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  • Debt & Negative Equity

    Distressed landlord Case Settlement & Process

    Following on from my previous post where I introduced CD Fairfield Capital as a company and our property debt resolutions brands, my next posts are case studies, real-life client situations we have dealt with and resolved.

    Our Professional Landlord client approached us via our website for advice. For the sake of anonymity, we shall call him Bob. Bob had overextended his borrowing,  purchasing 35 properties since 2004, refinancing several times to raise deposit funds for further purchases and so on. The challenges he was facing were:

    • Interest rate rises (2x 0.25% Bank of England rate rises since we initially took instruction – all mortgages on variable rates
    • The financial impact of Section 24 taxation;
    • Bob’s age, 53 – all mortgages were interested only with varying expiry dates (2019 – 2031); there were no repayment vehicles in place
    • Miscellaneous costs such as rental void periods, repairs and maintenance, management fees

    The Financials;

    Portfolio Value:                                   £5.12m

    Outstanding Debt:                              £5.93m

    Expected Shortfall/Negative Equity: £810,000

    Total Debt Written Off:                      £696,000

    Total Settlement:                                £114,000

    There was a combination of properties with equity and those insignificant negative equity.

    Bob told us the catalyst for contacting us was a combination of unplanned repair bills and the realisation that any further interest rate rises deemed the portfolio unprofitable as his cash-flow position was already precarious (up until that point it had always made a profit, albeit a rather modest one).

    There was also a serious concern for the family home. This property is also mortgaged, owned jointly with Bob’s wife and has significant equity.

    Once instructed, we completed a detailed review to include:

    • Recalling all lender documentation (15 lenders) to review their security
    • Achieving an accurate Statement of Affairs and considering all relevant client documentation
    • Portfolio Valuation – 35 individual reports

    After concluding this work, the following was evident:

    • As Bob had suspected the portfolio was untenable; despite there being some cash available, any combination of the challenges highlighted would quickly absorb this reserve.
    • Some lenders had the right to consolidate against the equity in other properties if sold.
    • This venture would become loss-making Q4 2018 or Q1 2019, and significantly so.

    The recommendation was made that all properties were to be sold except for the family home (this is not always the case). The Move With Us (link) network was appointed to address the asset management element of the case (various agents and locations through England and Wales) to commence in line with each lender’s specification.

    As the majority of the properties were tenanted, management contract extensions were agreed (where applicable) to ensure consistency with incoming rent, and the properties marketed.

    While marketing was ongoing, we provided all lender representation for Bob. Further to this a bespoke shortfall settlement package was offered and accepted on a pari passu basis amongst the lenders (in this case an IVA); the highlights being:

    • Bob retained his family home; we negotiated new terms with his existing lender on a full repayment basis (had previously been interest only)
    • Bob avoided bankruptcy
    • The equity from the properties sold above the loan value formed part of the settlement (£74,000)
    • Bob also added £40,000 - a combination of his savings and gifted funds from family to this sum, i.e. total settlement paid £114,000, total debt written off £696,000
    • Our total fee for this work was £37,500 (typical fee for addressing a single property and settlement is £4,000; average shortfall debt write-off is £70,000+)
    • The timeframe from instruction to conclusion circa 18 months

    The above case type is common. We receive dozens of enquiries per week from Landlords with similar circumstances and varying portfolio sizes, geographical locations and levels of equity. It’s often the case that the Landlord has already spoken to the lender(s), the Accountant, a Financial Adviser, Solicitor and/or an Insolvency Practitioner unfamiliar with the intricacies of individual lender shortfall policy.

    We are the ONLY company of our type in the UK with the expertise, regulation, lender relationships and track record to complete complex, multi-faceted cases of this type in a commercial and client-focused manner.

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    Firstly, how on earth did this chap manage to get so many mortgages ? Secondly, what on earth was his model, and did he not factor in "downside"  Finally, section 24, is going to destroy many LL like this and the Auction houses must be rubbing their hands with all the "pending" business.

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    Hi Timmy

    Unfortunately, this case isn’t unusual. We’ve had clients with 100+ mortgages. It is not our role to judge, rather be empathetic and solution focused. I assume that the portfolio had very significant equity at a time, hence the ability to raise additional funds and grow exponentially.

    I totally agree Section 24 is bad news for everyone (except the coffers of the Treasury!).

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