Earlier this year, the Guardian newspaper asked its readers to nominate words and phrases which should be erased from the English language. One of the most popular suggestions was the word gobsmacked. One reader, Anna Newton, wrote that “the sheer ugliness and implied violence of the word makes me shudder with revulsion”. I couldn’t agree more.

However, when I found out last week about a little known mortgage restriction which some of the major lenders are imposing, I’m glad the word was still at my disposal. Otherwise I’d have absolutely no idea how to describe my reaction. I was absolutely gobsmacked!

We’ve all become accustomed to the funding restrictions imposed as a result of the credit squeeze… the restrictions on loan-to-value ratios, limits on the number of properties you can own, higher interest rates, increased arrangement fees, longer tie-in periods, stricter credit checks. I can appreciate the reasons behind the measures and I’ve found ways to work around the various hurdles so I can continue to invest in property despite the squeeze. Recently there have been signs that the worst may be over and that some of the rules were slowly being relaxed. But the events of last week prove that we’ve still got a very long way to go before we can hope for a return to ‘normal’ lending.

I’ve been helping a friend of mine who’s taking his first tentative steps into the world of property investment. We sourced a property in need of substantial refurbishment. We did our research, estimated the cost of the renovation work, confirmed the potential sale value, calculated the maximum amount we should pay at auction and obtained approval for a bridging loan. The big day arrived and when the hammer came down we’d successfully bought the house for substantially less than our self-imposed maximum, bagging ourselves a bargain well below market value.

The purchase went smoothly and the finance came through as agreed. The builders were on site for several weeks, transforming the house into a bright, modern, welcoming home. Soon afterwards we received an offer from a first time buyer who was already pre-approved for a Royal Bank of Scotland mortgage. Perfect. We snapped his hand off!

Solicitors were instructed. The RBS appointed surveyor approved the valuation exactly as requested with no retentions. A completion date was agreed and everything was going swimmingly. Or so we thought.

Just 24 hours before exchange we got a call from our solicitor. The RBS had just retracted their mortgage offer because – prepare to be gobsmacked! – we’d only owned the property for three months. Now it was obvious to all that we’d bought the house to refurbish and sell. The bank had appointed an independent surveyor who had valued the property to their satisfaction. Yet the bank refused to lend against the property, insisting that we’d have to retain ownership of the property for a further three months before they would approve the funding!

I’ve grown to accept the reasoning behind the ’six month rule’ when remortgaging a property but never dreamt the same criteria would be imposed for the sale of a property. I’ve been involved in property for many years and come across some strange funding requirements but I’ve never come across anything so ridiculous.

Our buyer has appealed against the decision and we’re awaiting the bank’s response. In the current market buyers don’t grow on trees so fingers crossed they have a change of heart otherwise we may have to mothball the property for three months, absorb the additional bridging loan payments and delay our next investment project.

I’ve spoken to a number of my contacts and it seems that some lenders have been implementing this six month rule for a while now. So I’m appealing for your help. I’m trying to find out which lenders impose the rule and how widespread the problem is. Have you sold a refurbished property recently? Did your buyer experience any problems obtaining finance? Which lenders were involved?

Hopefully by comparing notes we can help prevent more gobs from being smacked!

Popularity: 4% [?]

I’m a regular visitor – and occasional contributor – to the excellent 4Walls Property Tribes forum. I recently came across a thread started by Richard Greenland who was amazed to learn that many buy-to-let investors budget on spending up to £250 per month per property on maintenance and other costs. His post generated a response from a number of experienced investors (including yours truly!) The general consensus seems to be that although costs can vary quite substantially between individual properties, £250 is a sensible and fairly accurate reflection of the monthly overheads of an average buy-to-let property… IN ADDITION to the cost of any mortgage repayments.

In percentage terms, it was generally agreed that 30-35% of gross rental income should be put aside to cover management and maintenance costs.

A lot of relatively new investors will probably dismiss this figure as hugely inaccurate and inflated. They will tot up their monthly costs and conclude that their outgoings are much lower. However, as a number of the people who contributed to the discussion pointed out, it’s only after you have owned several properties over an extended period of time, that you realise how the costs begin to mount up.

