Property TV | Property Question Time – S1Ep179 – Paul Mahoney , John Howard & Stephen Galpin

Bryony Billson: Hello and welcome to Property Question Time. I’m Bryony Billson and this is the show where you get the chance to have your questions answered by our resident property experts. So, let’s see who we have on the panel today.

A warm welcome to Paul Mahoney, Managing Director at Nova Financial Group.

Paul Mahoney: Hello.

Bryony Billson: Thank you for joining us.

John Howard, Property Developer and Author.

John Howard: Hi.

Bryony Billson: Thank you.

And last, but by no means least, Steven Galpin, Property Consultant.

Steven Galpin: Hi.

Bryony Billson: Welcome to today’s show. We’ve got a number of questions to get through. So, I’m gonna go straight to you, Paul with our first question.

If I were to use the equity in my current house as a deposit on a house that I intend to buy at auction, and then turn into an H.M.O., would I be able to get a buy to let mortgage to complete the acquisition of the property?

Paul Mahoney: Good question. So, traditionally no. Well, traditionally it would depend on the state of the property they’re buying at auction.

Bryony Billson: Right.

Paul Mahoney: If they’re planning to convert it, they would only be able to get a buy to let mortgage on the property at auction if it had a usable kitchen and bathroom, those sorts of things. Another thing to consider is when buying at auction, you need to complete within 30 days. Now, most buy to let mortgages will probably take longer than that.

Quite often, what people do is they get bridging finance in place, which is a bit quicker. And it allows them to complete on the purchase. It will generally also allow them to do the refurb or the conversion they’re planning to do, and then they can exit that short term finance with a buy to let mortgage. So, that’s quite important to keep in mind, the timeframe that’s involved of completing, because they’re putting down the deposit at auction, then having to complete, then having to do the works. I believe there are some new products on the market that allow for work to take place, and essentially, it’s a condition of the mortgage that the works do take place and then it’s finished within a certain period of time with some of the more flexible lenders.

I suppose the idea here is, make sure they’ve got the finance that’s fit for purpose in place. And the best way to do that is get advice.

John Howard: I think that’s right. Buying at auction, you’ve got to be on the ball.

Bryony Billson: Yeah.

John Howard: You’ve got to be on the ball. And it’s not always the right place for a first purchase property development if you like, or investment. Because you haven’t got any time, you’ve got to get on with it. A lot of pressure. Sometimes your best to look elsewhere for your first purchase.

Bryony Billson: Okay.

Steven Galpin: Well, I was just going to say, I think you’ve hit the nail on the head. It’s about pressure. And I think any form of property development, ownership, or anything to do with property, stay away from pressure, because pressure will cost you money.

Bryony Billson: Mm.

John Howard: Look how relaxed he looks.

Steven Galpin: Money.

Bryony Billson: Good advice. Does any of your advice change if they talk about wanting to change it into an H.M.O.? Just the same advice?

John Howard: Well again, that’s quite special to say an H.M.O. these days, you’ve got all the fire precautions, you’ve got to registered with the council, you’ve got to be on the ball with it.

Bryony Billson: Mm.

John Howard: It’s not as straightforward as it looks.

Paul Mahoney: Also, it’s been a bit of a buzzword for years now.

John Howard: Yeah.

Paul Mahoney: H.M.O. and whether H.M.O. actually works in an area anymore is questionable.

John Howard: Yup.

Paul Mahoney: For the reasons John mentioned, but also, is there the market for it?

Bryony Billson: Right.

Paul Mahoney: Is there already flooded? There’s a whole range of things to consider as to whether H.M.O. actually makes sense. As opposed to, it doubles my yield, so let’s do it.

Bryony Billson: Mm. Okay. Yeah, fantastic, brilliant. Okay, we’re going to move on the next question because I feel like we answered that clearly for that person.

I’m going to give it to you, John. Is it possible to get bridging finance on a property that I want to buy, renovate, and then rent out? My initial inquiries reveal that bridging loans need an exit route which usually involves the sale of the property. What do you think?

