The Complete Guide to Property Investment
Page 9
So in this chapter we’ll run through some of the main routes to finding property to buy, roughly in ascending order of how time-consuming they are. You can then decide which approach best suits the amount of time you’ve got to invest – as well as how much effort you need to put in for your strategy to work.
Sourcing companies
Sourcing companies, as the name suggests, specialise in sourcing properties (usually off-market opportunities they find through direct advertising or via their network) and passing them on to investors – for a fee, naturally. They’re (potentially) a great option for time-strapped investors: they’ll send opportunities through, you pick one, job done. There are companies that specialise in all sorts of different types of investment – from off-plan to new-builds to HMOs. There are some that will even source shabby houses and renovate them for you once you’ve purchased.
Why only potentially a great option? Because the quality of opportunities presented by sourcing companies differs so wildly: some are excellent, but I’m signed up to a lot of sourcers’ mailing lists and often see exactly the same over-priced property being touted by multiple companies in succession. They’ll always say it’s wonderful and massage the figures to make it seem more attractive than it is, so the onus is on you to investigate their claims and decide for yourself.
As a result, using a sourcing company will save you a lot of research and travel time, but you’ll still want to set aside plenty of time to assess and validate what they send your way. They’ll always claim that the property is available “below market value” (something we’ll be investigating later), and they’ll tell you what sort of rental income can be achieved from it. Depending on the company, those figures can be realistic, optimistic, or downright delusional. In the next chapter you’ll learn how to compare their analysis to your own.
Of course, sourcing companies charge a fee – which can be anything from about £1,000 for a small-scale operator who just does a bit of sourcing on the side, to five figures for companies who’ll also manage renovation or conversion projects for you. Rather than worrying about what’s “fair” or the “right price” to pay, I have a simple test: add their fee to the purchase price of the property. If it still stacks up as a good deal and you couldn’t find the opportunity yourself (or at least, couldn’t do so without investing an amount of your own time which you value at more than the fee), what does it matter? If someone could save me £10,000, I’d happily pay them £5,000 – even if that included a whacking great profit margin for them.
Estate agents
In case you hadn’t noticed, estate agents aren’t universally loved and respected. Nevertheless, there’s no denying that they see a heck of a lot of properties, and they’ll (collectively) represent the majority of the stock for sale in any given area. It would be a mistake to write them off as a source of deals because you object to their branded cars or habit of referring to everything as a “unique opportunity”.
The ideal scenario is to become bezzie mates with an estate agent so they’ll give you the nod on red-hot opportunities before they hit the open market – because for all their faults, they’ll know what’s coming up for sale way before anyone else. Realistically though, however charming and good looking you are, this isn’t going to happen right away. Speak to any agent and they’ll tell you that they’re inundated with calls from people who describe themselves as “investors” who are “cash buyers” and can “move fast” and all the rest of it, who turn out to be nothing of the sort. Even if you are the real deal, they’ve already heard so much nonsense from other people that they’re totally immune to your claims.
Don’t get me wrong: over time it absolutely is possible to build up relationships where you get preferential treatment. After all, what an agent really wants is to be able to shift their stock quickly and easily so they can move on to the next one and hit their monthly targets. If they know an investor who can be relied upon to buy lots of properties and not mess them around, that investor will always get the call first.
But talk is cheap, and particularly so in property – so it’s your actions that will build your relationships over time. And until you’ve achieved speed-dial status, I’ve got four simple rules for getting the best out of your local agents.
1. Useless agents are your best friends
There are all sorts of estate agents, from big national chains down to solo operators who don’t even have an office. The corporates normally do at least a semi-respectable job of marketing properties, but the quality of some smaller agents’ efforts is truly shocking.
Which is great news for you! If they’re failing to market a property effectively, that means fewer people are going to see it and the vendor is potentially going to be grateful for your (low) offer because barely anyone has been through the door.
A good first filter for poor marketing is finding properties that aren’t on the online portals like Rightmove and Zoopla. Failing to put properties online is inexcusable, given that it’s where 97% of buyers start their search. But it happens – and because many investors will only ever search online, your competition has already reduced to a fraction of what it would have been. So drive around your target area looking for “for sale” boards, note down the addresses, then cross-reference them against the portals. You can also check the local paper, which will normally have a property supplement on a specific day of the week where small ads will run.
With properties that have made it to the portals, I always get excited when I see ones with either just a sole external photo or internal photos that make it look like an absolute tip. Marketing like this is going to put off almost all potential owner-occupiers, and a good number of lazier investors too – so these are the first ones I call up about.
Also look out for properties listed with “online agents”. As these agents are basically “listing only” services for a set fee, they’re not going to be pushing their listings very hard – and often the vendors themselves will be doing the viewings. This is an opportunity to get in there and make your case to the vendor directly, cutting the agent out of the loop.
