How to Buy and Sell Property for Profit : Buying and selling profit used to be ‘easy’. For thousands of years you can buy property and be guaranteed to make money within years and in some cases, months. Some people (and mortgage lenders!) seem to think home prices will continue to rise, others warn of a housing bubble, but don’t seem to be able to accurately predict when it will burst.
However, explosions occurred, starting in the United States and hitting Britain very hard. The recession appears to be starting in the property sector and within a few months we saw sales fall by 50%, prices down 20% from 2007 peaks. Rental income, which typically rises when house prices fall, experienced a year-over-year decline of 5% or more, vacancies increased due to rent arrears.
Right now we seem to be in a strange state of flux. No one seems to know what will happen next. No one could believe that such a sharp recession, in less than 12 months, could look ‘over’. However, reports of green growth in the property market and the broader economy seem to be talked about on a daily basis. The private sector claims their order books are growing again and the latest figures even show unemployment is slowing.
But are things really starting to turn around? What about our huge debt as a nation, estimated at £13,000 per head of our population*? Is it true that businesses have borne the brunt of the credit crunch and the public sector is still less stressed? If this is true, what impact will layoffs and public sector freezes (or cuts) have on our economy – and property market – next year?
More importantly, as a property investor, what does this mean for you? What’s the good news? What’s the bad news? And most importantly, if you have money to invest, are there any ‘safe’ properties to invest in? Is short-term gain from property possible, or is it only possible to make money from property in the long run?
Many investors who had pulled out of the market in 2006 (or earlier) have been buying heavily since October 2008. Those who bought in the first six months after the crash benefited from getting offers from an oversupply of properties for sale and a huge increase in repossessions. . . . Buying ‘below market value’ is becoming a ‘favorite phrase’ of the property investment industry and astute investors buy properties up to 50% below their true value.
The bad news
But the credit crunch meant that investing in these bargains was only for cash-rich buyers because buy to let, commercial and development finance became difficult and in some cases impossible to secure. The return of the 25% deposit requirement, higher finance costs and the recent dramatic decline in property supply in many areas have made ‘below market value’ deals, in recent months difficult to fund and find.
Added to the financing difficulties is a six-month re-mortgage rule that stops investors from buying ‘below market value’ properties and then mortgaging them back immediately to take cash to invest in their next property. Although some still claim this can be done, most investment experts believe it is only possible if during the process, someone commits a mortgage fraud.
So, if you can access cash, is this a good time to invest?
There are currently two schools of thought. The former believes that we are in an ‘artificial’ state of recovery. Interest rates are artificially low, aid from the government is currently halting withdrawals and we are yet to see the effect of reducing public sector costs. As a result one school of thought continues to predict property prices to fall further and remain low for several years as unemployment and a return to normal interest rates continue to weigh on the economy.
The second school of thought is that while low supply and demand is causing the current signs of ‘green shoots’, the chances of many properties returning to the market are slim. Some predict that interest rates will remain low for many years (CEBR predicts interest rates will only increase to 2% in 2014). As a result, their prediction is that property prices will remain stable, and in under-supply areas such as the Southeast and London, prices may even show a slight increase.
Whichever of these scenarios you believe will happen, one thing is for sure, that finding the ‘bottom of the market’ is impossible. You will only know that it has been achieved AFTER recording! For example, for those hoping to secure repossession offers, recent statistics from David Sandeman at EI Group show that the ‘bottom’ of the repossession market (i.e. when repossessions sold through auction houses are at their highest) was Q4 2008 – almost the year. then!
However, good investors will always be able to make money – in both good and bad markets. And, while you might miss some of the offers that have been around for 12 months, there are still plenty of areas and properties worth considering investing in, as long as you’ve:-
1. Do extensive research
2. Consider different ways to make money from property
3. Accurately appraise the properties you buy
4. Identify potential future capital growth
Research, Research, Research
In my view, few people do enough research when buying investment properties, especially in unfamiliar areas. Those who do not visit the property prior to purchase should not invest at all, unless they have previously tried, tested and trusted an independent person who does the assessment independently of any property club or source business.
When researching an area or property, it is important to:-
1. Visit the street and surrounding area, researching current supply and demand from a buyer/tenant perspective.
2. If the property requires updating, make sure you have an accurate quote, and property repairs will provide a 20% refund.
3. If you are planning to lease a property, check rental rates from an agency that specializes in rentals, rather than an estate agent/licensing agency who may have a conflict of interest or have just started the rental business to help survive the recession.
