Purchasing Investment Property

Introduction – now that have you have analysed your local market, set your financial goals, planned to manage the risks and got approval for your mortgage, its now time to purchase your property...

The Property Purchase Process - the process of buying a property to let versus buying a property for your own residential use is very similar. Some helpful advice and details of formal regulations from the Government guidelines can be found on-line at the ODP:- http://www.odpm.gov.uk/  To put this into context of property letting, the legal and logistical process for buying a property to let out is as follows:-

Check Sources of Information for Properties for Sale – the main sources of information to help you find a suitable property to let are:-

• Estate Agents – estate agents are obviously the main source of information to find suitable properties. They will have a good feel for the maximum rental values and general demand for certain types of property. You have to expect to respond quickly to potential viewing opportunities; mailing lists are usually out of date as the market moves so fast. Make friends with agents – let them know you are serious and outline as much detail of your preferences as possible. They will want to know your requirements, whether your mortgage is approved and that (as a buy to let investor) you are a cash buyer. Make sure they have all your contact details logged.
  
  Agents should be very aware of the Property Misdescriptions Act 1981; this places legal obligations on agents not to provide false or misleading information about property. It is a criminal offence to breach this Act. Please visit http://www.hmso.gov.uk/acts/acts1991/Ukpga_19910029_en_1.htm  for further information.
  
  The fact you are a cash buyer may be key in fighting off offers other buyers (that are in chains), seeking the same property. Watch out for conflicts of interest like agents whose colleagues provide financial advice in the same branch – this may result in delays in your purchase process if the estate agent’s “tied agent” wants to sell you a buy to let mortgage. In some cases, this ‘dual role’ situation makes your communication simple.

• Private Sales – if you are looking to cut out the middle mans commission and save a few thousand pounds then private sales from classifieds are one option. It is always wise to confirm verbal discussions in writing so that arguments or confusion are not created later in the negotiation process. Local papers are a great source for private housing advertisements.

• Buying Off Plan – here you purchase a plot from a developer – they use your deposit to finance their building costs. This is fairly typical in large-scale new property developments.

• Internet Portals – internet portals are a great way to search any geographic area, across a range of agents for any type of property, in your price range in seconds.

• Auctions – here you can save potentially tens of thousands on your investment property, which ultimately represents pure profit margin when you realise your investment goals. Approximate savings vary but can be up to 30% to 40% compared to Estate Agents window prices. Most properties are vacant due to repossessions, or perhaps had a squatter problem and the lender wants a quick sale to recoup losses. Your local council may also use auctions as a quick way of generating cash. Sometimes private individual sellers use auctions for a quick sale.
  
  There are disadvantages – it fast and furious and not for the faint hearted; you could allow your solicitor to bid for you don’t want the stress of bidding yourself. Set a limit and stick to it. You must check the rules of the auction well before auction day; typically once the hammer goes down on your bid will be legally committed to purchase the property outright (and must provide the finance) within a set period. Therefore, you will need to have done your full structural surveys, raised finance and completed conveyancing well before the auction day. The time from advertising literature being produced and distributed by the auctioneers to auction day is around a month so you must be efficient with your preparation.

Analyse Local Areas - choose an area that is heavily desired by your target letting market. At present, Northern areas of the UK are enjoying the highest yields, while the South East is under immense price pressure and is not enjoying as healthy gains. Talk to the local agent who will have a good local knowledge of the local area and the types of property within it. Remember location is a crucial factor across all groups in achieving your investment goal; even if your property is extremely well presented – if it is not in the right location you will struggle to achieve comparable rental values to similar properties in the right location for your target market. The main factors to consider are the following areas:-

• Transport links – motorways, rail, bus, tube, airports, etc. This is by far the most important for professionals.

• Shops – supermarkets, local corner shops, department stores.

• Schools – check league position tables, are there any nurseries or playgroups nearby?

• Leisure Facilities – sports centers, youth clubs, cinemas, theatres, local pubs, libraries, parks

• Noise Pollution – closeness to motorways or dual carriageways, airports, factories or nightclubs. It’s a good idea to go back to a property you may have viewed in your car in the evening (rush hour time) to check traffic noise and congestion and see if the school run will impact your tenant’s commute.

• Environment – privacy, industrial waste sites, crime, neighborhood.

• Demographics – many areas are up and coming. Try to generalise the area as either popular with students, the family market, retired, young professionals etc – each has distinct needs.

View potential properties – now you are happy with the area, your goal must be to find a suitable property that will be attractive to your target tenant and be saleable in the future. The type of property and its location you choose will dictate the type of tenant attracted to it, the rental value, overall demand for use and ability to resell in the future. Some basic pointers are as follows:-

Safety First - always do this in daytime for safety reasons. Bring a mobile and get a map faxed or posted to you by the agent before you visit an area you may not be familiar with. Always tell someone where you are going (if going alone).

