Archive for July, 2009

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What are lease options?

July 24th, 2009

“Lease options” is a term used where an individual or company leases an asset (e.g. a house or other property) with the option to purchase the asset at a later date. Options are nothing new and have been used extensively by businesses for decades, however it is their application to residential property that is potentially very exciting.

Lease options are a fundamental component for “Rent to Own” or “rent to Buy”, the lease option is the legal contract that provides the tenant-buyer with the right to purchase a house, flat or other property for a fixed price at a future date.  Here is an example of how it could work for a tenant-buyer:

Firstly they find a property that is available to purchase via a lease option.  Key here is flexibility, only a small percentage of properties are available to purchase using a lease option, so having a wider range of properties that would be acceptable to purchase increases the chance of finding one.

Next you need to agree the financials.  There will be several elements; the lease option deposit; the monthly rent; the purchase price;  the option period; clarifying how much (if any) of the monthly rent can be accrued toward the eventual purchase price.

Typically a lease option for a tenant-buyer could be agreed with a deposit equating to 2-3 months rent; the rent would normally be at market rate + an additional amount to save toward your purchase price; the option period would normally be in the range 1 to 3 years; the purchase price would usually be around today’s valuation.  Once you have agreed these details a solicitor would incorporate them into the lease option contract.  The whole process can happen very quickly, often less than 1 month, in some cases within one week.

It is not possible to go into all of the details here but we strongly recommend visiting the forum “simple2buy.co.uk/forum” where you can browse  Q&A, ask questions yourself, and even post details of the type of property you are looking for.

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Posted in Rent to Own / Buy

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More mortgages for property buyers?

July 23rd, 2009

Today it was announced by the British Bankers’ Association (BBA) that there was an increase in mortgages approved for property buyers, apparently the highest number of mortgages approved for over 12 months. But, is this just some PR on behalf of the banks to “improve their reputation”?

The fact is that there is normally an increase in buying activity as we move into the summer months, so it would be expected to see an increase in the number of mortgages approved.  So the totals of 35,235 mortgages approved in June versus 31,919 in May is normal, to be expected. 

The real test is how much is being lent versus the typical year prior to the credit crunch.  The BBA do not seem to publish this information as it will almost certainly show the mortgage lending to property buyers is still at a very low level.  You only have to look at the difficulties people are STILL experiencing in obtaining a mortgage with unrealistically high levels of deposit.  Why do banks need 15% to 25% deposits when based on the assumption property prices do not have much further to fall mortgages with just 10% deposit (which are hard to get approved) can be considered secure.

The bottom line is that although the banks are finding the market difficult for raising funds they are still not doing enough to improve mortgage borrowing, despite what the BBA may publish.

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Posted in Property Buyers

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Property remortgaging – beware

July 23rd, 2009

Some lenders are offering exiting property owners the opportunity, after their existing mortgage deal comes to an end, to remortgage onto what appear to be quite attractive rates.  Beware.

At first glance some of the mortgage deals look great.  A 95% LTV (loan to valuation), one year fixed rate of 3.59%, followed by the lender’s standard variable rate (SVR) of 3.99%. Sounds tempting doesn’t it?

The reality is that the new SVR being offered by lenders is often a much worse deal than the current SVR.  For example at Nationwide many existing mortgages are based on an SVR that tracks 2% over the bank base rate (BBR), thus you would currently be paying 2.5%.  The new Nationwide SVR being offered is currently 3.99%, a massive 1.49% higher!

The message here is to make sure you read the small print on not just the new mortgage offer, but also your current mortgage – you may find that you will be better off not changing your mortgage.  Remember, the banks are still licking their wounds following the onset of the credit crunch, they are keen to improve their bottom line profits, so check very carefully before you take up what appears to be a great offer.

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Posted in Mortgages

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Mortgage Recycling

July 22nd, 2009

The phrase “mortgage recycling” describes what is starting to happen in the UK as a means to get round the inability of banks to provide mortgages.  You could call this an environmentally friendly way of helping buyers to get their own home and bypassing the banking system until such time as it recovers.

Mortgage recycling is where the buyer takes over the mortgage from the existing borrower and then moves into the property, thus there is no need for the property buyer to apply for a new mortgage.   In some countries such as USA and Australia, the buyer can have the vendor’s mortgage “reassigned” to them, thus making the process of mortgage recycling quite straightforward.  In the UK it is not possible to “reassign” the mortgage, it remains in the name of the original borrower, which until recently has made it difficult for mortgage recycling.  But there is now a solution to this, and here is how it works:

1 – The buyer finds a property they would like to buy, but it has to be a case where the existing vendor has little or no equity in the property, or they are willing to leave any equity they have in the property for a few years.