2. Follow up
Around 30% of properties that are “sold subject to contract” will fall through and end up back on the market again (which is why agents value buyers who don’t mess them around so highly).
Sales that have fallen through are brilliant opportunities, because by that point the vendor is emotionally invested in moving (and has maybe even committed to another purchase), and will be far more open to a low offer than they would have been a couple of months previously. So if you’ve viewed a property and been outbid (or enquired about a property that was already under offer by the time you called), follow up.
By “follow up”, I don’t mean “send an email at some unspecified future point”: I mean “call the agent every week until they tell you that it’s exchanged and the deal is going ahead”. You might think that agents keep lists of people who’ve expressed an interest in a property – so that they have something to fall back on for the one-in-three times that a deal falls through. But this happens approximately 0% of the time. In order to swoop in you need to be bugging the agent through the weeks when they’re getting twitchy about the sale not happening, and phone them at the exact point that they’re just about to re-list it.
You’ll feel like an idiot or a stalker at first, but you’ll be amazed at how often it gets results – and even if it doesn’t work, you’re still cementing yourself in the agent’s mind as a serious investor who’s a cut above all the dreamers they normally have wasting their time.
3. Be nice
Never forget that agents are working for the vendor rather than you, but that’s no reason not to have an enjoyable working relationship. It’s no secret that people are more willing to help people they like, so it’s a smart business move to be a pleasant person to deal with. It also makes the whole process a lot more fun than approaching everything as a battle that needs to be won.
One easy thin
g you can do to make an agent’s life easier is give clear and helpful feedback on what you think about properties you’ve viewed. Agents can feel resentful that they’ve taken the time to drive to a property, wait for you and walk you all around it… only for you to vanish and fail to return their calls asking for feedback. They need to be able to tell the vendor about the reactions they’re getting, so help them out a bit: proactively tell them why you’re not interested, without being unnecessarily scathing. Simply saying “It needs more work than I expected” or “The third bedroom is too small for it to work for me” will give them something to work with – and also gives them an opportunity to hint that a lower offer would still be welcomed, if that’s the case.
4. Do what you say you’ll do at all costs
Relationships with agents take a lot of time to build, but can be destroyed with just one action. It’s not hard to see why: they promise their client that they’ve found a buyer who can pay a certain amount or complete within a certain timescale, and it puts them in a very awkward position if that turns out not to be the case.
It’s worth keeping this in mind and taking a long-term approach to the relationship, even if it costs you money in the short term. Did you say you’d complete in 30 days but are now having trouble with your mortgage application? It might be worth seeing if the numbers still add up if you use bridging finance to complete, and worry about the mortgage later. Have you uncovered something at the last minute that’s going to cost you £1,000 to put right? Consider taking it on the chin rather than forcing the agent to tell their client that you’re lowering your offer at the eleventh hour.
It won’t always make sense to take a financial hit to protect the relationship, but the point is that being a “safe bet” is the attribute that will eventually lead to you getting the nod on those rare amazing deals that come along. Be wary about over-promising, and make sure you always deliver.
Auctions
Rob’s Golden Rule Of Auctions #1: There’s always a reason why a property has ended up at auction instead of going through the normal selling channels. Before you bid, you need to find out what that reason is.
It could be because the vendor is in a rush and needs the certainty of the sale once the hammer falls, which is fine. It could be because it’s in disastrous internal condition and there’s no point having an estate agent attempt to market it to ordinary “retail” buyers, which is also fine.
But it could be because it has a very short lease, or sitting tenants on a protected tenancy, or major structural problems, or is subject to a strange covenant that restricts its use. Any of these may or may not be fine, depending on your area of expertise and appetite for risk, but you need to know – so you can factor the cost of remedial action into your maximum bid. If you haven’t worked out what the problem is, you can’t bid effectively.
Rob’s Golden Rule Of Auctions #2: Just because it’s in an auction doesn’t make it a bargain.
You can blame Homes Under The Hammer for this one. Thanks to this type of TV show, there’s a general public opinion that auctions are the place to go to pick up a bargain property. Which, as the number of attendees increases, naturally raises demand and means that isn’t necessarily the case.
In fact, there’s a small sub-set of investors who pick up shabby properties that have been poorly marketed by estate agents (where demand is low), then stick them straight into auction (where demand is high) without doing anything to them at all. Their profit margin comes from the fact that amateur auction buyers will unwittingly bid more than they’d have paid by just buying through an estate agent – because they assume that because it’s in auction and looks like a bit of a wreck it must be a bargain.
For disciplined and serious investors, this is the major problem with auctions: you can set yourself a very sensible maximum bid based on the property’s realistic value, then get outbid by amateurs who’ve either got their sums wrong or just want “a project” and haven’t budgeted in a profit margin or the cost of their own time.
