A colleague recently showed me a property in Tottenham; it was a duplex in a purpose built block. It was due to come up in auction shortly, close to the station, and already producing a rental of £15,600 on an AST; the guide price was £165,000.
It looked good - on the surface, to get a yield this high anywhere in London is a rarity. The lease is long and service charges low, a deposit of 25% is all that is required which equates to £41,250. If you purchase this at £165,000 you will get a net income of £7,000 per annum allowing for service charges, mortgage interest and agents’ fees. A healthy return no doubt.
Looks too good to be true?
Actually situations like this did actually exist in a bygone era, before the credit crunch, you could buy a high yielding ex council property with only 15% deposit. So on a £300k property you would only need £45k, this property would be in a W2 postcode and give you a net yield of £28k AFTER service charges, mortgage and agents’ fees. So you would be getting about half your deposit money back every year. There were those who bought and profited greatly not just from the yield as high as it was, but from the capital growth of the property, and those who said it’s too good to be true and didn’t buy missed the boat.
Therefore, the criteria of not doing something because it’s ‘too good to be true’, doesn't always hold true.
I checked other properties which were sold in the same block, they had gone for even cheaper. The last one in the same block having sold for £147,000 in July 2015 which was the same property. It’s reasonably easy to check comparables in the same block, there is of course the variation in price according to floor and aspect, but on the whole an easy comparison can be drawn. All the properties in the block had been sold cheaply.
The guide price of £165,000 was not unreasonable.
The reason we were sourcing properties pre credit crunch at high yields was due to the acute shortage the housing associations had for accommodation, in order to attract landlords they were offering over the odds rental amounts. The essential point being they did not discriminate between private and ex council properties, the rent payable was driven by the number of rooms and borough. Ex council properties were about half the price of private ones.
These enhanced rentals are no longer on offer due to government cutbacks. Therefore, this is market rental, the only other reason for the high yield is therefore a dampened property price. So why is the price low in comparison to other two bedroom properties in the area? Other two bedrooms closely were going for £325k.
To me it only meant one thing, that the property is made with concrete panel construction. These were built after the second world war to fulfil a need for urgent housing. They were designed for a temporary period of time to fulfil an immediate and temporary need.
However, many are still standing 60 years later. Prior to the credit crunch there were a handful of lenders who would still lend on this type of construction, subject to valuer’s comments. They would charge extortionate rates, post credit crunch it has shrunk to zero. Perhaps you could convince a bridging lender to lend on one.
This means this property will need to be purchased in cash. Putting this much money in one property may not suit everyone. With this much cash you can purchase a property for £500k, with the rest of the money raised from bank debt. A 10% uplift in price would mean a capital gain of £50k, in order to obtain this level of gain from a property of £165k may take a decade.
The property may suit someone who has just retired or has received a redundancy package. This may be a good supplement for a wage, however the prospect for capital growth on this property is limited and will not increase in line with the local market.
I suspect the reason for this property to have been put in auction is to catch a buyer out unaware of the issues surrounding this property. When a property is sold by an organisation such as a housing association or a receiver it normally states this on the property description. In this case it is a private individual who owns the property.
Further research showed this property was put into auction on 5th November 2015 and didn't sell with the highest bid supposedly at £151k. Further delving revealed the property was originally purchased in auction on 22nd June 2015 for £147,000 by the same individual trying to sell it currently.
A clearer picture is being built up.
In an auction you effectively exchange once the hammer is brought down on the gravel, this means you have committed to put 10% of the property value down. You then have another four weeks to come up with the rest. If you do not do so you will lose the 10% put down.
As more and more retail investors are getting comfortable with the idea of purchasing at auction, it is increasingly becoming a dumping ground for properties with issues. Unsuspecting naive buyers are being caught out off guard.
The only way this would have been uncovered is through prior knowledge and experience or if a valuation is done in advance of the auction. This however means spending money in advance of the auction. This seems unpalatable to many as it could be money down the drain.
It seems this property was dumped in the auction by a gentleman who purchased it being attracted by the yield and the price. After putting his 10% down he realised he could not get a mortgage, therefore he probably scrambled around to cobble the money together in time for completion.
It seems he is now trying to offload his investment in the same way he ended up purchasing it, through the auction hoping to catch another unsuspecting buyer.
Auctions can be a good source of deal flow but also a dumping ground for problematic properties for unsuspecting buyers. It takes knowledge and experience to be able to differentiate between the two. We offer a service which includes sourcing auction properties and analysing the deal well in advance of the auction so you can purchase with peace of mind.
