Buy to Let Negatives.


We at Landlord Mortgages have a new friend, a resident landlord called 'lurker' and would like to introduce him to you. We have decided to shield his identity because, as will become apparent, negativity can breed dislike.

'Lurker' is around every corner of our web space and like a virus he becomes very destructive and at times can be uncontrollable but we are, nevertheless, glad to have him on board. One thing he really does well and that is to derail the thought process of other Property Investors to at least consider some of the negatives associated with Buy to Let.

Should I buy at auction?

So easy isn’t it? By watching “Under the hammer” on BBC1 you could easily be led to think that with a little bit of reconditioning work on the average auction property you could make at least 20 grand, or have a rental income for life. It is property programmes like this that have led a number of people to give up their jobs to become property developers and has probably further inflated property prices.

Of course, such programmes should really be taken with a pinch of salt! On one of my favourite websites recently, a poster was stating that what this programme does not do is to revisit these properties after a further 18 months. Apparently, one such property in Liverpool was featured on the programme. It was purchased at auction, done up and then after three months the two local estate agents had valued it at £20000 more than it had cost. The poster had been trying to purchase the property at a bankruptcy sale 18 months further down the line as apparently it hadn’t sold as the programme had forecast. Oh dear!

I have never purchased at an auction itself. I This doesn’t mean that I haven’t tried, but the hammer price has always been something ridiculously over my limit. There are you see three types of potential bidders at auction: There are the types like me who view the property, work out how much it will cost to do up, research the probable market price, add a margin for costs and a sensible bit of profit and bid accordingly.

I’ve done this tons of times and never got anywhere. This is because there are also the bargain hunters who are probably first time buyers and want a place to do up and live in. As they are not interested in making any money out of the deal and can also forget resale costs, they can afford to bid more. The third type of buyer is a builder who is looking for some work. He will buy a place for his workmen to do up and can therefore get the job done at the lowest possible cost. He may well be able to utilise material and equipment that he is removing from other properties. He can therefore also afford to bid more. Of course the silliest things happen at auction – the frenzy which grips some buyers can inflate the price to uneconomic levels or rash decisions can so easily be made (wrongly) on the spur of the moment. Thus an auction can often be a good place at which to sell a property but to buy one you have to be much more careful than you may think from watching “Under the hammer!”

This does not mean that I have not bought an auction property, but it has always been bought prior, or as a result of an offer made to the auctioneer afterwards. It also does not mean that you cannot get a bargain at auction – they must occur it’s just that I haven’t come across one that I have considered worth bidding for. Maybe I still have more to learn – but at least it has not yet driven me to bankruptcy!

One personal example of auction madness (in my opinion): I was interested in a maisonette in a road where I already owned a similar property so had an excellent idea of the market price. Prior to the auction I enquired as to the legal pack and the auctioneer apologised that it was not available as advertised, but would obviously be available at the sale. “If you come early,” he said, “I will ensure that my staff let you in to examine it carefully.”

The auctioneer was as good as his word: I arrived early and was admitted before anybody else. I thus studied the legal pack carefully, discovered that the property had changed hands three times in the last three or so years with each vendor taking a nice profit, however the guide price was set at a sensible level. I then noted on the mining survey that an old mine shaft was located feet from the foundations of the property! “Oops” I thought and decided to knock a couple of thousand off my maximum bid price.

The auction started and this lot was about half way down the list so it was an hour before it came up. During this time I carefully watched the table where all the legal packs were displayed. Not one other person checked the pack for this particular property. I eventually dropped out of the bidding when my new limit was reached and the hammer fell when this property reached its fully refurbished market value!

If you manage to buy profitably at auction, be prepared for a lot of legwork, a lot of spade work and a lot of disappointments beforehand – oh and don’t take a lot of notice of “Homes under the Hammer.”.

Do you always get your properties surveyed?

Before I married, my wife bought a property – we are still renting it out today and it earns an important part of our income. Before purchase, she engaged a qualified surveyor who gave a full report and found no issues. When she moved in, she found that the bathroom taps did not provide any water when turned on despite the surveyor’s report mentioning that hot and cold water were supplied to the taps in the bathroom. Naturally, this report was not made available until the surveyor in question had received his (substantial) fee. In other words the surveyor had inspected the bathroom, noted that taps marked “hot” and “cold” were fitted to bath and basin and reported accordingly. He didn’t even bother to turn them on! His substantial fee reflected the years of study and experience he had attained before being able to call himself a chartered surveyor. When my wife queried his competence, he produced some long tome explaining that he was not actually required, according to his code of practice, to check that taps actually worked, only that they were fitted. Thus he was in a position to justify his fee despite this being queried.