John Howard: Well, you’ve got to be careful with bridging loans because they’re expensive. It’s basically short term lending.

Bryony Billson: Okay.

John Howard: Okay, so that’s the thing to remember. And you’re probably going to be paying 10% per annum interest on the money. So, if you need to purchase a property that needs doing up, then certainly look to the bridging people to borrow off, but quite right, most of them don’t want to lend for more than a year. I personally think a year is maximum.

So you want to get in, get it organized, get the build work done, and if you want to keep it, refinance on a buy to let mortgage or something like that. If you’re just doing up to sell, then you need to be organized, get it refurbished quickly, and get it on the market quickly, because that money’s costing a lot every month.

Paul Mahoney: Yeah, just as John said, be conscious of the timing. Because if there are delays, that could completely kill it.

John Howard: Yeah, kills the time.

Paul Mahoney: So, I think John’s used to getting great rates because you know, he’s got experience, but some bridging loans can be a lot more expensive than that. Up to 2.5% per month. So, if it’s your first time, you’re probably going to be-

John Howard: I should have from 10%.

Paul Mahoney: It’s probably going to be at the upper end because they’ll consider you more of a risk.

John Howard: Yeah.

Paul Mahoney: So it is expensive money, and it’s usually only used if that’s the only solution for that period of time.

Bryony Billson: Yeah.

John Howard: If you’re paying 2% a month, you’ve got to have a better deal than I can find probably.

Bryony Billson: Mm.

John Howard: And I like to think we know what we’re doing.

Steven Galpin: I think when you’re appraising these deals, often when somebody’s starting out, time is the one element they forget to think about.

John Howard: Absolutely, and it’s so important.

Steven Galpin: So expensive.

John Howard: Time is money.

Bryony Billson: Do you have any advice in your experience of managing time with property development?

Steven Galpin: No, it’s just a very important assessment that you must make when if planning commission is involved, maybe a sense of what to look at the distance between or the timing between planning meetings and that authority, for instance, because if you fail at one, and they’re only sitting in six month cycles, then you’ve got six months to wait before you’re next opportunity.

John Howard: Absolutely.

Steven Galpin: And who’s going to pay for that?

Bryony Billson: Yeah.

Steven Galpin: You’ve got a property on your books you have to pay for, either interest or-

John Howard: Yeah, absolutely. I’d get as much organized before you actually commit to that property as possible.

Bryony Billson: Right, yeah.

John Howard: So get all the building prices back in, get the building almost ready to start. So as soon as you’ve completed the purchase, they’re in the next week. Bang! Doing it. Not, “Then I’ll get organized. And three months later, we’ll start work.” No, it’s not good enough. The week after you’ve bought that, you want the builders in, getting it going. And you want to make sure you get fixed time and price off that builder, when he’s going to be out.

Bryony Billson: Yeah. Fantastic. Okay. Thank you. Some really clear and direct advice there, thank you very much.

Right, Steven. When house prices start to stop their growth in an area, such as Nottinghamshire, does that indicate that the area will take a long time to see growth again? And if so, are landlords best to try to exit in case things get worse? Such as with the possibility of no Brexit? What do you think?

Steven Galpin: Well, I don’t think there’s a real answer to that question.

Bryony Billson: No, it’s a lot.

Steven Galpin: I think because it’s too broad in a way. Let’s just look at what happens, you will find, here we go, see, I get criticized now that-

John Howard: It’s coming.

Steven Galpin: Here in London we have a fairly instant effect on property when things happen, whether is Brexit, whether it’s interest rates or anything else. And what happens then is you get an instant almost overnight effect London. It then ripples out across the country. It will accelerate faster in places like Manchester or Birmingham, or Nottingham, wherever.

The key is to understand what’s going to happen next and if we all knew, we’d all be very wealthy, wouldn’t we? What tends to happen is you will start to get seeds of activity in London again and gradually again, those seeds will ripple out across the country. It doesn’t actually work in reverse, so we don’t go that way and then zoom back in this way.