2 – The buyer takes out a lease option agreement where they have the right to buy the property at any time over say the next 3 years (the term can vary).  The lease option contract will stipulate that the buyer will insure and maintain the property and pay the vendor the equivalent of their monthly mortgage payments – including any future increases or decreases in these payments.

3 – Whilst living in their new property under the lease option agreement the buyer works on improving their financial situation to take on a mortgage when the lending market improves.  The idea is to have a lease option term that allows sufficient time for an adequate deposit to be saved, credit rating to be improved, etc.

4 – At or before the end of the lease option period the buyer obtains their mortgage and completes the purchase of the property. 

The above steps are a very brief outline of how this works, more information can be found at simple2buy.co.uk/forum where experts are on hand to explain the process … more commonly referred to as “rent to own”.   It really is a great way for people who cannot get mortgages today to get on the property ladder, and also for the vendor to release themselves from the ties of their property.

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Posted in Rent to Own / Buy

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Buy-to-let investors return

July 21st, 2009

With the low interest rates many people are seeing their savings make poor returns in deposit accounts causing investors to look elsewhere for higher returns on  their money.  Some of these investors are now turning to property as an alternative source of income.

One of the places where the increase in activity can be seen is auction rooms.  12 months ago properties could be purchased at significant discounts at auctions, but today those discounts are reduced as more investors seek to purchase buy-to-let properties.  But, when you take into account the price falls of the last 12 months then those bidding are actually picking up better deals today as the overall market price has fallen.

In many cases buy-to-let properties can now be purchased with 6% + yields in the south east, higher yields of 8% + can be achieved in the north east of UK.  Overall, even after allowing for rental voids and management costs these provide attractive returns when compared with money left in a deposit account. 

But property investors also need to be cautious with respect to capital growth.  Many analysts are predicting the the recovery in property prices will be slow over many years, some even say it will be 2015 before prices recover to their peak of 2007.  For the investor this suggests purchases should be based on rental yields, not on hopes of short term capital growth.

One last comment, if you are seeking to invest in buy-to-let, make sure you carefully check tenants to ensure they will be able to pay the rent, you can purchase tenant checks from Credit Check Services for as little as £8.95.

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Posted in Buy-to-Let

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Lenders unable to value properties

July 20th, 2009

It was reported in the Guardian today that lenders are delaying / stopping new mortgages because of difficulties with valuing a property.  The consequence reported was that whole property chains are failing to complete due to one or two in the chain struggling to get the required valuation.

So why does this happen?  Well you will see from our earlier posts on house prices that there is much confusion as to what is happening in the market.  Halifax, Nationwide and Land Registry all offering different figures, some up, some down.  The bottom line is the low volume of property transactions combined without continued recession uncertainty make it difficult for valuers.

That said, if your property is of fairly standard build, typical for its area, then it should not be difficult to arrive at a property valuation, here are some tips.

1 – Check out the actual sold prices in your street.  These are the prices paid for a property, not what was advertised by the estate agent.  You can find out what the sold prices are here … http://www.hometrack.co.uk/ … Simply type in your postcode, you will then get a list of sold prices and dates for your street. 

2 – Next look at the list of properties sold and note the prices of any properties that are similar to yours (known to valuers as comparables). 

3 – Next find out what the postcode price change is for your area. Enter the sold price for the comparable you found (in step 2 above) here  http://www.nationwide.co.uk/hpi/calculator.asp … along with the current quarter / year.  Then enter the current quarter / year and “calculate”4 – You have the current valuation for your comparable.  But you need to do one last check, make any allowance for differences between your property and the comparable, e.g. conservatory added, general condition, etc. 

The 4 steps above will give you an approximate valuation for your property, it is not a RICS valuation but if you have a good comparable in your street then your valuation should be close to the RICS figure.

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Posted in UK House Prices

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Buy-to-let mortgages for investment property buyers

July 20th, 2009

Mortgages are no longer the preserve of banks and building societies.

For around one year now it has been difficult for may to obtain buy-to-let (BTL) mortgages. Private investors have seen their deposit requirements increase from a typical 15% to an average of 30% today (lowest deposit offers are 25% but fees and terms are less favourable). So for the private property buyer it means you need a lot of cash to take on a property investment. The banks are really making it tough for everyone.

But the market is starting to change. A private investment fund is now offering BTL mortgages at 85% LTV, a deposit of just 15% needed. The only catch is their fees are high at around 6% of the loan compared to 3% to 3.5% fees charged by the banks. But then the private fund is currently offering a 5.2% five year fixed rate, which seems very attractive compared with the 3% to 4% (above) base rate trackers offered by the banks.

