All the property â€œgurusâ€ (and Iâ€™ve really started to despise that word) advocate buying BMV property â€“ â€œyou make your money when you buy the property not when you sell itâ€ as Robert Kiyosaki (the guruâ€™s guru) says.
One of the best ways of doing that is buying repossessed properties at below market value. Given the state of the economy, you can find plenty of these deals through estate agents and auctions and, if you are buying large numbers direct through the asset management companies. It helps enormously if you are a cash buyer and at the very least you need to have funding already in place as the seller will always want to see proof of funds before even considering an offer.
So, in theory at least, buying repossessions (or â€œcorporate salesâ€ as the agents euphemistically now call them) can be a lucrative property investment strategy enabling you to buy at a bargain price, renovate it and sell to the open market at a decent profit or rent it out and obtain a very decent yield.
But you need to be fully prepared for whatâ€™s in store. Here are a few examples of the issues we have encountered in the last few months which are (apart from the last one) fairly typical of what you will experience if you start buying repossessions.
Ask Yourself: Is it really a bargain?
Just because itâ€™s a repo (ccmph, sorryâ€¦ corporate sale) does not automatically mean it is a bargain. Doing your due diligence on the internet/ telephone is one thing to establish previous property sale prices and comparables, but you absolutely must do a site visit to establish whether it is truly a bargain. Repos, by their nature, tend to be in a fairly appalling condition. You need to calculate what you will have to spend to bring the property up to scratch. It may well be that whilst the 2 bed terrace for sale at Â£35,000 looks like it is a great deal at Â£15,000 below comparable properties, it may actually need Â£20k spending on it and there is little margin for profit. Many estate agents wonâ€™t tell you that over the phone, even if you ask them, as they like to get as many viewings as possible even if it should be obvious from what youâ€™ve told them that it wonâ€™t be suitable for you â€“ I think it gives them something to show their client as evidence they have been doing some work!
A more unusual example (but one that is becoming increasingly common) is Japanese Knotweed. In quick succession, we found two properties that looked like great deals until we realised the gardens were riddled with Japanese Knotweed. This is a notoriously invasive weed, which can cause serious damage to property. It also makes the property un-mortgageable and can be an expensive problem to clear up, taking many months. All of which can of course represent an opportunity, if the buyer will reduce the price accordingly. But many sellers, even in this market, are extremely stubborn and in neither of our cases would they reduce the price, so we had to walk away. Presumably, some unsuspecting person with an incompetent surveyor bought them in the end, as they are no longer on the market.
Tip: You must do a personal viewing and work out your refurb budget allowing a 15-20% contingency before making an offer.
It is the duty of the bank in possession to obtain the highest price possible. They will never agree to take a property off the market. This means even if they accept your offer, you can be gazumped at any time up to exchange of contracts, losing survey fees, structural engineer fees, search fees and legal fees in the process. Quite an expensive business, and if it happens a few times it will eat up a high proportion of any profit you hope to make, especially if you are dealing at the low end of the market. Itâ€™s especially galling when the other side has caused the delays and allowed time for a rival purchaser to make an offer.
Whilst being a cash buyer has its advantages, as an investor you are looking to make a profit. There is a ceiling to what you can pay and still retain a realistic chance of achieving this and, as you may well be competing against potential owner occupiers who are not so like minded, and likely to be prepared to pay more, expect to be gazumped â€“ frequently.
Part 2 featuring more of the joyous perils and pitfalls of buying repossessed property will be published next week..