So it can be quite a long process where you’re out of the center of any major town. The simplest way of judging what’s happening, you’ll start to see some of the for sale boards having “SOLD,” on them, I mean, I can remember it when we had the crash in the 80s. It was months if not a couple of years before we saw any sold signs.

Bryony Billson: Right.

Steven Galpin: You know? That’s the kind of information you’ve got to look to. Once again, we talk so often on this program about having your contacts in the property market having your team around you. Develop your relationships with your local agent, they’ll always keep you informed and if you have a good relationship, you’ll get a little bit of advance warning of what’s happening.

John Howard: Yeah.

Steven Galpin: I’m afraid I can’t tell you what’s going to happen in Nottingham or Manchester, or anywhere else, or even in London. But, just look for the signs and once again, it comes back in a way to the previous question. Don’t put yourself under pressure. If you’re going to get into a situation where the property’s going to have to go because you need the money, and you’re pressured, you’ll lose money. The successful property development will be able to make these judgments, spread his investment out, go for his development over a period of time, and build in a factor that allows him to have those delays or hiccups in the market.

John Howard: There’s one trick I can give people.

Bryony Billson: Mm.

John Howard: And that is this; when car sales start to go up-

Bryony Billson: Mm-hmm (affirmative).

John Howard: … normally follows that the property market does the same. Car sales first because it’s more instant. When people are feeling better about themselves, start buying new cars and a bit more confident about the market and about the economy, property follows.

Bryony Billson: Mm. Interesting.

Paul Mahoney: Just something to add to that-

Bryony Billson: Thank you.

Paul Mahoney: In my opinion, property is about time in the market, not timing the market. So it seems like this person is seeing the market flatten a bit and thinking, “Should I sell and get out at the top and maybe I can buy back in in a couple of years.” Nobody can do that, you know? No one can say, “This is the top, this is the bottom.” Property’s a mid to long term investment, you know? If you’re confident that was a good investment in the first place, hold onto it. If it doesn’t fit in with your portfolio, your strategy anymore, then sell it for that reason, not because you’ve seen a bit of a plateau in the market.

Bryony Billson: Mm. Thank you, okay.

Steven Galpin: I think I’m just going to add something to John’s car.

Bryony Billson: Oh yes.

Steven Galpin: Analogy there.

Bryony Billson: Is it another top tip? Because we like those.

Steven Galpin: Well, I don’t know. Look, in general, I’d agree with you.

John Howard: Oh, thank you.

Steven Galpin: If there’s a feel good factor of people, people buy. But let’s go back to 2008 when we had the crash.

John Howard: Yes.

Steven Galpin: The car market crashed as well.

John Howard: It did.

Steven Galpin: Exactly at that point. However-

John Howard: First.

Steven Galpin: 2008 to 2016 before we started to get involved in Brexit, the car market absolutely rocketed.

John Howard: Yup.

Steven Galpin: And what the government should learn from that, and the banks too, is that the car market has rocketed because it’s made readily available finance for those cars. You and I can go out and buy something quite flashy and special for very little down and a monthly payment. And yet, the housing market, the funding opportunities have got less and less and less, and more and more stringent.

John Howard: Well, I would disagree with that.

Steven Galpin: Well, hold on, we’ve had all this fuss, haven’t we, that young people can’t buy their new home because the deposits are too big.

John Howard: But what have the government done? They’ve put 10 billion aside for help to buy 10 billion pounds, that’s an enormous amount of money.

Steven Galpin: It is an enormous amount of money, but I’d look at the take up rate.

John Howard: The take up rate is quite good. It’s quite good.

Bryony Billson: Unfortunately, we do have to take a short break, but maybe we’ll be back to debate that a little bit more.

Don’t go anywhere, we’ll be back with a few more of your questions in just a few moments.

Welcome back to Property Question Time for the second half of today’s show. And we’ll go straight in with another question for you, Paul.

Having bought a one bed in London three years ago, with a 25,000 pound deposit, I’ve now got 100,000 pound equity, maybe a tad more. I don’t like the block and I’m moving out. My fiance has her own place, and we married in the spring, so we’re moving in together. I can rent it, but other income and tax countdowns means I don’t make any net profit. I could sell, but I don’t know where to invest the 100,000 plus equity. Any ideas?