Check for Potential/ Actual Structural Defects – go with an experienced property purchaser to make an initial judgment about major potential defects. Your surveyor will point out the major and minor defects at a later date; before you get excited about a certain property and decide to instruct (and pay) a surveyor, do some basic checks yourself first when viewing. Look for cracks in the brickwork and walls – these are usually signs that subsidence may be affecting the building. Look for damp or rotten window frames; touch the paintwork in the wood; if it’s soft or flakes away that could mean it’s rotten and needs replacing. Replacement windows could be a major cost (approximately £5,000+) to sort out for future tenants and cannot be ignored. Smell the kitchen and the bathroom; mould could mean hidden damp – another expensive and time-consuming problem to fix. When viewing the outside, look at the roof for broken or missing tiles, uneven rooflines. In addition, check how close nearby trees are for risks they could collapse in a storm and how close they are (the root structure could be interfering with the foundations of your property).

Log Everything – always sit down in the car and write down notes straight after viewing each property (you may be viewing lots of similar properties). Ask the seller lots of questions directly – the agent is only likely to know the key selling points and wont have an intimate knowledge of the property. Confirm what is included in the asking price? Establish the seller’s personal circumstances and give the seller confidence you are also serious – are they in a chain? Why do they want to sell? What work has been done to the property? If building work has been done has proper planning permission being granted in writing i.e. for an extension or loft conversion? What areas are they prepared to negotiate on?.. price, fittings, exchange date, deposit size – everything is negotiable if you discuss it.

Employ a Solicitor / Conveyancer - employ a solicitor who will protect your legal interests, as well as communicate with the sellers solicitors. Conveyancing costs depend upon the complexity of the purchase or sale (typically £300 to £800). Make sure they give you a written quote as well as confirm they will act on your behalf. Most of your correspondence will be through post and the telephone. Arranging a first opening meeting is advisable to establish a personal relationship. Solicitor’s charges relate to the preparation of contracts, local authority searches, payment of stamp duty and land registry charges (separate charges below).

Stamp Duty - Stamp Duty is an ancient Government tax linked to capital wealth i.e. purchase of property. It is over 300 years old and was last consolidated in 1891. Today millions of individuals pay it each time a property is purchased. It is essentially a charge on documents that transfer property. The Government uses Stamp Duty as a macro economic tool to cool or heat up the performance of the housing market as well as generate over £4 billion per year to fund Public Spending.

Land Registry – the Land registry represents a more nominal fee, charged by the Government to maintain a central database of land property title of ownership across the UK. Stamp Duty and Land Registry Charges are both banded and based on the value of the property you intend to purchase.

Make an Offer – the law and process relating to making an offer is specific to England and Wales – this e-book does not cover Scottish law or process. The process is intuitive and straightforward; the seller’s agent will ask for your offer in writing.  Your solicitor will usually confirm your offer in writing to the seller’s solicitor and the agent on your behalf. Remember that almost 30% of offers never make it completion – this is due to problems with lenders, surveys or valuations to save time and stress. Some helpful hints when making an offer are:-


Negotiating Tips - Some basic tips are as follows:-

• Question Sellers Motives - ask the seller/ agent; why they are selling? How long has the property been on the market (signals over valuation); Are they are keen to move quickly? If you can commit to an early Exchange by date X, would they accept a slightly lower offer of Y? Ask lots of questions – the more informed you are, the less likely you are to be caught out by timewasters or ditherers who can afford to sit on the property and squeeze every last penny out of the bidders.

• Offer a Token Deposit - offer a small token deposit as a sign you are serious and committed to your offer this can help speed things along. People like actions.

• Unforeseen Potential Defects - if you find major potential problem from the survey, you can still negotiate (and reduce your offer price. These are reasonable requests usually relating to unforeseen structural defects. For example, the survey states it will cost you £5,000 to repair the roof – this is £5,000 of unexpected cost you will have to incur sometime soon after purchasing the property. Conversely, the seller is perfectly in his rights to change his mind and reject your offer for whatever reason in the future (at any time up to Exchange of contracts). Watch out you are not being gazumped; this is where the seller accepts a better offer than yours for a higher offer than the one you originally agreed. Remember, the seller can pull out for any reason. Recently the law has placed restrictions on sharp practice by some estate agents where verbal communication has inflated prices (commissions) between rival bidders.

• Negotiate on Contents - a major startup cost area for new buy to let property is furniture. If the seller refuses to negotiate on price, try and negotiate to see if they will include some of the appliances as part of the sale – this could save you thousands as well as save time and hassle for a seller in not having to transport items to their new property – most people push the boat out and purchase new items when they move home. Remember to only include relatively modern items that meet current safety guidelines (see 4.7) – fridge, cooker, washing machine, cupboards and beds etc.