Regular on-going costs such as management fees, vacant periods, property insurance, gas certificates etc are fairly easy to budget and account for. It’s usually these costs which a newbie investor includes in his budget. However, what’s often overlooked are all those relatively small, regular maintenance and refurbishments costs – repairs to boilers, appliances, ovens etc – which soon mount up to become a major strain on your bottom line.

But that’s only part of the story. The big shock comes when you have to start replacing worn out white goods, cookers, shower units, carpets and furniture. Each item on that list could potentially wipe out several week’s worth of rental income.

However, there’s worse to come. Redecoration will be needed every 3 – 5 years. Kitchens, bathrooms, boilers, interior doors etc will probably have to replaced every 5 – 10 years. New windows, external doors, barge boards, guttering, pathways, driveways, radiators etc will be required every 15 – 20 years. Depending on the age of the property and the length of time you retain it, rewires and re-roofs may be necessary. Obviously this sort of major renovation work isn’t cheap. Unless it’s been budgeted for upfront, many people find that their ‘investments’ turn into expensive liabilities.

Buy-to-let is a long term investment. Therefore it’s sensible to budget for all the costs you’re likely to encounter during the life of your investment. The maintenance costs for a new or recently refurbished property are likely to be minimal at first. But over the longer term those costs will grow in significance, particularly when larger scale refurbishment is required.

Buy-to-let can prove to be a very profitable long term investment strategy. But only if you do your sums properly, budget for the myriad of hidden costs that will crop up along the way and put money aside to pay for them when they do. Many people seem more interested in the number of properties they own, rather than the income they’re generating or the true long term value of their investments.

Due to the high cost and scarcity of finance, making genuine profits from buy-to-let is far, far harder than it used to be. I hope the advice provided on forums such as 4Walls will motivate more investors to take a long hard look at their strategies and to double check their figures. I suspect a fair few people may be in for a nasty shock.

Popularity: 58% [?]

It’s been a good while since you could achieve a genuine 100% No Money Down (NMD) deal legally and effectively. Since 2008, when Mortgage Express withdrew their same day remortgage product, it’s been virtually impossible for investors to acquire properties without putting some money into a project. Nowadays the only realistic option is to take out a bridging loan to buy a below market value property and then refinance the funding after six months.

Some people are still trying to promote the concept of NMD property deals using various – and often rather dubious – methods. But with such a huge funding gap, I’m of the firm opinion that NMD simply isn’t viable… unless you’re willing to commit fraud, which can never be advisable!

Let me explain. In order to achieve a NMD deal you’d need to acquire a property at least 40% below market value. A genuine 40%+ discount would enable you to cover the bridging finance, legals, remortgage costs etc and provide a little spare cash for some modest refurbishment work.

There are some well priced properties out there at the moment but in my experience very few deliver a genuine 40% discount on market value. Those that do are generally in a really poor state and need a lot of expensive refurbishment work. If you’re lucky enough to stumble across a real bargain, you’ll find that high loan-to-value bridging loans aren’t cheap. In fact the interest rates can be eye-watering, leaving you open to a lot of risk if refurb costs start to escalate or the property lies empty for any length of time. There would have to be enough money in the deal to fund the bridging loan repayments for an initial six month period before you’d be allowed to refinance the property via a less costly 75% buy-to-let mortgage product.

The situation is even worse for new build projects. As you probably know, funding for development projects is invariably based on GDV (Gross Development Value i.e. the estimated value of the finished properties). So to pull off a true NMD new build development, the cost of the land, remediation, construction, legals, finance and marketing would have to total less than 70% of GDV. That’s assuming you can find such an amazing deal AND a lender is willing to provide such high loan to value funding. I recently had such an offer withdrawn at the last minute, leaving me with egg on my face after boasting of my “Latest No Money Down Development Project“. Luckily I’d already lined up a ‘Plan B’ in the form of a Joint Venture with a friend with spare cash to invest so I was able to proceed with a 50% GDV loan offering much more favourable interest rates, at a reduced level of risk, without putting any of my own money down.

As far as I can see, these days only a very healthy planning gain deal - whereby you vastly increase the value of the land by obtaining planning permission and thereby create significant equity - could enable you to 100% fund a development. But it’s not hard to spot the flaw in that plan… where does the money come from to fund the upfront costs of the planning application which, depending on the scale of the scheme, could run into several thousand pounds?

