Category Archives for "Property Investing"

Are Valuers Are Hampering Property Investing?

By Matthew Moody | Property Investing

 

Before I got involved in property investing, I thought that a property valuation meant just that; or so I thought.  It didn’t take too long before I understood that the same terminology, “Property Valuation”, can mean very different things.

Here are a few examples for you:

1. A likely sale price in a seller’s market
2. A likely sale price in a buyer’s market
3. The value of the land acquisition, construction of the property and associated costs of bringing the product to market
4. A representation of a banks risk assessment of a property

While 1, 2 & 3 are self explanatory, let me expand on # 4.

By way of example, let’s assume in this instance that a mortgage application is received by a bank to fund the purchase of an apartment or townhouse.

The underlying purpose of the bank carrying out a valuation is a commercial appraisal. The valuation represents their internal risk assessment associated with the proposed loan and will be interpreted in the context of their current lending policies and dictated by that lenders risk parameters. Therefore, the outcome that you and I may receive will be after consideration has been given to the following:

• The individual unit within the development or street.
• A lenders total exposure within any one development as a whole. A bank may be happy to loan up to 85% of an individual unit but they would probably not be willing to loan up to 80% of the total value of all the units in that project as this would skew their risk on the development. Therefore, it can happen that after a certain number of properties have been funded by a particular lender; if anyone else is looking for funding of another property in the same development they may be unable to secure a similar valuation, as those that have gone before them.  A bank may agree to take on another client in that development but insist on a much tighter valuation criteria forcing the purchaser to take up more of the overall exposure to keep the “lenders LTV” down.
• A lenders total exposure within the surrounding area (postcode).  Banks will make a commercial decision on the level of exposure they are comfortable to have in a particular area.  Once those limits are reached they will not necessarily pull out and say no to more units … but any future loan applications in that locality may only be approved subject to tougher valuation guidelines.
• The availability of funds will also affect the banks risk rating.  When funds are plentiful they will be happier to loosen their risk ratings. When the supply of money is tight (as in recent months) they are quick to tighten their risk ratings again.  The sub prime mess in the USA has had an impact on property valuations in the UK… due to the banks difficulty in obtaining more funds from overseas.  NB: This has very little to do with the true value of the property.

The current economic uncertainty impacts a lenders ability to accept risk and as many brokers have wryly remarked “they are all withdrawing back into their shells”.  The more volatility that is seen in the money markets are… the more cautious the banks will be with their risk ratings.  This is driven not only by good business management but as part of their fiduciary and principal duty to shareholders (you didn’t think banks were here to serve YOU did you?). 

Investors need to correctly understand the entire process of property valuations and this then leads us onto the role of the valuer.

The Commercial Consideration of a Valuer

When a valuer is contracted to value a property, they need to consider any future legal challenges.  Suppose the purchaser defaults and the property is “disposed” through repossession channels below market value; if a lender does not manage to recoup their exposure to the loan, they may sue the valuer for losses. One way for a valuer to insure that they never need to make a claim against their professional indemnity insurance policy is to ensure that the purchaser puts more into the deal than the 15% that was rife only 6 months ago.  I have personally challenged the reasoning for low valuations on many occasions and whilst no surveyor has ever admitted it to me… the commercial decision to protect or insure themselves from possible future legal challenge is very transparent and clear.

The Subjective Consideration of the Valuer

This is a big one and probably the one that effects all of us the most!  Everybody has different tastes, likes, prejudices, opinions and so on. The same applies when it comes to property valuations.

While some may say that a valuation is an exact science… it absolutely is not in practice. If the person who valued my last purchase had disliked it or thought I was paying over the odds, he would not have valued it at list price because ultimate, it is their opinion and we cannot effect their decision if they are wrong!  

EXAMPLE 1: Two identical townhouses were valued early this year. In each case the lender appointed the same surveyor to carry out the valuation. The first one came back valued at list price.  About 10 days later the second one came in £15,000 under contract price. Both properties were sold for the same price and were identical in every way.

So why the difference? In this case it seems the only reason was that there were two different staff members from the surveyors were used.  While they worked out of the same office and valued the “same” property on behalf of the same bank, they obviously had different opinions. This is why valuation can never be a science – at best its a parody of what a science should be with emotional elements thrown in for luck.

Confused yet? Wait, there’s more….

EXAMPLE 2: Two apartments were valued in the same complex earlier this year.  They were not exactly the same – one had a larger floor space than the other and an additional bathroom.  The price, lenders and valuers were all different.  However, let me ask you how could the first one be valued for 15% less and the second valued at list price?

Would you rather take the advice of a financial planner who had graduated from university with a degree; but lacked life experience or any financial success himself? The laws states that unless you have the qualifications (piece of paper) you cannot offer any financial advice; regardless of how much personal experience, wealth and success you may have accumulated. If you have the piece of paper, regardless of how badly you lack in personal experience, wealth or success you can advise others.

I don’t say this in a blatant attack on surveyors and do not suggest that all valuers lack experience… but I would dearly love to know how much property investing success they had. After all, if it is a science and they are so sure… within 5 years they should all be well on their way to great property wealth; or so you would think.