Asking Price vs. Contents – in a situation where the asking price is slightly over a Stamp Duty threshold band i.e. £120,100, you have the potential to offer to reduce the price below the banding (£119,950) in exchange for a specific higher value attached to the contents or “fixtures and fittings” (for example £3,000 for all the furniture). This process is known as “apportioning”. Beware, the Inland Revenue will challenge this transaction if the actual “contents” cannot be clearly identified, and are worth the sum paid in the transaction and are collectively are not worth over 10% of the agreed lower property value. In other words, the Inland Revenue suspects what is happening and uses these guidelines as basic tests and thresholds to stop the widespread avoidance of Stamp Duty altogether. The Government has set specific policies to stop the increase in Stamp Duty avoidance, so most people will have to pay Stamp Duty.

So to sum up... Your strongest negotiating points when making an offer as a buy to let investor are; that you are a cash buyer (as opposed to a buyer who must sell their own property) and have your mortgage approved in principal (reducing delay and stress for the seller) – fax a copy of the mortgage offer to the estate agent.

Preliminary Enquiries to the Sellers Solicitor/ Conveyancer –. At this point, your solicitor will attempt to minimise risk to you by formally requesting certain information from the seller’s solicitor. These are usually in standard checklist format and cover issues such as land disputes, where boundaries at the property lie, planning restrictions, guarantees (the main one being NHBC http://www.nhbc.co.uk/ ), services to the property, rights of way etc. In addition, your solicitor will request the seller complete a tick box declaration of fixtures and fittings (what’s included or excluded in the sale).

HM Land Registry and Local Searches - This details the ownership of all freehold land in the UK; proving the seller (or sellers lender) has title of ownership and can legally sell you the property. The record also describes any restrictions that may affect the sale of that land. In addition, your solicitor will undertake local searches checking risks – planning permissions, flooding, subsidence, council plans for the area (such as building a new multi storey car park at the end of your garden). These searches involve obtaining local information about the risks associated with the property – basically anything that may impact your ability to purchase or sell the property in the future.

D.I.Y Online Searches - These ‘pay as you use’ services immediately provide a comprehensive report outlining risks associated with a specific property based on the postal code of the property your making an offer on. These risks include flooding, landslip, pollution, landfill and subsidence among many others.

Lender Obtains Property Valuation - in parallel to these activities, your mortgage lender will want re-assurance that the value of the property in question is worth the re-building costs in the event you could not repay the mortgage. The cost of this valuation (typically £100) is from the mortgage lender (passed on to you) to send out a qualified surveyor to undertake the valuation. Beware; this does not give you, the buyer, any information about the structural situation of the property. For that you must instruct a qualified RICS (Royal Institute of Chartered Surveyors) surveyor….

Survey – the costs depend upon whether you choose a Full Structural Survey or just a Homebuyers survey (for houses under thirty years old). The cost is determined by the condition, size and age of the property. The main types of survey are:-

• The Full Structural Survey-  report will provide you with a comprehensive report detailing the structural state, condition and construction of the property. It usually takes several hours checking roofing timbers, floors, testing for damp etc and is more expensive than the standard Homebuyers Report. The report will list all faults and make recommendations of how to rectify them including the potential implementation of further specialist surveys to be undertaken. If you are planning to buy an older property (over 30 years) is it always advisable to pay for a full structural survey; it is inevitable that building materials deteriorate over time. It is better to find costly faults before you exchange contracts – you would kick yourself if you didn’t bother with a structural survey, bought a property, and then got a phone call from your tenants in a year’s time complaining of a leaking roof. If the survey finds unexpected defects the buyer can renegotiate the asking price with the seller based on the estimated cost of undertaking the work.

• Homebuyers Survey – this is the most popular method of providing basic re-assurance the property is structurally sound. It is presented a standard format - around 10 pages long.

Deposit & Exchange of Contracts – when your solicitor and the sellers solicitor are both happy that;

• The contract is correct;

• Funds are available;

• You have arranged life assurance;

• The completion date has been agreed by you and the seller;

Then final contracts are physically exchanged confirming your commitment to pay for the property in full and the seller’s commitment to sell the property to you within a pre-agreed timescale; in other words the contract becomes legally binding. Stay in touch with your solicitor in the days leading up to exchange and ensure you copy all correspondence. There will also be a nominal charge for same day, guaranteed, secure, electronic transfer of your deposit (and on completion) using BACS from your bank to the mortgage company. Your solicitor will handle this and this fee and their professional fees are also taken from the overall monies.

Remember that the average time between offer and completion can be several months. Make sure you arrange buildings insurance on the property starting from the point you exchange contracts, as you will be liable for the cost of re-building a property in the event of a fire or similar disaster.

Completion – the contract will have an agreed completion date to transfer the balance of the monies to the seller from your mortgage lender. The estate agent is usually paid directly from your solicitor from your mortgage balance. The title deeds are handed over from the seller’s solicitor to the buyers mortgage lender. The sellers solicitor gives authority to the estate agent to hand over the keys to you. You now own your investment property!
 

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