The Efficient Market Hypothesis has been applied to the stock market, it is a theory which says that investors respond rationally to publicly available information. It also assumes that market prices for assets incorporate all the publicly known information about a security and that when prices are too high given expected returns, rational investors sell.
Taken literally this means there can be no such thing as a deal in the market as rational investors will exploit the gap and the price will be adjusted instantly.
This has two flaws. One is investors do not respond rationally, this is not possible as they are human and emotionally led creatures. This is why you have subjects like behavioural science which looks at why we behave in quirky ways which do not make sense.
The second is the information available. Sure there is some information available to every one but there is information which will not be available to everyone. The interpretation of this information is very important too, as the same information will mean different things to two different people.
Parallels can be drawn with the property market, how do we find deals? Do they even exist if everyone knows everything and responds rationally to the information? With the internet at everyone’s finger tips information about a property can be discovered within minutes and everyone has access to this information.
So how does one get the edge when investing in property?
The first distinction is using time. Property by nature is not as responsive as stocks, so by the time you agree the price to when completion takes place there can be a time lag of around three months, during this time the value may have gone up or down. There is also the time period between exchange and completion, in central locations property prices can go up from month to month.
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Being creative with time means you can multiply your money many times before you even complete a deal.
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With off plan properties the time period can be a couple of years. This means the lag between exchange and completion can be exploited to your advantage, also you have only put in 10% of the purchase price therefore if the price increases by 10% you will have doubled your money.
The other factor is information. When a property comes up in the auction and the tenancies or service charges are unknown it will scare the majority of buyers away. All this means is this information was not supplied to the auctioneer. It does not even mean the sellers solicitor does not have this information.
These properties can sometimes go for 50% of their value, because people assume the worst and assume there will be regulated tenants in the property when there are not. At times simple investigation can resolve this. Also at times people who’s properties get repossessed exploit this by ensuring the information is not passed to the receiver, and also create sub leases, false walls, anything they can do to reduce the amount the property will fetch and then they purchase the properties back up again at a reduced value.
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As we are not rational creatures, if a property has been on the market for a long while it loses its appeal, people intrinsically don’t want what others do not want.
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The numbers may stack up and the price could be cheap but the emotional factor will override the common sense which should be involved when purchasing property. Obviously in these cases common sense isn’t so common. If a property has a couple of failed sales, investors will simply pass it by and assume there MUST be something wrong with the property. In today’s world where credit is not as it once was there can be the simple reason that a investor could not raise the funds. Conversely when others are after the same property it can go for a ridiculous amount of money. Nowhere is this better seen then at auction where properties at times can go for much more than their worth, driven on by an emotional urge to purchase a particular property.
Another factor is of course agents and auctioneers being taken care of. Of course bribery would be illegal under the Bribery Act 2010. However being hospitable or paying a consultancy fee would not. Changing the label and you change something from being Haram to Hallal. Incidentally Islamic finance is based on this principle where the paying of interest is changed to be called rent, or it is rolled up and incorporated into the purchase price. This market has over $1 trillion of assets under this label.
The other factor which can be used is knowledge. For example, this could be knowledge that a certain council are allowing conversions from office to residential, or how a short lease property can be renewed cheaper than everyone else thinks it can be. This information can be invaluable when doing property deals.
Seeing a conversion angle can also be used. Simply from a one bedroom to a two bedroom property, prices can be increased from £235k to £315k practically with plaster boards. We have done this and the valuations were not done by us but by a professional surveyor. Of course the rentals too increase. With this scenario you have the option of refinancing and pulling your money out whilst having the benefit of the rental income.
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In the property market you have more talkers and procrastinators than people who actually move and close deals.
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Again this is human nature. So when you’re looking at a deal and if you have the funds ready to close in a few days you are in a position of power. This means you can bang down the price, assuming of course the seller needs the money. Or it may be they have had a few sales fall through from people who couldn’t get the funds ready and simply want a done deal.
Another way would be to purchase something which is unmortgagable. For example it is very difficult to raise funds for development. If these funds are raised from another property or you have the cash, you’re in a position to purchase, develop and then refinance. Development funding has dried up and there are not many people walking around with cash to invest into development deals.
The Real Deal
Paddington, W2
Purchase Price: £300,000
“The deepening Eurozone crisis is leading Central London
invenstment experts to predict a surge of activity this year.” – Estates Gazzette
An opportunity to take advantage of this and invest your money in Central London.
- What we offer:
Exceptionally well located one bedroom flat in Paddington.
- Who will it suit:
Ideal for the high tax bracket investor, looking purely for capital growth.
- What will impact the growth:
Low price negotiated.
CrossRail link being launched.
Proximity of Hyde Park and Paddington station with Heathrow links within 10 minutes walk.
Call us now to find out more: 0207 096 1083, Email: info@sowandreap.co.uk
Suresh Vagjiani
Sow & Reap
A Property Investment Company
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We offer a Property Sourcing Service, so call us now to see how we can help on 0207 096 1083 or email info@sowandreap.co.uk
Our Address: Westbourne House, 14-16 Westbourne Grove, London, W2 5RH
