Political Change Could Be What’s Needed For HIPs

By Andy Shaw | January 23, 2010

Originally Posted 6th May 2008

I saw that the Conservative Party has called for the abolition of Home Information Packs (HIPs). The packs were supposed to be designed to provide key information to home buyers and speed up the buying and selling process, ha!

They have been strong critics of HIPs since their inception and have promised to scrap the packs should they be elected – which is good news in my opinion, as they are a near complete waste of money. This was agreed by the shadow housing minister Grant Shapps who recently described HIPs as a “bureaucratic farce” and a “complete waste of time”.

The problem with them was, and still is, that they failed to solve the problem of the valuation whereby the lenders wouldn’t accept the vals, and why should they? – it’s not the government’s money on the line: it’s theirs. So why accept the government’s valuers.

Frankly how did they ever think they would get over this problem? I think this stupid policy that was organised under Tony Blair, and finished off under the Moron, was all about some sort of political high ground where they could say they had done something. The problem with anything like that comes when it is not thought through before it is implemented and then it is fraught with problems!

This problem is cancerous and it is terminal! Trouble is that they don’t like admitting that they got it wrong. Big business has this problem too as jobs will be on the line when they have to make U-turns. Whereas the small business that is cash tight doesn’t make these sorts of mistakes as they have to learn fast and make immediate U-turns.

I identified a recent incident in one of my businesses where a project had been allowed to over-run and how an ‘eye off the ball’ situation had meant a missed opportunity that dwarfed the size of the overall project benefit. By return of email the manager of the project apologised and completely accepted the blame. Then he instigated massive change in the project, enabling it to be completed in time, and produce what had been promised.

The trouble Labour has is that they, and a large number of private inspectors, have spent a small fortune on this and as the government is nearly broke they can’t afford a compensation payout to remove this very bad mistake. Actually I wouldn’t be surprised, if Labour were to get back in next time (almost as likely as me winning the lottery – and I don’t buy a ticket), if they killed this themselves, knowing they had another five years to let time cover up the mistake.

Of course the Conservatives are merely the latest in a long line of critics. In March, National Association of Estate Agents (NAEA) chief executive Peter Bolton King cited research statistics including:

o       Only 29% of sellers who sold a property with a pack felt that it made the process more efficient. (Not knowing how to answer or even knowing what the HIP was I doubt the percentage was really this high, but you have to consider the person being questioned ;-) )

o       Only 20% of buyers felt HIPs sped up the buying process (This is more of an indication, but again far too high when we consider that more recently built homes would be helped in the speed of selling, whereas older homes would be hindered. Therefore points towards what is to be expected)

o       41% thought they made the buying process more difficult. (Only 41%!!!)

(my thoughts in italics)

The chief exec went on to say, “This research confirms what the NAEA and its members have consistently said: HIPs are not the way to improve the buying and selling process”.

The Trade body the Association of Home Information Pack Providers (AHIPP) questioned the research, claiming it focused on too small a sample of the market to be definitive. I’d agree with them there as these percentages just looked wrong to me (not that I have anything to base it on other than my feelings towards this), but I don’t think a more detailed survey will help their cause much. I think more detailed research would reveal a much greater case for the burial of HIPs in an unmarked grave.

Governments should stay out of things they do not understand!

Best wishes

Andy

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Two Ways The Beginner Can & Will Still Win In Today’s Property Market

By Andy Shaw | January 23, 2010

Hi,  I was reading an article this morning and Barry Hall, who is the spokesperson for RICS (Royal Institute of Chartered Surveyors), said a couple of things that are really useful if you can spin them to your investment strategy:

“While banks remain cautious about offering loans, demand for rental property will continue to increase with many would-be-buyers unable to make the jump to home ownership”

Read the rest of this entry »

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Does The Credit Crunch ‘Stop Play’ For The Property Investor?

By Andy Shaw | January 23, 2010

Originally Posted 23rd April 2008

The simple answer is Only if you don’t know what you are doing!

I said in my book that my strategy would work in a rising, static and falling market. So why is it then all of the agents we buy from (without exception) say we are the only buyers of flats?

They tell us that they are selling 3 & 4 bed places, though not many. But apparently there are no buyers for flats, So, 1st time buyers have left the building! Buy to let Investors, have left the building! Property Investors, have left the building!

What do you think that has done to our ability to buy?

Talk about cherry pick!

