Shadow falls over buy-to-let schemes

Shadow falls over buy-to-let schemes

BUY-TO-LET is back in the news, but for all the wrong reasons. This month, the Department of Trade and Industry shut down several schemes that promised “and failed” to make millionaires out of investors.

Rivals quickly moved to condemn the cowboys in their industry. Inside Track, one of the biggest companies in the business, went so far as to put forward its own four-point plan for regulating the property investment sector.

But against the background of a stagnating UK housing market, some property professionals are questioning the way that many of the remaining schemes operate.

Marketing material tends to be long on the potential to make money and short on the pitfalls. An Inside Track marketing leaflet tells you “how to make a million in property investment – even in a falling market”. The website of PropertySecrets.net, an agent for overseas property aimed at UK investors, proclaims: “Buy-to-let and property investment. Maximum profit “minimum risk”

At the moment, such claims do not have to be substantiated, as they would if made by firms which came under the aegis of the Financial Services Authority. In fact, the Inside Track promotion’s boast that “last year we created over 200 property millionaires’ relates to the gross value of its investors’ property.” The company admits that the net value, after deducting the debt taken on to acquire the assets, would make their clients’ wealth look far more modest.

Ray Boulger, of John Charcol, the mortgage adviser, says that such claims are misleading. He says: “To be a property millionaire properly, you need to have net assets of £1 million. In the boom markets of three to four years ago, that was possible. In today’s quieter market, that is much harder.”

But the criticisms go much deeper than the promotional material. These buy-to-let companies typically aim to negotiate special deals with developers of flats or houses. In return for tying up the sale of a large chunk of a new development in advance, the agent will obtain a “discount” on the purchase price. This sum, often from 10 per cent to 20 per cent, should then be passed on to the buy-to-let investor.

Someone who has lined up a mortgage to cover 85 per cent of the value will then own a property with minimal outlay of their own. In a rising market, with a tenant covering the costs of a loan, this so-called off-plan buying is a licence to print money.

Lee Grandin, of Landlord Mortgages, a specialist buy-to-let broker, describes it as “a high-risk, high-reward, high-loss strategy”.

He points out that new properties tend to be sold at a premium anyway, while a valuer’s figure can be out by as much as 10 per cent. Taking account of either of those factors could wipe out your discount. Not only that, but when the property is eventually built, an investor’s flat will be coming on to the letting market along with all the others in the development. This “investor flooding” could make it harder to find tenants.

John Heron, managing director of Paragon Mortgages, the third largest lender to the market, is much more blunt. He says that such schemes are “fundamentally about property speculation and not about long-term investment in private rented property”.

Less than 5 per cent of the property his firm lends against is new because professional landlords find it difficult to let. “Much of the new property is higher value, whereas much of the demand is affordable,” he says.

Not surprisingly, such criticisms are rebutted by operators of buy-to-let schemes. Tony McKay, chief operating officer of Inside Track, says: “Our activity is completely transparent. We negotiate a discount with a developer and pass the whole of that discount to the investor.”

Such discounts are genuine, he says, because the developer saves on certain marketing costs by selling to an investment club, while a pre-sale reduces his risks. A valuation 12 months ago of 2,600 properties bought by Inside Track investors showed an uplift of £80 million on an original cost of £395 million, according to Mr McKay.

He admits that the subsequent flattening of the market may have left some property below the pre-discounted price, but he says that the discount provides insurance against falls in values.

Source: Times Online