The lack of traditional funding has meant us property folk have had to turn to alternative methods of finance to get our property investments and development projects off the ground. People have tried various different approaches but the most popular vehicle by far is Joint Venturing (JV).

Wikipedia defines a JV as “an entity formed between two or more parties to undertake economic activity together. The parties agree to create a new entity by both contributing equity, and they then share in the revenues, expenses, and control of the enterprise.” Whilst JVs can take many forms, in the property world they often involve one of the following scenarios:

• A property developer provides the expertise and construction / refurbishment capabilities. The other party provides the necessary capital.
• A landowner puts his development land into the deal, whilst the developer handles the construction and marketing of the properties.
• An investor is interested in funding a property venture but lacks the necessary experience and contacts. A JV is formed with an experienced property professional who oversees the ‘nuts and bolts’ of the project.

Joint Ventures have provided a lifeline to many development companies over recent months, allowing them to take on new projects – albeit on a small scale – despite the glut in funding. It’s drastically reduced their level of risk and undoubtedly saved many businesses from going under. It’s also provided a method for landowners with little or no borrowings against their land to achieve significantly higher returns over and above current value. There’s a little more risk involved as they must rely on the developer to sell the properties before they see any money but in a stagnant market many landowners have jumped at the chance of a JV.

As for me, by entering into Joint Ventures I’m able to do more deals, spread my risk and make my resources go further. JVs are another way of leveraging my time, resources and expertise.

So how do JVs work in practice? Well, as they say, there’s more than one way to skin a cat. When it comes to JVs there are no hard and fast rules… as a property professional it’s up to you to spot the potential of a JV and structure a deal which benefits both parties.

I’ve entered into several JV deals recently including:

Buying auction property:

Borrowing funds from a family member to purchase a property at auction. I’ve then refurbished the property and refinanced or sold thereafter returning a healthy rate of interest to the family investor. These deals are particularly useful if you have a poor credit history or just want to borrow at a cheaper rate than a bridging company. The majority of people with savings are returning very little interest from the bank at the moment and so investing in bricks and mortar, below market value and for a decent return, is very attractive.

Small new build residential development:

As I mentioned earlier, I’m about to embark on a new build project: a small scheme of two semi detached houses in Bolton. For this deal I’ve teamed up with an old contact who has cash sat in the bank doing “very little”. He’s helped with funding the land in return for 20% of the profits plus a sensible interest rate on the funds invested. My contact has always been keen to get into property development and by partnering with me he gets to do just that but with little risk and no hassle. I utilise his money and he utilises my expertise and development team. We both make a good return. A win/win situation!

Small commercial development:

Another friend of mine, a chartered surveyor with a small commercial property portfolio, wanted to expand and was given the opportunity to find new premises for a national veterinary chain. With this in mind, I helped him source a potential site and negotiate its purchase. I then brought in my team to obtain detailed planning consent for a mixed use scheme. Once planning was granted I fully demolished and remediated the site for him and set my construction contractors to work. The development is now almost complete. My financial input into this deal was zero however my reward was in the form of a large discount off the purchase price of another piece of land my friend owned. Again, a win/win situation for us both.

Larger scale residential development:

I’m in the throws of negotiating a JV to develop a residential site for 16 houses in the North West. At the moment, development funding for such a large scheme would require a significant cash input of several hundred thousand pounds. Therefore in order to avoid having to find and inject such a large amount of cash, I’ve managed to negotiate a JV with the landowner. We intend to establish a new company with shares owned 50/50 between us. The landowner puts his land into the deal (in other words, it will be owned by the new company) providing the capital we require to seek bank funding to develop the scheme to the tune of £1.3m. I then develop the site, sell the houses and return a profit for both parties thereafter. At least, that’s the plan, all being well.

The bank will be repaid first. Then the land owner will be re-embursed for his land at a pre-agreed rate. Finally, the profit will be split between us.

The landowner benefits from the deal as they’re able to sell their land now at a price that reflects their input and they also get a share of the profits to reflect the risk involved. The advantage for me is that we’re able to acquire and develop a large site with much less risk than via a traditional funding source.