4. Check what properties are currently out of stock to buy or rent. Areas that appear to be recovering from declining property prices and rents are likely to be areas that will provide good capital growth in the future.
5. Get feedback on the value of potential sales from independent RICS real estate agents and surveyors acting on YOUR behalf.
6. Check the stock of other properties in the future that may affect your property demand. If you buy a two-bedroom flat, what if another 1,000 are planned to be built? What planning permits have local authorities been granted?
7. Find out about future population changes. If you buy a large property to rent out to students, will there be enough families who can afford the large property when you want to sell it?
8. If you buy a three bedroom property and plan to convert it to a five bedroom property, make sure the additional space costs will be covered by the increase in the actual property value.
Consider different ways to make money from property
Many people only look to buy to let or renovate to make money off the property. However, you can also invest in:-
1. Buy land and build for rent or sale.
2. Commercial as opposed to residential property.
3. Develop mixed use properties, for example buying shop houses and flats on them and renovating them for sale or rent at a profit.
4. Property funds and syndicates.
5. Work with developers to purchase properties below market value through a ‘part swap’ scheme.
Valuing Property Accurately
While we typically value property in the professional parts exchange business, we typically spend about three full days and use five professionals to help accurately assess the property. And we have to. To make money swapping parts, you have to buy the property at a discount of between 10-20% and then sell the property (usually through an agent) within three months, or you may start to lose money.
To appraise a property, you need to:-
Understand what’s happening in the local market
Use Hometrack and then visit a local real estate agent who has sold similar properties. Hometrack will show you how many weeks and how many display properties need to be sold, as well as what the average bid versus ask price is. Use this information to check with local agents how accurate it is and what their current market experience is.
Identify the ‘price for property for sale’ beforehand:-
1. Go to a property portal like Rightmove and click on ‘sale price’.
2. Enter the zip code of the property.
3. Select the first distance of 1 mile, then if little or no result select up to 3 miles.
4. Enter your property type.
5. Enter 10% below the minimum value for your current property valuation.
6. Enter 10% above for the maximum price of the property you own.
7. Then check the box that says ‘include sold, under offer, subject to contract’
8. Find properties that have recently been offered/sold, then follow up with the agent who sold the property.
Find comparisons of similar properties that were recently sold
Up-to-date comparisons are essential in understanding the likely value of a property, and are defined as properties that have recently been sold in the same location, ideally on the same street or very similar property on a nearby street, e.g. spring, detached terrace or 1930s Victorian era.
Other Assessment Methods
You can use automated ‘on-line’ systems, such as Zoopla but be warned, these are never as accurate as doing your own research and the numbers are usually based on ‘past’ not future prices.
Finally, if you believe you have a property that is worth investing in, and especially if it is in poor condition and difficult to appraise, contact your local RICS surveyor for a professional assessment that includes the possible costs of the work and check these costs with a local dealer.
Identify potential future capital growth
Until the credit crunch, multi-storey homes had outperformed other types of residential investment from a capital perspective over the past ten years. Both investors and first-time buyers competed to buy this type of property and that led to an increase in the value of this two-bed property.
Over the next five years, with large public debt and recovery from recession likely to mean people’s incomes have not increased much and with the number of people able to invest declining, property prices are unlikely to increase much. Even some reports (such as Knight Frank) suggest that it will take until 2014 for prices to recover to their 2007 levels.
So, if you want to buy property now and sell it at a profit in the future, you need to start predicting the types of properties in your area that are most likely to sell in the future and attract as many buyers as possible.
There can’t be a ‘magic’ answer to this. This will depend on local property supply, demand (which will vary according to population and financial availability) and how well the local economy recovers. To help you do this, you need to find information about:-
1. Possible population changes.
2. Planning to increase the supply of new buildings and social housing.
3. Changes in transportation that shorten or shorten the time it takes to get to big cities.
4. Areas and types of property that will remain in short supply now and in the future.
For example if the area you are investing in has an aging population, then there may be a shortage of bungalows with manageable gardens. If other areas have a shortage of two bedroom apartments within easy reach of train stations, shops and jobs and a relatively young population, then this type of property may be the best one to invest in.
In short, there are no ‘shortcuts’ to making money from property in the future. You must have cash for deposits and finance fees and do extensive research on the viability of investment properties now and in the future.
Finally, with governments looking for different ways to pay their debts, you also need to make sure you get good legal and tax advice so you buy property the right way and minimize tax bills that may be due now and in the future!