So if private funds can lend at much higher LTVs (smaller deposits) why can’t the high street banks? There are several reasons for this. One is, according to the Council of Mortgage Lenders (CML), the banks can not raise funds at sufficiently attractive rates to pass on to property buyers. Another possibility is the bank risk profile, as many still have a lot of high risk debt including many mortgages with negative equity they need to improve their overall loan books. In effect with the banks taking on very secure mortgages (e.g. 75% LTV) they can offset the more risky loans, so overall their lending risk profile is reduced. The bank’s risk profile is a key factor for their ability to raise funds in the money markets, no one wants to lend to a bank that may subsequently go out of business.

So, overall we have good news that private funds are entering the mortgage maket. Maybe in the future the banks will see more competition, which hopefully will be better for those wanting to take out a mortgage.

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Posted in Buy-to-Let

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Tenant Vetting

July 17th, 2009

With the increase in credit defaults and identity fraud it has never been more important for landlords to carry out tenant vetting, a process where a professional company carries out checks to verify whether a tenant has a history for CCJs, Bankruptcy or Insolvency.  Additionally and online agency can obtain identity verifications so that you know the tenant is who they say they are (in conjunction with a passport check – see below).

There are several companies providing online services to check tenants, but their services do vary, so here are some points to check for.

1 – CCJ, Bankruptcy and Insolvency checks.  Some companies will only use the tenant’s current address as a basis for a search, in these cases they cannot guarantee to find all CCJs that may relate to a tenant.  It is imperative that a “linked address search” in conducted, such searches look for address linked to the current address and then use those address to search for CCJs etc.  By carrying out a linked address search you can have much greater assurance about your tennant’s CCJ history.

2-  Identity.  Anyone can give you a name and date of birth as “their own”, you can check it online and it may come up clean.  But, is this their real name and address?  It is essential that you check photo ID for the tenant, not a workplace ID, but a Passport, failing that a Driving Licence (but these are more easy to fake than passports).

3- Financial stress. A tenant may not have any CCJs but they could be under considerable financial stress and thus risk of defaulting.  For example, a tenant may have 20 + financial accounts with mail order companies, credit cards, HP agreements, etc.  A high number of accounts suggest financial stress, especially when combined with a relatively low income.  To check for financial stress you need ensure the tenant credit check includes Insight, make sure the tenant checking company provides this option.

These above are just some of the points to be aware of for tenant vetting.  The bottom line is though the less you check the tenant, the greater the risk of a tenant defaulting.

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Posted in Buy-to-Let

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Flat Sale in London

July 17th, 2009

A flat sale in London is not that difficult, despite the number of new properties built, you just need to find a private buyer who will take it on as an investment.  But at the end of the day is is all about price, if you are looking to sell at full market valuation then it is going to be very difficult to find a buyer in  today’s market.

If you need to sell quickly just click on the Property Buyers link on the home page, once brief details are obtained on the property for sale a buyer will be found and the sale completed within a few weeks.  If the sale is urgent then at the right price a sale can be completed in days.

There are basically two ways to sell, one is a below market value transaction which will mean offering the buyer a significant discount – but then there are no agent fees to pay and the sale is completed very quickly.  The other way to sell is with a deferred completion, in this was you get close to market valuation for your property, and all your costs including mortgage, insurance, maintenance, etc, paid until the sale is completed and the funds transferred to your account. 

Whichever way you choose to sell your London flat or other property you can be freed up to move on in weeks (or days), no need to stay tied to your flat. It really is straightforward, two options to choose from, either way you don’t have to stay tied to your property.

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Posted in London Property

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Outlook for property prices is bleak

July 17th, 2009

This was an assessment of UK property investment made by the IMF in its recent “health check” on the UK economy.

The IMF gave a warning that the UK has far too much debt, so much so that it is testing the market’s confidence in sterling.  Why is this is important for the UK?  Put simply if markets lose confidence the value of the UK currency will fall, driving up import prices and creating inflation.  The latter is of particular concern when the economy is weak.

The figures being quoted are almost mind blowing, the IMF are warning that UK debt could equal the GDP (Gross Domestic Product), which is around £1.5 trillion.  The bottom line message from the IMF is that the UK needs to tackle public spending, costs have to be reduced.

The IMF also warned of the risk of a Double Dip recession where following a short period of recovery in the UK economy we enter another period of recession.

Overall it is gloomy stuff from the IMF, but it does not mean this is where the UK economy is heading, its a bit like the doctor telling you to change your life-style habits to avoid future illness.  The key thing here is for the UK to take note and follow the doctors orders.

So lets end on a positive note.  It is hard to see that the UK government will not take the action needed to cut spending, so we can reasonably expect to the UK recover from recession and for the economy to start growing in a more sustainable way.  It will not be a return to the heady days of a few years ago, it will be a slower recovery over a pro-longed period, but a recovery it will be.

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Posted in UK Economy, UK House Prices

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