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  • Property Prices

    "A bad property deal is like a bad haircut ... it will grow out" ... or will it?

    I met some property investing friends for lunch yesterday as they wanted to run a problem by me.

    They have three flats in Sheffield that they bought through a deal sourcer in 2006.

    All three flats are in negative cash flow and negative equity.

    Here are the numbers:

    Market value of the flats : £96K (an identical one sold recently).

    Mortgage on flats: £126K (so £30K negative equity)

    Monthly mortgage payment: £620 each

    Monthly rent: £450 each (so in negative cash flow to the tune of £170 per month each before service charges, repairs, voids etc).

    They wanted advice on how to dispose of these flats as they were subsidising them by £510 per month before factoring in service charges etc.

    I advised them to look into Rent to Buy, although the numbers are not favourable to this.

    I suggested that they let out a room in their house (they would get £600 per month) to pay the shortfall.

    I suggested they buy a high yielding holiday let to subsidise the shortfall.

    They are retired but have £650K equity in their own home and I put them in touch with a trusted mortgage broker to find out about equity release.

    There is an old saying that "a bad property deal is like a bad haircut ... it will grow out in time".

    [Image: 683402-bad-mugshot-haircuts.jpg]

    I am not sure this is the case anymore due to stagnant capital growth and further possible declines in house prices on the horizon.

    What advice would you give this couple of how to minimise the damage of these properties?

    Could they approach the lender about a "haircut" for all three?!?!
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    Could they approach the lender about a "haircut" for all three?!?!

    .... in principle they could but it depends which lender it is.
    • If they have a loan with a commercial lender, then probably yes
    • If they have mortgages with different BTL lenders, they most likely wont be interested in taking a haircut
    • If they have a mortgages with Mortgage Express or what is now NRAM, they have no chance


    Kevin Wright
    07889 526979
    kevinwright@thinkpositive.co.uk
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    Kevin Wright
    07889 526979
    kevinwright@thinkpositively.co.uk
    Vanessa and others,

    I would say there are 5 major themes to check when looking at a deal. Condition, price vs. value, motivation, location and financing. Only location is really out of the buyer's / owner's control. Rarely will a bad location become better with time. It can happen when there is a change in the infrastructure or a general gentrification. In general waiting for such a change is a bad idea as there are other locations that are worth focusing on.

    With the exception of location, I would say that time can heal a number of sins.

    A simple one for me is negative equity. People talk about it like it is a problem without a context. All it means is the person borrowed more than the asset is worth. You can fix it by paying down the debt. You can avoid it by using a large deposit or paying all cash. Negative equity is relative. If you do not have an intention to sell, negative equity is not much of an issue. Most people who buy a new car have negative equity from the day they drive the car home. They rarely think about it but if the house is in negative equity nightmares are imagined.

    Time provides an opportunity to correct the problem. Or it could provide time for the problem to fester. Time gives the owner a choice. People need to grab the bull by the horns and deal with the situation. That could mean paying down the debt over time or waiting for rents to rise. Or it could mean selling now as there is no logic to waiting for things that can not change to change.
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    John Corey 


    I host the London Real Estate Meet on the 2nd Tuesday of every month since 2005. If you have never been before, email me for the 'new visitor' link.

    PropertyFortress.com/Events

    Also happy to chat on the phone. Pay It Forward; my way of giving back through sharing. Click on the link: PropertyFortress.com/Ask-John to book a time. I will call you at the time you selected. Nothing to buy. Just be prepared with your questions so we can use the 20 minutes wisely.

    Hi V

    I'm probably the last person to comment on hair cuts as I now get charged by the minute by my barber.To increase their income could they rent per room instead and would that give them a greater return on the rent?

    If the loans are with a mainstream BTL lender then the chances of a haircut are slim. Usually only with commercial loans or a lender looking to exit the market and close down.With the equity in the background it would be doubtful. Also by mentioning it to lender you are then on the radar and if they refuse they could force you to sell or put capital in and then remortgage.
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    Regards Simon Searchlight Finance

    Fulfil Your Property Ambitions

    01565 654005

    Searchlight Finance Ltd is authorised and regulated by the Financial Conduct Authority reference 743220.

    HMO Finance I Complex BTL I Bridging Finance I Development Finance

    Buy to Let I Portfolio Finance I Commercial Mortgages

    West Bromwich are owend by the Bank of Ireland. They are closed to new business and are in the process of running down their mortgage book.

    As they are not a commerical lender they have no track record in accepting reduced settlements. However, it doesn't mean that you can''t contact them to explain your circumstances and see if they will play ball.