Paul Mahoney: Okay, well first off, congratulations!

Bryony Billson: Yes.

Paul Mahoney: 300% return in three years is pretty good going.

John Howard: I thought you meant the finance-

Bryony Billson: I thought you meant for the wedding!

John Howard: Yeah, for the wedding.

Bryony Billson: Congratulations for the wedding.

Paul Mahoney: And for the wedding of course. Okay, so you don’t like the block, it seems difficult to refinance.

Bryony Billson: Mm-hmm (affirmative).

Paul Mahoney: What was the reason for being difficult to refinance?

Bryony Billson: Tax countdowns.

Paul Mahoney: Okay.

Bryony Billson: They don’t make any net profit.

Paul Mahoney: Okay. Fine. It might be the serviceability. The fact that it’s in London, yields are low in London, prices are high.

Bryony Billson: Yeah.

Paul Mahoney: With some changes last year that the Prudential Regulatory Authority brought in place. Buy to let mortgage need to cover a benchmark rate of 5.5%, which means if your rental income is less than about 4% yield, you’re in trouble, as far as the amount you can borrow. So that might be the reason.

That 100,000 in my opinion could definitely be better utilized outside of London, for a buy to let. London is again, in my opinion, increasingly becoming more difficult to justify on buy to let basis. One of the reasons is serviceability, like I mentioned. The fact that you can borrow less. For example, if you’ve got a 500,000 pound average property price in London, generally the most you can borrow to buy that property’s about 300,000. So you’re applying 200,000 pounds which is a lot of money to one single property, and that will probably only just be breaking even.

So therefore, you’re investing solely for growth, in a market that’s already [inaudible 00:14:12] really well from a growth perspective. Which, in my mind doesn’t make a lot of sense.

However, you could take that 100,000 pounds and you split it into two, and buy two 200,000 pound properties in the likes of Birmingham, Manchester or Liverpool. Centrally located, desirable properties in desirable locations where your yields are double that of London. So overall, form a net yield perspective, you’d be doing quite well, and again, in my opinion, you’ll probably do better over the next few years from a growth perspective as well.

Bryony Billson: Interesting. You were nodding along there.

John Howard: I am nodding. Paul makes a lot of sense.

Bryony Billson: Yes.

John Howard: As always. I would agree with him on the yield and everything else. Not so sure, I might agree with Steven on the growth, the London growth. But you have to make a choice, do you want growth, capital growth, or do you want income? So, the North normally is more income, and the capital growth is down South. As a very broad basis.

Bryony Billson: So John, question from one of our viewers.

We currently live in a house which occupies a plot of around 1.5 acres in a small village. Recently, there’s been a lot of redevelopment in the neighboring village. Developers of around 10 houses. If we wanted to, what would be the best way to proceed with looking to develop this in a similar way?

John Howard: Okay. Well, first of all, there’s an awful lot of development like this going on at the moment across the U.K. and it’s become a lot easier than it was.

Bryony Billson: Okay.

John Howard: The first thing to do is get ahold of a planning consultant. Ask him to pop out for a cup of tea. Hopefully the first initial meeting will be free, hopefully. Biscuits would help, I’m sure. Let him have a look, or her, look at the land and see what they think.

Try to produce a site plan, you can get one off the land registry or whatever. An ordinate survey plan, so when they come, they’ve got something to look at, plan wise. And then it may well be that they consider putting in a preapplication to the council, in which case they’ll do that for you. And there’s sometimes a charge for that. Sometimes there isn’t. The council should come back within 28 days with their opinion of whether it can be built on or not.

Bryony Billson: Okay.

John Howard: So that’s the basis to go with. Now sometimes, people think, okay well, I’ve got a house here. I can cut my garden off and just build on the land of the side. Which is great if you want to stay there. But don’t forget, there can be a lot of building work going on if you do that. There’s tax implications, which I’m certain Paul will jump in on in a moment. Also, you’ve got to remember that the house you’re keeping will go down in value substantially because of what’s going on next door to you.

