It’s not ideal to have to view the World through the eyes of a suspicious cynic and one could argue that all elements of society have unscrupulous elements but it was shocking as the credit crunch unfolded how many professional bodies were caught up in the fraud backlash. Solicitors and Surveyors were in the firing line in increasing numbers as lenders sought to recoup losses. A recent court case proves that landlords might not have that option which is worrying in itself.
The Discount That Never Was & The Unrealistic Rent That Would Never Be Received
To fully understand some of the issues we have to look back to the many, many ‘property clubs’ that sprung up and ran seminars across the country preaching millionaire property investment plans. A number of incentives were offered ranging from 20+% ‘discounts’ on properties and ‘guaranteed rent’ for fixed periods such as two years. This was often negotiated with the developer on a huge portion of the development which was then sold off plan through the club to members. Naturally not all clubs were any kind of scam but many exploited a number of loopholes and were supported by questionable behaviour from inside professional groups.
Imagine now a situation where you are asked to value a property. So far 100% of the units have been sold through a club at a 20%+ discount (not one single unit sold to anyone at full price yet) and the full price is based on an ever growing property market (over 15% per annum at one point). You decide that of course these will sell at full price and value them up at the projected price and the club buyer then can put either a very small or no deposit down on the property.
At such a high loan to value the ‘market’ rent one would see in the very same geographic area would be way off the requirement for the loan. Luckily this property comes with a guaranteed rent from the developer which is more than enough to meet the lender’s requirement. Since this is fixed for two years and this brand new exciting development is in an up and coming area where some offices and all sorts of things like rail and tram links are planned you think it’s possible this will be the rent in future (despite nowhere nearby being anywhere near this much) and you value it up accordingly allowing the lender to lend.
How It All Went Wrong
With hindsight my comments above may seem alarming – but at the time no doubt they felt in the face of the ‘evidence’ and the huge pressure on them from just about every element on society to believe the story of ever increasing property prices as well as typical ‘broker mentality’ (read some stock analyst’s predictions and you’ll see what I mean).
A few years later and often at the same time as these landlords were taking over these properties the new units were also being offered at huge discounts to first time buyers. Sometimes new developments had sprung up in the same city with units going for 40% less than the landlords had paid. After the two years had elapsed the rent was often not enough to cover the mortgage and plunged into negative equity during a bear market for property in the UK things didn’t look so rosy for our budding property millionaires.
Let’s Sue the Messenger! – Why Landlords Aren’t Protected
Lenders were quick to turn on the valuers. It was seen as unacceptable that in some cases these apparently unsubstantiated rents and valuations were used and a number of big valuation groups made provisions in their accounts and statements to the market to prepare for possible compensation whilst maintaining a combative public position against the claims. Buy to let investors were unable to join the party however.
On June 17th the court ruled that valuers do not owe the same duty of care to buy-to-let investors as residential buyers.Natalie Thomas – Mortgage Strategy Magazine
The courts take a view that as an investor you have to take your own advice and use your own experience when assessing your investments. The valuer is simply providing a report to the lender (remember the lender in fact instructed this for their purposes and not yours). It’s vitally important that you do thorough research into the region as well as the yields on the property type you are interested in. Before you hand over thousands to get access to tons of secret discounts and clues to becoming a millionaire try ringing up some developers yourself and you’ll soon find these discounts aren’t so secret or hard to come by after all. Remember as well if something seems too easy then some more research is almost certainly required on your part before you sign up.