    The outcome you would want is to sell off the properties, West Bromwich to receive the full proceeds and their agreement to write off any shortfall
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    Kevin Wright
    07889 526979
    kevinwright@thinkpositively.co.uk
    An alternative that might work for some lenders who do not wish to crystalize a loss is to restructure the payments. Lengthen the term, switch to repayment when the income rises sufficiently and other ways to get the loan to match the long term income stream can make sense.

    A lender might even be willing to take short fall on a loan if they can add a charge to the primary residence.

    What a lender will do and what is in the best interest of the borrower will vary. At some level both sides have to have a reason for compromising and accepting less than a perfect solution. Normally this happens when things have gone so bad that the likely future state is worse that the alternative on offer. One in the hand being worth two in the bush. Other times the lender is not able to do anything other than repossess later as the owners of the loan book have other concerns that are overriding a pragmatic solution for the one borrower. Moral hazard is one. The politics of a haircut on a specific manager's or politician's watch is another. Kicking it down the road could be the better short term solution for a lender being wound down.
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    John Corey 


    I host the London Real Estate Meet on the 2nd Tuesday of every month since 2005. If you have never been before, email me for the 'new visitor' link.

    PropertyFortress.com/Events

    Also happy to chat on the phone. Pay It Forward; my way of giving back through sharing. Click on the link: PropertyFortress.com/Ask-John to book a time. I will call you at the time you selected. Nothing to buy. Just be prepared with your questions so we can use the 20 minutes wisely.

    (30-10-2012 12:10 PM)john_corey Wrote:  An alternative that might work for some lenders who do not wish to crystalize a loss is to restructure the payments. Lengthen the term, switch to repayment when the income rises sufficiently and other ways to get the loan to match the long term income stream can make sense.

    A lender might even be willing to take short fall on a loan if they can add a charge to the primary residence.

    What a lender will do and what is in the best interest of the borrower will vary. At some level both sides have to have a reason for compromising and accepting less than a perfect solution. Normally this happens when things have gone so bad that the likely future state is worse that the alternative on offer. One in the hand being worth two in the bush. Other times the lender is not able to do anything other than repossess later as the owners of the loan book have other concerns that are overriding a pragmatic solution for the one borrower. Moral hazard is one. The politics of a haircut on a specific manager's or politician's watch is another. Kicking it down the road could be the better short term solution for a lender being wound down.
    I guess it depends on their long/short term targets.. I believe house prices very long term (10 years+) will be higher - however in the short term I think they'll move sideways or fall - good as it allow me to buy more properties over next five years.

    However if they cant wait that long and continue to subsidise their properties then they should sell asap as I personally think interest rates will rise over next few years making their shortfall even higher.

    Hard to understand with interest rates being so low why they are in such negative cash flow - big miscalculation of rents or did something happen locally to make rents fall?
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    The only thing I can think of is to balance up the cost of subsiding the flats until they regain positive equity again - a guesstimate - vs selling in the short term. Are they likely to lose more by holding and subsidising than by selling?

    If they're in no rush to sell and can afford the subsidy there is an argument to keep the status quo. Depends on their timescales to a degree.

    Might be worth them trying to source another genuine BMV or 2 - if they have the funds - to go some way to rebalancing the loss on these. The "swings and roundabouts" or "win some, lose some" approach.

    J.
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    Jayne Owen @jayneowen

    Editor and Writer: Your Property Network magazine

    Investor: Mozaique Property, South & West Wales and South West England

    Occasional reviewer at The Property Bookshop (@Property_Books)

    This is an interesting thread. In answer to will time forgive a property mistake? who knows?

    As to what these owners can do I think John has the best plan, switch to repayment if they can afford to do so and see it as a long term pension investment.

    If they can't afford to do this then they are stuck and have a choice of selling now and swallowing the loss or gradually bleeding for the next who knows how many years.
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    Editor of Your Property Network Magazine
    Leading property resource for UK investors.
    Grab a FREE copy of YPN at http://bit.ly/YPNfree
    Sometimes you' ve just got to accept your mistake, take your medicine and walk away.

    If they are subsidising to the tune of £6k a year (before service charges and I'm assuming before voids, maintenance etc) then over the next 10 years that's minimum 60k before maintenance, voids,replacement of old kitchens and bathroooms etc and any rate rises.

    And in 10 years, they may be worth the same or less so they will have to take another £60k + hit then.

    They are yielding 4% on what they owe, I'm assuming they put a hefty deposit in so yield will have been below 4% (no doubt told would rent for £1k per month).

    They'd be better taking the pain, refinancing some equity, and purchasing 10%+ yielding properties that will help reduce their hit over the next 10 years rather than cling to the vain hope of massive price rises to fix their poor haircut which is only likely to make their loss greater.
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