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Thought I would share an experience I have had, in the hope that those of you out there, can go into similar transactions with your eyes wide open.
3 Years ago I bought an Offplan Unit in Manchester, with the expectation that it would be finished in Q1 2017. Here we are in Q4 of 2018, and still I wait.
It is apparently nearing completion and so I have started to line up financing. BUT, I am met with a dead end. None of the banks will touch it, just one, provided I am willing to pay a 3,000 arrangement fee plus a 6.5% interest rate!
The reason? It was sold with an attached rental guarantee (Net Yield of 6% for 12M). While I thought this was a good thing, the banks won't touch it because in the event of me not being able to make my mortgage payments, the bank will not be able to get the property back because the 'tenant' is a corporate entity, the developer Fortis.
In addition, with the development (Adelphi Wharf) being marketed as a BTL, the concern of the banks is that on completion, many will sell, causing prices to collapse with Supply outstripping Demand.
According to the mortgage broker I spoke with, my best chance of securing a mortgage is to have the Rent Guarantee removed! BUT this would not be smart, as it's a big development with hundreds of units coming on stream at the same time, and it may prove difficult to let, especially with a 2nd and 3rd Phase being built at the same time (it still looks like a construction site).
So, I have parted with 50% of the purchase price (122k) nearly 3 years ago (on exchange) which has been dead capital earning no return. Now, I am going to have to stump up the remaining 61k in cash with no leverage on the investment, making it an extremely poor return on capital. Of course, I may see an uplift in Capital Value but that remains to be seen.
Let this be a warning to many of you out there! Thankfully I am in a position where I can fund the remaining 50% in cash, otherwise I would be in a very tough situation indeed!
Instead of "Rent Guarantees" in general, its "Vendor Rental Guarantees" that should be wary of. (the former is good insurance a landlord can get to protect themselves, the latter is a vendor incentive).
Yes - have seen this.
If a property needs 12 month rental guarantee in order to sell, what is the actual market value, if the lender has to take possession.Then you have the issue that the vendor may not honour the rental guarantee.Then you start thinking - why would any of the flats in the block rent out the property if they have guaranteed rent (and no tenant damage).Then you think - wont there be mass sales in 12 months or over saturation of rents.Then the underwriter gets concerned.
P.S. I am not sure your broker is correct about nullifying the rental guarantee. As others in the block will still have the issue.
I know an adviser got one of these cases over the line recently, will have a word with him for some insight.
_________________________________________________________________________The above post is not financial advice, its often me rambling - passing time on a coffee break.If you are looking for the Best BTL Mortgage? Call the Specialist Team at Bespoke Finance._________________________________________________________________________
Adam, you're right of course and I should have made that distinction in the title.
I am not sure what you mean by "why would any of the flats in the block rent out the property is they have guaranteed rent". The vendor company (Fortis) would rent out the properties via their management company to recoup the rental that they paid out to the buyers. They would surely minimise the outlay for themselves.
If you do have any further insight from that advisor I would be all ears.
This project is so late being completed, I will just be relieved that there is actually something finished at the end of the day!
It seems I am going to have to own this for longer than I might have ordinarily wanted. Of course, I would have a trouble selling it on completion while the rent guarantee is in place because any prospective buyer is also going to have the same mortgage issues.
Lesson learned! Never again
Thanks for the heads up. makes sobering reading.
It appears 132 of the 580 units have been sold Off Plan
One Re-Sale being advertised on Rightmove
2 bedroom flat for saleAdelphi Wharf, Adelphi Street, Salford, M3 6ENOffers Over £179,995
Gross rent: £9,000 Ground rent: £345 Service charge: £840 Lettings fees: £345 Net income: £7,470 Gross yield: 5% Net yield: 4.15%
Although Letting fees I would have expected min 10% of Gross Rent £900 lowering yield further
That's interesting about the 132 units being sold of the 580. I wonder whether this means the developer struggled to sell the rest or whether additional sales were deliberately held back in order for them to realise maximum value on sale.
I have just been in touch with the selling agent Knight Knox, and they informed me that Rightmove is out of date and only reflects Phase 1. All 3 phases were sold prior to the launch of Phase 2.
The joys of buying off plan. Hope it all works out for you financially. I'm sure you won't be the last investor to encounter difficulties, especially up in Manchester, Salford and Liverpool areas where large developments are popping up.
The photo of the living room looks quite narrow. The sofa is offset from the coffee table and TV unit to give the illusion of space.
Yes I noticed that too! Couldn't swing the proverbial cat in there. That's another thing with buying off-plan, they have their room dimensions when selling but as far as I am aware, there is an allowable tolerance level when they are actually built, meaning the flat could be smaller than one imagines.What is worrying is that the one photographed here is the "show apartment" so surely one of the better ones!
I agree with Adam Hosker regarding the vendor rental guarantee in that it's usually just a vendor incentive. Think of it as nothing to do with actual renting but it's a discount on the purchase price. Say the gross rent (under whatever their terms are) is £9k for the 12 months. Think of this as you are getting £9k off the purchase price. It's likely that the £9k was added to the value anyway to determine the selling price at the start (so you're likely to be paying for it in one way or another). It's marketed as a rental guarantee (instead of just a discount) because it will give you a warm fuzzy feeling that you don't have to worry about the rent in the first year when all the apartments go live. However, with no incentive to rent out it's just delaying the problem for 12 months but by then the developer should be well out of it. It's unlikely the developer will try to rent the apartments as it will be too much hassle and he should have already factored this 'discount' into his profit margin anyway.
I completely agree with this assessment. Here at Property Tribes, we have always warned about these developer rental guarantees, as they are often just added to the price, so your own money is paid back to you in instalments of so-called "rent". On occasion, the developer goes bust and the rental payments stop. There is nothing really guaranteed about it, other than you likely over-paid for a property and will be fighting for tenants when all the units come on-stream.Thanks to the original poster for sharing their experience - the lender angle is not one I have heard of before - so an added problem with these types of vendor rental guarantees.
Vanessa Warwick Landlord and Co-Founder of PropertyTribes.com **If you have got value from Property Tribes, find out how you can support it in remaining a free to use community resource**