No Happiness For The Doubting Thomas

Time to time we come across clients who have had their money disappear in other property investment schemes. Recently I had one who had invested in an office scheme in Manchester where they were required to put 10% deposit down, the rest would be funded by way of a loan.

This was deposited in 2007 pre credit crunch times and the office never got built, the money was never returned. Our client had purchased two units with a deposit of £20,000 with the idea that the rest of the money will be funded and there will be a rent role of £8,000. Not only this he encouraged another member of his family to invest in the same development.

The scheme was being sold via adverts in The Evening Standard. When they went to book the scheme they were told many Asians from the Harrow area had booked units, some as many as six units in one go.

This client is an accountant currently winding down his practice, he looked like an accountant too and his surname is Shah. Oddly enough most Mr Shahs I know seem to be accountants.

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So as he had had his fingers burnt in this speculative scheme, naturally when he came to see us he had some concerns. He views all property investments with caution.

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This is not the first time we have come across this scenario. We have had clients who have had 600 properties in Margate where the properties had £800k loans on them but were worth less than £400k. The family still wanted to invest in property but were concerned where and how they should do this.

When you look at the UK property market as a whole there is only one place which jumps out at you, that’s central London and when looking at central London it is difficult to find deals in this patch, hence the decision to enter the market with us.

Another client had nursing homes around the UK and had properties all around the UK, all outside of London. These were those cheap and cheerful properties with no money down, high yields, rented out to housing associations etc if you get the picture. These are sold by property groups to those want to be investors who have no money to invest. They are encouraged to use their credit cards to pay for the fees attached to the purchase of these properties.

Sometimes these companies even encourage you to pay for tuition which apparently teaches you to purchase property with no money down using borrowed funds, with the promise of making all of the money back plus more. Perhaps I’m missing something, but in my experience it’s hard enough to grab a deal when it’s straight forward, let alone when trying to convince the seller and the agent to do the deal using an unfamiliar method. The other point is if the property cannot be sold in the usual manner, perhaps you will have the same issue when trying to resell it again in the future.

One client who came to us didn’t know us as a firm, he came through a recommendation who also didn’t know us too well. Again he was very paranoid in investing in a property in Hampstead we had recently introduced him to for £790k, even to the point of checking out the solicitor’s bank details and asking the receptionist at the lawyer’s office if she knew me. Of course she said no!

So he promptly called me up and asked why she did not know me! I said, quite annoyed of course, “she doesn’t know me as I don’t deal with her, speak to the partner of the firm.” Finally he was appeased and then proceeded with the transfer. Even after the transfer and the exchange he still wanted to see the property and ask further questions. What is it they say regarding the doubting Thomas? No happiness in this life nor the next?

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What he didn’t appreciate was the pace these properties move at; before he could arrange to see the property we had promptly sold it for £850k within a few weeks of exchange. Now he is a believer. No longer a man of doubt and suspicion.

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There are some distinctions when operating through a firm such as us. Firstly the property you are purchasing already exists. This means it cannot be compared to a postdated cheque type investment where build may or may not occur sometime in the future; this variable does not exist in these investments.

Then of course there are the multiple exit routes, the importance of the three Rs we have covered previously: Remortgaging, Renting and reselling; these three are your exit routes. And there are three of them not just one. This is important as with the best will in the world sometimes things do not quite go to plan, and these are your insurance policies.

With an off plan office investment scheme you have not one but zero exit routes, you cannot exit until the office has been built. Currently the investors in the above described situation have employed a legal firm to try and recover their deposits.

Many off plan residential property purchasers have also been stung, not realising when they exchange with their 10% deposit if the value of the investment drops the loss is not only their 10%. Many are under the illusion they can simply walk away from the investment. Not so, you are obliged to complete the purchase at the original contract price, irrespective of how much the investment is worth. This has been tested in the courts. And actually, if the investors had made a profit would they have expected the developer to benefit? So why when it comes to making a loss do they expect the developer to bear the brunt?

The other main attraction of London is not simply the level of demand but the diversity of the demand. For example, when the government capped the rentals paid many said this will result in an excess supply of ex- council properties on the market as the reason for holding them has disappeared. However, the prices of these properties have not come down but have only been increasing in value.

Even though the dominating demand was from council tenants when this has disappeared other sectors such as students and sharers quickly filled the void. A real life example is a two-bed room property which we sourced for a client in Feb 2012 for £315,000, it is currently worth £390,000. Prices for these properties are still on the increase, irrespective of the government cap on rents.

Going back to my accountant client, he wanted to invest somewhere safe and somewhere where the returns are still strong. This is in preparation of his coming retirement. Some of his funds were tied up in a ‘high’ yielding investment of 3%; seeing the need to make his funds work harder for him than what his bank was offering and wishing to avoid a repeat of his previous experience he approached us. Our advice to him was to join in with other investors, so his investment is being traded; the idea of this is to increase his cash lump sum. After which if he wishes, he has the option to purchase a high yielding investment and enjoy the return, if he requires a monthly income at that point.

To simply purchase a property with a small amount of capital and sit back down is not the best way forward. It may even be a good way, but not the best way.

The Real Deal

Paddington, London, W2

Purchase Price: £215,000