In Summary:

1. There are numerous commercial considerations for a lender that a bank will use as part of the valuation process
2. Valuers are usually employees
3. Their qualifications come from classroom training not practical application or understanding.
4. They operate under the commercial guidelines of their employer
5. Their employer is contracted by the lender not you
6. The lender sets parameters to reflect the commercial impacts of their overall risk policy
7. A valuers subjective opinion may reflect in the result given. That opinion may or may not be based on solid research and fact. In the current market it may reflect how the valuer has been impacted by negative media reporting
8. A valuer may not be a property investor (or even an investor at all). This would not disqualify him/her from operating as a valuer
9. In their defence, valuers are not paid anywhere near the money that would be necessary to justify the time required to undertake a proper “scientific” analysis of the worth of a property. The time they can allocate to the job requires them to rely heavily on online data which is normally out of date by the time the information is received from the Land Registry and uploaded. Neither does this program tell anything of the story behind a sale; leaving the valuer to err on the side of caution as always.

So, if you are thoroughly confused, you are forgiven and can go back to being confused!

Property Investing is Backed by The Government!

By Matthew Moody | Property Investing

Following the recent NLA property investing conference held at the weekend, the Government stated that they were committed to not bringing forward knee-jerk legislation that would hamper the growth of the sector but, instead would target the rogue operators which give responsible landlords a bad name.

Given the criticism that has been levelled at this government over the HMO licencing requirements, tenancy deposit protection, energy performance certificates and now possible licencing of all landlords, it seems at last that the government is recognizing that the industry has been a “great tool to help house the people of this country”.

The Minister speaking, Iain Wright, also re-affirmed what most of my readers already know “the people who suffer the most from burdensome regulation are reputable landlords.”.  Their new focus for legislation is to target rogue operators rather than hamper growth.

_{Picture courtesy of National Landlords Association Limited.}

Also speaking at the conference, Dr Julie Rugg spoke about the need for landlords to view what they do as a business and not purely as an investment vehicle.  Property investing has often been touted as the quick route to riches with many large companies claiming that you can make millions in a short space of time. 

Whilst its certainly true that property investing can be very lucrative, I agree wholeheartedly with Dr Rugg that property investing needs to have some controls and understanding around it to ensure people treat this as a proper business.

The Horror of HMO’s – Read What Our Tenants Are Saying

By Matthew Moody | Property Investing

I came across a blog today from someone based up in Manchester calling himself “renter girl”.

He or she seems to be living in an illegal HMO let by a landlord who doesn’t care.

Why do I say this – because they claim that 8 adults are sharing one bathroom and one cooker and fridge – which is pretty appalling I have to say!

This is exactly the type of HMO which I hope my readers are opposed to and are NOT providing.  HMO’s can offer a decent standard of accomodation in an appealing setting where adults can mingle and not feel unsafe or threatened by others.  They can do this in accomodation which caters to their needs and offers luxury accomodation at an all-inclusive reasonable price.

If you want to read the full story and marvel, then renter girl has plenty to say for himself or herself – but I suggest you step back and think like a tenant – and try to over-deliver in everyway to provide excellence in accomodation standards – that way, you won’t have tenants moaning and you will have happy long-staying tenants.

Otherwise, feast your eyes on some of our accredited properties and aim to be the very best.

In the meantime, for more hints and tips on becoming a SUCCESSFUL HMO landlord, sign up to our newsletter today at the top-right of this page.

Get Your HMO Licence Now – or Face a £3,000 Fine and Repayment of Rent

By Matthew Moody | Property Investing

There’s lots of stories in the news right now about HMO’s and some of them are grossly unfair and often prejudiced.

However, this recent story from Liverpool illustrates why its really best to get your HMO licence in as soon as possible – and if you have a 3-storey property with 5 or more tenants in it – pretty pronto.

I don’t know the in’s and out’s of the story but the landlord in this case ended up paying the council a fine of £3,000 plus costs and his tenants 3 months worth of rent which came to £3,900.

Just goes to show, don’t ignore it; get your HMO licence if you are advised to apply for one.

HMO Regulations Are Here to Deter Rogue Landlords

By Matthew Moody | Property Investing

I can’t believe some of these pictures but the reason why HMO Regulations are in place is to protect tenants and maintain standards.

It appears that in some parts of the country, this is only just beginning to happen but take a look at this recent article about a property in Strood and you might think it was a derelict house with nobody living there.

Your tenants pay your mortgage and your bills – please look after them, get repairs done and maintain your houses.

Just this last month in my houses, I’ve replaced an old radiator, replaced a boiler, repaired two other boilers, repaired an oven, had a plumber called out because of a leak and we aren’t out of November yet!

People may not like the so-called big brother mentality of HMO Regulations but I actually think its a good thing we have them because landlords like the one featured in the above article do not deserve to be renting property out in this condition.

James Caan’s The 7 Golden Rules of Property Investing – What’s Missing?

By Matthew Moody | Property Investing

I read a brilliant article in the Telegraph at the weekend featuring Dragons Den, James Caan and his take on the 7 Golden Rules of Property Investing.

There were some golden (paron the pun) nuggets in the article but I was left feeling that may’be some of the rules of property investing had been missed out, or glossed over.

You can read the article for yourself and decide but for me, the number one golden rule above all rules (and ignore it at your own cost) is Cashflow.

You can research all you like, go out on a limb and think big but unless you focus your goals on cashflow, all you will end up with is an asset class that may appreciate in value in the long-term but if you are in this game to make good decent returns every month to help fund your lifestyle, then you may need more than capital appreciation to make this work for you.

By investing in a cashflow positive property such as a HMO, you can benefit from both capital appreciation and massive cashflow – the best of both worlds.

For more details on investing in cashflow-positive HMO’s, go to the top-right and register for my exclusive mini-course – my readers tell me it gives more information than most guru’s full courses!  And its entirely free.