Crucially, to reduce our risks further still, I’ve devised a plan to split the development into three stages. So rather than develop all the houses in one go (as you would do in a buoyant market) I will initially build and sell four houses, then develop another six, before completing the project with the final six properties. The landowner will only transfer into the JV company enough land to complete each phase so will not be required to commit his entire site from the outset. Structuring the deal in this way means that we will never owe more than around 45% loan-to-value development funding which is prudent in the current climate.

This same principal can be applied to much smaller projects such as garden plots. I often source land directly from the owner, gain planning consent and turn it quickly for a profit. However, if the landowner is agreeable to a JV, I can often leverage more from the deal by developing out the plot.

I’m currently involved in an extremely large deal which has required a complex and very high value JV agreement. More about that in the coming months but if everything goes to plan, we will walk away with a truly life changing profit… all on the back of other people’s money.

The property slump has been tough but the current swathe of bargain basement properties and development sites provide rich pickings for the canny investor. If you’re itching to get a piece of the action but lack the necessary funds, maybe a JV is the answer you’ve been searching for.

I would’ve been forced to walk away from many of my most profitable deals if I hadn’t ‘jumped into bed’ with a JV partner. Anyone considering a deal shouldn’t be put off at the first hurdle just because they lack the necessary funds. By being creative and entering into a JV you can overcome many funding issues and create lasting fruitful partnerships. In these difficult times we have to look to new ways to make deals happen. If you’re anything like me, you’ll see Joint Ventures as a key part of your wealth building strategy.

Popularity: 1% [?]

I’ve mentioned before that I’m about to embark on a small development project of two semi-detached houses. Well, my solicitor has almost completed due diligence and we’re almost ready to complete purchase of the land.

I’ve agreed to buy the small site in Bolton with the intention of turning a £70,000 or £80,000 profit. The land already benefits from detailed planning consent, however I decided to amend the floorplans of the two houses to provide a more attractive internal layout. Unfortunately this has resulted in the extra cost and hassle of a new planning application but I’m sure the changes I’ve made will make the properties much more desirable. I’ve just found out that the revised plans have been passed by the local planning authority. So we’re all set!

The land was on the market at £99,950 but I’ve managed to negotiate the purchase price down to £55,000. I don’t believe that in the current climate the site was worth anything like £99,950 but as I’ve managed to secure the site for nearly half that value I reckon I’ve got myself a very good deal.

Crucially the site is fully remediated and ready to go, so all I have to consider are the construction costs. If you’ve read my previous blog posts you won’t be surprised to learn that I’m going to employ a main contractor to complete all the construction work under a fixed price contract. The build will take six months, so I’m going to schedule completion for next spring which will coincide with the beginning of the 2010 ‘buying season’ and should give the market chance to improve a little further (fingers crossed!).

My original ‘back of envelope’ figures weren’t too far wide of the mark. I’ve now firmed up the budget:

Funding for the scheme has changed since I first considered the deal. I originally had a lender lined up who was prepared to provide 70% of GDV which at £320,000 would have provided us with funding of £224,000. As we’ve built a 30% profit margin into the scheme, a 70% loan would have meant we didn’t have to inject much (if any) of our own capital. The down side, however, was the very high interest costs (around 18% per annum).

I’ve opted for an alternative product from another lender which provides funding up to a maximum of 50% of GDV – in this instance, £160,000. This deal offers a much cheaper interest rate at 9% per annum. We’ve therefore taken on a JV partner to fund the shortfall. Although our partner will receive a percentage of the profits, we get to develop the scheme quickly with very little risk. The loan to value on the finished houses will be just 50% (ish!).

I wish I had the benefit of a crystal ball to tell me how much interest – and money! – the properties will attract once the development is completed. My predicted value of £160k per house is based on sales of similar properties in the area but trying to predict GDV (gross development value) is difficult enough at the best of times. In the current climate it’s harder than ever.

However, before the bank will grant funding, their surveyor will have to confirm that he agrees with my GDV figures. If nothing else, this process gives me the benefit of another pair of expert eyes double checking my figures and provides a little extra reassurance before I commit to the deal.