For this reason (as you’re probably picking up), I’m not a fan of buying at auction. It’s frustrating to have to thoroughly research multiple properties – and you must be thorough, because if you make the winning bid, you’ve bought it and there’s no backing out – then not end up being able to buy any of them.
But I can’t deny that the simplicity of the sale being guaranteed when the hammer falls (rather than commencing months of legal nonsense) is appealing, and it works well for a lot of people – so let’s take a quick look at the defining features of an auction purchase.
Auction houses will publish their catalogue for upcoming auctions about a month in advance, and there will normally be a few set times where “block viewings” will take place for each property: the auctioneer will open up and hang around for an hour, and anyone who’s interested can just show up without an appointment. Each property will also have a “legal pack” – the contents of which vary, but will usually include documents like local searches, the title plan, and so on. Legal packs need to be available before the day of the auction, but won’t always be in place by the time the property appears in the catalogue. Depending on the auctioneer, there will sometimes be a service where you register your interest and they’ll email you whenever the legal pack is updated.
Ideally, before bidding, you’ll want to physically inspect the property and get your solicitor to look over the legal pack. This is where things can get tricky: you don’t want to pay a solicitor a fortune to look at a property you might not be able to buy, and they won’t be willing to look at a bunch of potential purchases just as a favour. As you build up a relationship and they realise that you can send a fair bit of work their way, you might be able to persuade them to give the legals a quick glance for free or a small fee.
Ideally again, you’d get a full survey undertaken on each property you’re interested in (we’ll discuss surveys in more detail later). In reality though, it’s just far too expensive to incur that kind of cost when you don’t have any certainty that you can get it for the right price. This is a big reason why I don’t recommend auctions to people without building skills or contacts: as an amateur it’s very hard to know whether just a cosmetic refurbishment is needed or if there’s something serious going on. If you can persuade a builder to come along to the block viewing with you to give an opinion and roughly cost up the work involved, that’s a huge plus.
Then, of course, you need to determine your maximum bid – which is no different from assessing any other deal, and will be the subject of the next chapter. By now you should know what’s wrong with the property (remember: there will always be something), and factor that into your bid. Each property will have a “guide price”, which you can completely ignore: sometimes guides are set deliberately low to encourage people to view the property and kick off the bidding, and in any case they shouldn’t have any bearing on how much it makes sense for you to be paying. There will sometimes also be a “reserve price” (which won’t be published), meaning that if the maximum bid falls below that price, the sale won’t happen.
Armed with your maximum bid, you turn up on the day (or participate over the phone, or sometimes online) and don’t exceed it. If you’re prone to getting carried away, take a friend who can be trusted to pin your arms to your sides and march you out of the room once your maximum has been reached. Everyone thinks that they’re completely rational, but auctioneers are professionals at creating a charged environment – and, psychologically, once you’ve invested time and possibly money in researching a property, you’re highly motivated to suspend your better judgement and try to make it work.
And as I’ve said, once the hammer falls, you’re legally bound to buy the property – no backing out, at least not without huge expense. You’ll be expected to pay the deposit (normally 10%) plus the auctioneer’s fee in person, there and then, with the balance normally due (depending on the exact terms of the auction) 28 days later.
All in all, auctions a
re something of a double-edged sword: compared to the normal conveyancing process it’s wonderful to have the certainty of the sale immediately and the whole thing wrapped up inside a month, but it also forces you to make a decision with very limited information and no chance of backing out if you make a mistake.
There is, however, a way of getting the best of both worlds that I’m quite a fan of: buying after auction.
There can be any number of reasons why a property didn’t sell at auction – from the ones you might expect (like some major, obvious problem that means nobody will touch it with a bargepole), down to the reserve price being set too high, to random factors like a lack of viewings because of problems getting access to the property, or a low turnout at the auction that evening because of a major football match (seriously).
Vendors tend to be open to offers after auction, because they’re worried: they put it into the auction to have the certainty of a sale, thousands of people saw it in the catalogue, and nobody wants it. As a result, not always but often, they’ll be open to low offers that they never would have entertained beforehand. In short, the dynamics have shifted: rather than being just one of hundreds of potential bidders, you’re suddenly in the driving seat.
Yes, you’ll miss out on some opportunities that do sell in the room for less than you would have been willing to pay, but (in my opinion) checking out the unsold lots from auctions can offer a better return on your time: you know that you’re in with a reasonable chance of being able to buy everything you’re looking at, and there’s no risk of getting carried away and exceeding your maximum bid.
Direct to vendor
While the majority of properties being sold end up with an agent or in an auction, not all do. Some people need to sell right now and can’t wait for the property to be marketed, or don’t like the idea of having people walking through their house on viewings for weeks on end, or don’t want the neighbours to know they’re selling, or have any number of other reasons for wanting to sell “outside the system”. There are also people who’d normally put their property on with an agent, but would be happy to have a quick sale and not go through the whole painful process if you can get to them at the right time.