Bryony Billson: Hmm.

John Howard: By then.

Bryony Billson: Hmm. Okay. Was there anything, Paul that you wanted to add to that?

Paul Mahoney: Not particularly, you covered it quite well.

John Howard: I just think in terms of tax, you’ve got the situation where, if you’ve got your own house-

Paul Mahoney: Yeah.

John Howard: … but if you sell the land all separately, you could get taxed on the land, would that be right?

Paul Mahoney: Yeah.

John Howard: You won’t get taxed on the home, but of course it depends which way you do it. You need to take some tax advice from the council.

Bryony Billson: Hmm.

John Howard: As well.

Bryony Billson: And also, presumably it’s actually quite hard to get planning permission in rural areas, in a village. To-

John Howard: Well it’s a lot easier than it was.

Bryony Billson: Okay.

John Howard: So, have a go, have a look. But take some professional advice.

Steven Galpin: I think the only thing just to remember though, is if you part with part of your land-

John Howard: Yup.

Steven Galpin: You’ve probably bought there because you enjoyed the privacy, you enjoyed the land, everything else, and you’re going to have somebody living on your bit of land that you previously owned, who you’ve got no control over. So, you’ve lost some of your privacy, you’ve lost some of the advantages. On the other hand, you have got some money. But it is a balance.

John Howard: T’is a balance. Yeah. And actually, sometimes, not always, but sometimes, unless you can get quite a few properties on the land next door, you’ve lost so much by selling it, that the house you’re keeping is worth so much less, that actually, there’s not much in it.

Bryony Billson: Hmm.

John Howard: So just because you can get plannings, sometimes, not always the best thing to do.

Bryony Billson: That’s something we’ve discussed in previous episodes, is actually about that. Being quite clear, is this your home?

John Howard: Yes.

Bryony Billson: Is this where you want to live for a long time? Do you love it and value it for what it is, for you and your family? Or is this a business decision? Is this about investing?

John Howard: But, I mean, it can be great for a family because they can then perhaps help the children buy, get on housing ladder. It’s a personal decision to them.

Bryony Billson: Yeah.

John Howard: The first thing though, is find out if you can build or not. Because if you can’t do it, it’s a waste of time anyway talking about it. So find out first, then make that decision.

Bryony Billson: So next question is for you, Steven. I exchanged contracts on an apartment I’m buying as an investment to rent out in January and paid in full. Then, I visited the property. It’s a brand new renovated building, so I saw it just before they finished it. Since then, my lawyer’s been saying there’s problems with the sellers finance and they can’t complete. I have found out that there are tenants living in the apartment. What can I do?

Steven Galpin: Wow.

Bryony Billson: Panic?

Steven Galpin: A long chat with the lawyer’s going to be needed here.

John Howard: Yes.

Steven Galpin: Little bit confused there, I don’t know what they mean by, I paid in full. I’m going to presume that they paid the deposit in full.

Bryony Billson: Yes.

Steven Galpin: Which would have been a 10%. Now, after you’ve paid your 10% deposit, usually you have 28 days after before completion. Obviously, the other side have come back to the lawyer and said, “Well, look, we’ve got a difficulty with tenants.” But again, I’m a little bit confused because they said they looked at the building, at the point of exchange. Presumably, there were no tenants in it then, if it was being refurbished, so where have these tenants come from? I’m not quite sure about it, I don’t know if whether my colleagues picked anything up there.

Paul Mahoney: There’s a few options.

John Howard: A few options. I imagine they’re short on money, the developer, so [inaudible 00:20:03] to tenants.

Steven Galpin: See that’s what I was coming to next. Again, the developer being short of money or having a problem with his finances would indicate that he’s probably not finished it properly, he’s not got vacant possession of the whole building as he should have.