I thought I’d managed to pre-sell one of the houses which would have made the venture even more of a no-brainer. Unfortunately, due to personal circumstances, the buyer can no longer wait six months before moving house. So it’s worth our while to go that extra mile to improve the chances of a quick sale, especially in the current climate. The longer the houses are on the market, the more it will cost us in finance charges. So I use a range of tactics to increase saleability, such as…

• Price the homes keenly: As we’ve built a good margin into the deal, we can afford to price the properties competitively. I’d rather accept a few thousand pounds less for the properties, sell them quickly and release capital for our next deal, than have them hanging around costing extra £££ in interest.
• Include ‘free’ white goods: A full set of white goods – washer/dryer, dishwasher, fridge/freezer, oven, hob and extractor – can be bought and installed for around £1,500. I’ve included this cost in the budget. In my experience, a kitchen full of brand new white goods has a very high perceived value in the mind of prospective purchasers. It can really make your property stand out against those of your competitors.
• Kitchen accessories: You’d be surprised how a few accessories can smarten the appearance of a kitchen. It adds to the wow factor and doesn’t cost a great deal.
• High quality internal specification: I usually install high quality internal joinery. It’s amazing how much difference solid wood doors and well crafted ironmongery can have on a property. The larger house builders tend to charge extra for fully tiled bathrooms. But it’s possible to buy good quality, expensive looking tiles for as little as £8 per metre. So it needn’t cost a fortune to tile the whole room but the end result is well worth it.
• Branded bathroom suites: Branded sanitary ware adds value but doesn’t have to cost the earth. Alternatively, install a cheaper suite but add more expensive taps. This really can make a difference to the look.
• Fitted carpets: It will only cost around £1,100 to fully carpet and underlay each of the semi-detached houses. In my experience, most people put a high perceived value on a fully carpeted house.
• Recessed lights in bathrooms and kitchen: recessed lights are cheap to install but look great.
• Tiled kitchen floor: tiles are much more durable than vinyl and give a much better finish.
• Blinds and curtains: window dressings make a house much more saleable, but I’d normally only install blinds and curtains in a show home.
• Small patio: you may be surprised to learn that most of the larger developers don’t install any form of patio area at the rear of their homes. It’s normal to flag a pathway around a home so it doesn’t cost much more to add a patio which helps buyers to picture themselves enjoying their new outdoor space.

I’ve negotiated a really keen price with my main contractor, so I can probably afford to include many of the items I’ve listed above. However, as always, I’ve taken a long hard look at the build spec and I’ve managed to find a few areas where I can cut back on costs. The biggest saving relates to the boundary around the rear garden of the properties. The original planning consent specified a solid brick wall which would cost around £13,000 in labour and materials. By replacing the brick wall with a high quality timber fence (not one of those horrible concrete / timber waney lap efforts!) I will be able to save £11,000 without much loss in perceived value.

The main contractor I’ve got lined up for the project has completed several projects for me in the past. They know the standard of finish I require and will work directly with my architect, structural engineer and monitoring surveyor (working on behalf of the funder) to complete the project with minimal intervention from me. So now that I’ve negotiated to buy the land, secured the revised planning consent and applied for funding, my involvement should be limited to a monthly site meeting. I also tend to get involved in selecting kitchens, tiles, bathrooms and carpets but only because I enjoy this part of the process so much. If I get too tied up with other projects, I’ll delegate the work to an extremely competitive interior design company who’ve helped me out in the past.

The fixed price build contract dictates not only the build cost and specification but also the build term. My contractor has agreed to a detailed build program of six months with penalty clauses for delays. I always include late completion penalties to protect myself against increased finance costs but I have little grounds for concern… my contractor hasn’t been so much as a day late on any of my previous projects.

As soon as construction work begins, I’ll appoint a local estate agent to help market the properties. I’ve already commissioned some CGI’s to help with this process… you never know, we might even be able to achieve sales off-plan.

I’d like to think that the properties will be considered very good value for money when compared to what’s being offered by our competitors. Thankfully, due to the deal I’ve struck with the land price, we’ve already built a good margin into the scheme and can offer extra incentives such as deposit contributions if necessary. Even so, the scheme should return a healthy profit.

