction of Houses' and 'Understanding Housing Defects' by Duncan Marshall to get to grips with some basic surveying skills. Common structural issues are cracks, damp, woodworm and poor construction of extensions or alterations. You will also need to brush up on your understanding of the law. Common issues include problems with the title and short leases.
Before putting in a bid, you should be in a position to estimate the cost of likely works, so you may want to take a trusted builder to view the property with you and give you a provisional quote.
“Make sure you do your sums” Richard says. “People often think they're getting a bargain at auction. But you must factor in costs like stamp duty, legal fees, lease extension costs, and a realistic estimate of how much works will cost, plus agents’ fees if you're planning to sell the property afterwards. Make sure you decide what your maximum bid will be before you go into the auction room, otherwise you may get carried away. Bid with your head, not your heart.”
Richard recommends asking agents what the rental value of the property will be and how much the property is likely to be valued at after you buy. If you won't make any profit, then it may be better to buy a property that does not require modernisation through an estate agent.
It is also essential to know how you are going to finance your purchase. Richard advises it may not be practical to reach an agreement in principle with a lender in advance, because if you are outbid, you are going to end up with footprints on your credit file, which could damage your chances of getting a mortgage when you buy.
Once your bid is accepted you go forward to the front desk and sign the contract. You must also provide a cheque, usually for 10% of the value, so you need to make sure you have positioned cleared funds in the right account to cover the cheque payment. The auctioneer will usually require two forms of ID and the name of your solicitor and that's it, you will have exchanged! If you don't complete, you will lose your deposit.
After an auction, successful bidders have 28 days in which to complete, which is a fast turnaround for most mainstream buy-to-let or residential lenders. “Apart from dealing with the legal aspects of the purchase and planning for any works that need to be carried out, if you are not a cash buyer, your main challenge will be to organise finance,” Richard says. “If you can, buy with a mainstream lender and you might manage to get a 70% or 75% loan. This is much cheaper than the lender of last resort, which is bridging finance.”
Opportunities and risks
Auctions are a good place to find bargains, especially for cash buyers. A cash buyer can buy properties for which other people cannot raise mortgage finance. Furthermore, properties are often sold at auction because there is a problem that means that mainstream lending is not possible. For example if the property does not have a working bathroom or kitchen, it may be deemed uninhabitable. Lenders do not like serious damp or legal problems that might make the property difficult to sell. Structural problems such as cracks might also make building insurance difficult to obtain for the rest of the property’s existence, and this will also make mortgaging difficult or impossible.
Richard says that auctions are at their best when the market is depressed, as there will be more stock from repossessions and fewer people able to buy. At buoyant times, when the market is rising or there is a shortage of stock, competition for lots will be much more intense. “Currently the shortage of stock and pent up demand in London has eliminated bargains at auction,” he says. “However, as supply increases over the next few months, we should see the gap between guide and sale prices narrow.”
“Auctions can be very exhilarating and quite sociable as you meet lots of other players. But you need nerves of steel in the room, so if it's your first time, take a friend. You can get some bargains, but this is often down to luck. The best bargain I ever bought was because the agent couldn't open the front door of the property on two of the viewings and hardly anybody got to see inside. Luckily he did manage to open the door on the day I was viewing and I was the only person to bid.”