What do you remedy? Well, the simple contractual answer is that you give notice to complete, which gives them a number of days in which to complete. After which, you’re entitled to dmamages. Now, whether that’s the right course of action for this operation, I don’t know. I would start to talk to the lawyer about coming out of this transaction I think. I don’t like the sound of it. If you’ve got a freeholder who is behaving like this at the point of sale, heaven knows what he’s going to behave like-

John Howard: Make it worse.

Steven Galpin: Yeah, you know, later on, we’re talking about property management. Well, you know property management is pretty passive, but if you’ve got a bad freeholder, it’s bad news.

Bryony Billson: Mm.

Steven Galpin: So, I would go back to the lawyer, I would look at options, probably a notice to complete will flush the issue out.

John Howard: Yes.

Steven Galpin: I think that’s the key. You’ve got to take the sort of high ground-

John Howard: I think you’ve got to be tough and I think you need to serve the notice. Give them so many days in which to complete. On the basis of that, you can also say to them, “We’d really rather have our money back, to be honest with you.” And that’s probably the best way out of it. Get the 10% deposit back. Whether you can get your solicitors fees back or not… difficult.

Bryony Billson: Hmm.

Paul Mahoney: Depending on how long has lapsed-

John Howard: Yes.

Paul Mahoney: … between when they exchanged-

John Howard: Yeah.

Paul Mahoney: … as well. That there should be a [inaudible 00:21:45] date in place.

John Howard: Yes.

Steven Galpin: Yeah. When I’m giving notice to complete I think you’re entitled to put in your legal costs.

John Howard: You are, but whether you’ll get them or not’s another…

Steven Galpin: [inaudible 00:21:54] Yeah.

John Howard: If the developer’s in trouble, luckily, the 10% should be held by the other side’s solicitors. So, as long as they’ve done that, and held the money, the deposit is there and safe. So you should get that back. As for costs, very difficult without going to court.

Paul Mahoney: It doesn’t particularly help this person, but it does definitely highlight the importance of thorough due diligence on a developer when you’re buying off plan.

John Howard: Yes.

Paul Mahoney: That is partially the solicitors responsibility. However, solicitors, unfortunately, aren’t inherently commercially minded. So they will do some checks and things, but it’s probably worth working with someone, an advisor or whatever it may be, that understands this type of buying, and can give you guidance on what to look for and what to avoid. You mentioned about the deposit being 10%, well an actual fact, outside of London, deposits are more like 20-30%. And in some cases, they can be up to 80% over the build. Now the ladder is something to completely avoid. Because that means you’re essentially funding the whole build.

Steven Galpin: It won’t be that on a refurbishment, Paul.

Paul Mahoney: Generally not, no. Not usually, but-

John Howard: Traditionally, it’s 10%.

Paul Mahoney: Yeah.

Bryony Billson: Okay.

Paul Mahoney: But understanding you know, what the deposit is, does it make sense? Is it protected? How is it protected? How is it released to the developer? How is it held in escrow? There’s a number of different things to understand that protects you as the buyer.

Bryony Billson: Hmm. And I think having those protections there are particularly important, especially when we’ve talked before about removing the emotional element, keeping that business mindset, yes maybe you need some of that emotion to help with the right judgment call on when to step out of a project. But, I think protected from the start-

Steven Galpin: I think Paul’s right about another point as well, solicitors are not always commercially minded. When you buy a property like this, usually you’ll have a report on title. Which will be very technical. It will tell you whether it’s in a flood plane, it will tell you if the planning commissioner’s been properly sorted, whether building regulations have been applied for and granted, et cetera, et cetera. But it won’t actually tell you if it’s a good deal or if the developer’s okay. That’s really down to you, and this is again, the business aspect of property.

Bryony Billson: Well, I feel like we could talk about this topic all day long, but unfortunately, we have run out of time today. Thank you so much to all three of you for sharing so much information and advice to our viewers at home.

Thank you to you for watching and we’ll see you soon.

Speaker 5: If you have any questions that you would like to send to any of our experts at Property Question Time, you can submit them via our website, on social media, or email us at info@propertytelevision.co.uk or email us on info@propertytelevision.co.uk.

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