May I humbly suggest that, because of their code of practice and all the get out clauses it contains, any member of the appropriate body of surveyors is not worth the fee he will no doubt demand!

If you don’t know enough about building to be able to spot a “lemon” yourself then I recommend you acquire a “tame” builder. If you obtain an experienced guy (old may = experienced in this case) then he will either visit your property for free, or he will charge a modest fee for his services. This is because he will be hoping to get some work (or at least have an opportunity to quote) if he finds something wrong. Such people are worth their weight in gold. They will tell you so much more than a surveyor! First, when they spot a problem, not only will they tell you about it, they will also be able to tell you why it has occurred and, more importantly, how costly it will be to fix! Don’t expect a builder to be able to write a flash written report either. Just view the property with him and make a note of his comments yourself. If, as a result of cracking or other forms of movement he suggests a structural survey, then this is the time to get further (possibly expensive) advice – and you can bet he will know a friend he can recommend! Oh – and I bet he will turn on the bathroom taps!

What do you look for in a property lettings agent?

Be warned that there are no qualifications or experience needed to set up as a property rental agent so there are a number out there who have little clue as to how to do the job properly, but rapidly learn how to make as much money as they cam from their landlord clients. This is often not enough, so they start to fail to forward rent payments onto their landlord clients as well and until very recently spent the tenants deposit money that they were holding as well. – then they either disappeared or went bankrupt. This meant that the landlord was legally obliged to fork out of his own pocket a deposit refund when a tenant left, despite possibly not having received any rent from said agent for a considerable time. Ouch!

A good property agent will be experienced and will have been in business for a number of years. He/she will also have a large number of landlord clients and should be personally recommended if at all possible. Although it is nice to see such agents operating from high street type premises, I know of a number of good agents who work from home.

It is often claimed that membership of an appropriate body is confirmation that an agent has the necessary expertise to act professionally on behalf of his clients and has suitable mechanisms in place to protect his clients (and their tenants) money should he hit hard financial times. They also provide an arbitration service which is binding on their members. Although this can be a good indication that an agent is competent it is not always the case. One member of the agent’s staff may hold individual membership, thus the agent himself advertises it, but the association’s terms and conditions are not binding on the agent himself. All this tells you is that a member of the staff is competent, but his/her advice may be disregarded by the agent himself.

A good agent will have so many clients that he does not have money problems and therefore will not need to take action to make more money out of his clients than is appropriate to the service he is required to provide. An indication that this may not be the case is when his terms of business do not allow him to do something! If he does not like to do what you require of him then he must have a good, plausible reason. It is up to you (the customer) whether you accept this, or try and insist he does what you want. You can always take your business elsewhere.

There are two functions that an agent would be expected to perform. One is full management service. This is needed by those who live a considerable distance from their rental property and therefore need a local person on hand. An agent would therefore be expected to find tenants, collect their rent, organise any repairs with local contractors and liase with you at all times. They would also be expected to get rid of tenants if they failed to pay their rent or started to act in an “untenantlike” manner. An agent who knows what he is doing should also be able to take the necessary court action to evict tenants himself without recourse, as a matter of course, to a solicitor or other legal professional. A fee of, in the region of 10% of the rental income is about the norm for this full service.

The other service, the one I use, as I don’t live too far away from my properties, is the tenant finding only service and it is here that some agents try to make an extra buck or two! For me, a tenant finding service it just that. Agent advertises for tenant, conducts viewings and when potential tenant shows interest, carries out credit check, takes up references, interviews same and then reports to me. If I accept tenant, he then signs my AST, I collect deposit, rent as agreed and hand over keys. Agent then receives agreed (usually substantial) fee. Job done. Of course, other services may be offered and may be accepted if you wish, but they should never be a required part of a “package” I mean if you want the agent to collect the rent, fine, and he will probably deduct a percentage for his trouble. If you want him to look after the deposit particularly because of the current law change situation then O.K. If you would rather him use his own documentation fair enough. But don’t let him charge a monthly fee for this! Don’t let him insist on renewing the tenancy agreement every six months – it isn’t necessary, and make sure that any agreement he asks you to sign does not allow him to make an annual charge because he found you a tenant but does nothing else!

I have had it tried on me and quietly, without any fuss at all crossed out the appropriate clauses in an agent’s agreement. Said agent smiled wanly and signed his bit of the altered copy accepting my changes! Remember, there are usually plenty of agents out there, so finding another who will do what you want should be possible. I know one agent who was said to provide an excellent service. I approached him some years ago and told him what I wanted. “I am sorry sir, but we don’t do ‘find a tenant only’ – we like to provide a full service for a monthly fee of x% of the rental income.” I went elsewhere.