Hopefully we’ll make £80,000+ profit within around 10 months. But if the market proves to be tougher than we expected and we only walk away with £50,000 then the project will still deliver a great return for our time and effort. Thanks to my fantastic team, I can leave all the hard work to other people and concentrate on other deals.

I’ll keep you posted as to how we get on.

Popularity: 1% [?]

Regular readers will already be familiar with my multi-faceted approach to property. In addition to run-of-the-mill buy-to-let investing, I generate life changing and regular income through site finding, new build developing, land trading, renovating and – more recently – by helping others to replicate my methods.

I’ve already described how I used my knowledge of the planning system to obtain permission to build my own home. If you remember, my wife and I had set our hearts on a one acre, semi-rural, ‘greenfield’ site. An independent planning consultant had told the owner of the land that he stood very little chance of achieving planning consent for any sort of development. As a result, I was able to purchase the site extremely cheaply.

Within a few months, armed with detailed planning permission to erect a 7,500 sq ft house, I could have sold the land to a developer and walked away with a quick profit of around £140,000.

Incredible isn’t it? The value of the land had increased by 140 GRAND, simply because it now benefited from planning permission for a spectacular luxury home.

If you’ve read my recent post A Tricky Question of Looking Beyond the Obvious you’ll know that, on that occasion, I decided not to sell the land and instead embarked on my first self build project. However, I’m constantly on the lookout for ‘planning gain’ opportunities and over the years have made many hundreds of thousands of pounds simply by trading in land. One of the best examples relates to a site I spotted whilst out shopping with my wife. That everyday shopping trip turned into a £300,000 windfall.

The site was a former garage premises very close to Bolton town centre which was up for sale with a local agent. It was on the market for £220,000 but was to be sold with a covenant preventing the site being used as a garage in the future. You see, the company selling the land had constructed a new garage close by and didn’t want their old site to be used by a competitor.

The garage had been on the market for some time (which is hardly surprising considering the restrictions of the covenant). Whilst the site was very ‘tight’ and positioned on a bend in the road, I could see its potential for residential use, provided I could obtain consent. As soon as my wife had finished dragging me round the shops, I made enquiries with the local planning office as to their views.

Luckily, they were fairly receptive to my idea, provided I could come up with a suitable way of servicing the homes by a refuse truck. Encouraged by their response, I quickly contacted the agent. I put in an offer at full asking price but stipulated that my offer was subject to me obtaining consent for residential development. To my delight, the agent emailed me the very next day with some fantastic news. The vendor had accepted my offer.

I instructed my solicitor to draw up a contract whereby I’d buy the site, on condition that I was granted detailed planning consent within 12 months, with an allowance of an additional 6 months if my application was refused. This give me time to lodge an appeal against the decision. As soon as we’d exchanged contracts, I got together with my architect and prepared a detailed planning application for a high density, mixed use scheme of 21 apartments, a retail unit and associated parking. Without much fuss or debate, the local planning committee granted permission for the scheme. The whole process took around six months.

I’d already calculated that, with planning, the site would be worth over half a million pounds. Had it not been for a river running along one of the boundaries which would require additional groundworks, the site would have been worth even more.

It didn’t take long for me to find a buyer. Six weeks after going on sale, a Liverpool developer bought the site for £535,000. My profit margin after architect, legal and planning costs? £300,000! I probably made more money from the deal than the Liverpool company who had to put in all the time, effort and risk of developing the scheme and selling the units.

I’ve completed many similar planning gain deals over the years, although I’m happy to admit, not many of them have been as straightforward or as profitable as the example above. That said, planning gain can be extremely lucrative and, provided you know what you’re doing, can deliver truly life changing rewards. Over the coming weeks I’ll be writing more about the techniques I use, including:

• How I source potential development sites.
• How I limit my risks by gaining legal control of a site before paying the landowner a penny and before obtaining planning consent.
• How I calculate the value of a site before and after planning
• How I decide on the most appropriate – and profitable – scheme for a site
• How I increase my chances of obtaining the necessary consents
• How I go about obtaining planning permission
• How I go about overturning consent refusals
• How I market my development sites and obtain the very best selling price

So if you like the idea of taking home a six figure, quick(ish) turnaround profit, watch this space!

Popularity: 2% [?]