Landlords Hidden Negative Equity – UK Property Investment Debate

I read over the weekend about the very sorry affair of a novice female landlord. This newbie landlord’s problems began back in 2003 when she was enticed at a ‘property seminar’ by the promise of a ‘fast buck’ to invest in 4 ‘off plan’ buy-to-let properties. Now this poor landlord is facing financial ruin as one by one the buy-to-let mortgage companies have repossessed her buy-to-let investments.

This landlord’s problems were three fold:

1. The rents the landlord was promised by the sales staff were never realised.

2. The landlord’s unrealistic rental expectations resulted in her holding out for too high rents which she never obtained, as a result she incurred high voids (her properties were only let for 70-80% of the time).

3. The prices that the landlord bought at even with an alleged discount were considerably above any realistic market value. The result is a significant capital loss when the properties are finally sold; this is likely to be in the order of 30-40%.

In addition to these direct problems with the landlord’s buy-to-let property portfolio, the landlord also borrowed money to pay the mortgages on her properties when they were empty. This additional borrowing now totals some £100,000.

I suspect that this poor lady landlord is not alone amongst landlords. I am careful to point out that I along with the rest of the team at Property Hawk have been strongly advising landlords to steer clear of this type of ‘discounted’ off-plan investments from the beginning. Sadly some landlords have already circum to the sales pitch. PLEASE DON’T FALL FOR IT!

All this prompted me to think, what would I do if I was confronted with this situation?

PLAN OF ACTION

Firstly, the solution to any problem starts with the fact that you as a landlord accept that there is a problem. Too many newbie landlords are still in denial. They bought a buy-to-let 2 bed apartment say 3 years ago for £150,000. “Everybody knows that house prices have been going up”.

Therefore it is worth at least £150,000, probably a bit more. The reality is unless a landlord has bought in London, this is very unlikely to be the case. The glut of new build ‘luxury’ buy-to-let apartments has meant that supply outstrips demand and this continues to depress values.

Therefore a landlord needs to get an accurate value of what their property investment is really worth. On the face of it this is not difficult. Thanks to the land registry there are now numerous websites where a landlord can get the prices for actual sales in or around their property. I would suggest Our Property as one of the best.

However, landlords should be aware that where properties were sold with a discount, the list price and not the discounted or actual sales price is often shown. Otherwise get a couple of local estate agents to give you a value and ask them to price it to sell. Agents will otherwise tell you, their prospective client what you want to hear to get your business. This is not necessarily the hard truth. After this process, you as the landlord and buy-to-let property owner will need to sit down and face up to how you are going to approach your hidden negative equity.

I’ll just hand back the keys!

Some landlord’s think that getting rid of their buy-to-let negative equity is as easy as just handing back the keys for their residential investment to their buy-to-let mortgage company. That way the residential investment property is no longer their problem.

“The buy-to-let mortgage company can sort it out!”

Again, unfortunately wrong. The buy-to-let mortgage company will indeed eventually repossess a landlord’s buy-to-let investment if a landlord stops paying the buy-to-let mortgage. The buy-to-let mortgage company will then sell the landlord’s residential investment property. However, an empty buy-to-let apartment which the market knows is a forced sale, probably sold at auction mean that the chances are that the buy-to-let property will be bought by another buy-to-let investor who will scrutinise the investment figures and will be looking for a property bargain (BMV property).

The chances are in this case that a buy-to-let investment property will not even get looked at by 90% of property buyers who are owner / occupiers. Not only do owner / occupiers make up the bulk of prospective purchasers but also are likely to pay more. This is because they are ultimately looking for a home and therefore are not constrained by financial returns in the way that buy-to-let investors are. The outcome of a forced sale by the buy-to-let mortgage company of a landlord’s investment property is that the landlord is likely to get less for their buy-to-let investment than if they were in control of the selling process.

How does a landlord secure a property bargain?

The reality is that the buy-to-let mortgage company is not overly bothered about getting the top price, particularly where they can easily recoup their mortgage advance. Their aim is simple, to sell the repossessed buy-to-let investment property as soon as they can. Once the buy-to-let mortgage company has sold the residential investment property they will present the landlord with a bill. This demand will include any shortfall in the repayment of the outstanding buy-to-let mortgage, missed buy-to-let mortgage payments and charges and expenses incurred in disposing of the residential investment property. These charges are likely to be significant and the total demand from the buy-to-let mortgage company could easily run into tens of thousands of pounds. A sum that is likely to take a property investor many, many years to pay off.

A landlord’s best options

The best option for a landlord in this unfortunate situation is firstly having faced the facts is to take control. A landlord should use their realistic valuations for their buy-to-let investment to work out how much their negative equity is. Then, a landlord needs to work out a strategy to start repaying it. This may not be easy. Many landlords on interest only mortgages are already struggling to meet their buy-to-let mortgage repayments. However, I would suggest that a landlord should consider these four points:

1. Landlords should look for is a low Annual Percentage Rate (APR). This will ensure that they minimise the payments necessary over the period of the loan. It is possible to get APRs in the low 6%.

2. Landlords should consider using any savings to make a one off over payment on their buy-to-let mortgage account and reduce their negative equity that way.

3. If a landlord has a mortgage on their home it may well be that they can re-mortgage their domestic property at a better interest rate and use these funds to part repay their buy-to-let mortgage thereby wiping out their negative equity.

4. The best way for me is if a landlord’s rents are strong is to convert their loan from all interest only to part repayment. This way the landlord can use the cash generative quality of their buy-to-let property investment to slowly repay any negative equity.

Inaction is not an option.

One thing I would strongly advice landlords in this unfortunate situation is not to ignore it. It is not going to be tempered by fast rising house prices as has happened in previous years. Therefore a landlord should ‘face the music’, take advice from professionals mortgage consultants on their options and above all ensure that they pay off their negative equity to give them as a landlord and property investor a secure long-term and sustainable property investment.

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