I’m just back from Cyprus and on my return I looked through the last few purchases made last week. Now I’ve actually instructed the guys to buy 50% of what we were buying on purpose, not because I’m scared but to make the agents think that we are considering pulling out of the market.

So is it working? You bet it is they are afraid to lose their one and only buyer! So what do you think that is doing for our negotiations from vendors?

This bit is not Rocket Science :-)

One of the properties we just bought was the one below, and here’s the email communication I had with Julian on it:

2 Bed Maisonette

Price: £85,000

Re-val: £139,950

Re-furb: £2,467.50

Re-mortgage 80%

So the deal gives us all money back, roughly £6,000 in cash and £27,990 equity.

Of course it fitted our model…

I emailed him:

Hi,

This is a stunning deal, amongst other excellent deals, well done.

Was the vendor on this one a new to buy to let, investor or a long term property investor?

Andy

Note: I knew it wasn’t someone who lived there as they can’t afford to let them go at these sorts of discounts.

His response:

A very frightened but experienced investor.

Now what does that say to you?

First off I thought it was going to be someone new to BTL, but it wasn’t, it was an experienced investor. So the experienced investors are panicking, but why are they panicking. Because they are uninformed of course, because they don’t actually understand property investing, because they got into it because they knew it was the right thing to do. But his laziness towards learning about his investment, his lack of memory towards the decade before, when the only people who lost money Investing in property were… the ones who sold of course!

So he’s just transferred some of his wealth to one of my Passive clients.

Now anyone could get that to value for £120k, anyone so why did he sell? Why did he change from knowing it was right, to now believing that he must sell?

Well he has listened to the uniformed bloke in the pub or the rubbish being covered on the TV, he has been poisoned and now he believes he is more at risk if he stays in.

Recession’s become a self fulfilling prophecy in the end, as people talk themselves into it (mind you I’m helping to talk the Estate Agents into it :-) ) but in truth the game has just changed shape, the rules have altered but the game does not ’stop play’ for the sophisticated investor.

For the sophisticated investor the game gets easier as there are less un-sophisticated people around getting in their way and making a profit by mistake.

So now You are in a unique position at the moment as probably everyone else is being scare mongered, so you can capitalise on this situation just as we are.

The other deals I ok’d yesterday were:

4 Bed Maisonette

Price: £100,000

Re-val: £150,00 – he thinks we can easily get more but it will be capped by rent!

Re-furb: £2,733

Re-mortgage 80%

Yes it did say 4 bed!

3 flats with the exact same maths:

1 Bed Flat

Price: £75,000

Re-val: £119,950

Re-furb: £2,467.50

Re-mortgage 80%

Another 3 flats with the exact same maths:

1 Bed Flat

Price: £73,000

Re-val: £119,950

Re-furb: £2,467.50

Re-mortgage 80%

As you can see the guys in acquisitions are really having some fun right now, we have got stacks of agents that we are telling the same story to about the doom and gloom and they are telling other agents. And as I said in the book, how are prices decided for property? Well the Estate Agent looks at what their competitors’ are doing, and then sets his price accordingly.

So that was 8 stonking deals, all of which have gone to our Passive clients. And as I said I’ve asked them to slow the buying down! So these are the fruit we are picking up off the ground.

If this is what a recession looks like then from a property investors point of view, I’d much rather be doing this now than any time since I’ve ever been an investor. The averages we are making for our Passive clients now are higher averages than at any other time.

So what does this mean for you? Well frankly one of two things, either you need to get out and be doing wicked deals like us but protecting your cash flow, or simply and unashamedly, it has never been a better time to be a Passive client than right now.

You know how it is always the other person who seems to get the breaks, and how the general public look at them and say something like, ‘well it’s alright for you, you got in at the right time!’ Well when we started in 2002, there was no boom going on, the media was saying there’s a crash coming (no shock there) and all of our friends and relatives said something like, ‘you’re mad to get in now, you’re buying at the wrong time.’

We did anyway, we knew we were right we acted boldly and unseen forces came to our aid. As when everyone is pointing one way, there is money to be found in the opposite direction. Nothing knew there, so why is it when it’s happening right now, or whenever it does are so many people stunned into panic or just frozen to the spot?

I think this goes a long way to explain why 99% of You will not retire rich. Money is not made following the herd, money is made going off in your own direction. Why is it when people read self development books that teach them to look out for opportunity and be ready, that they tell themselves they will be, yet when opportunity comes along they simply are caught like Rabbits in a cars headlights? Opportunity favours those who act.

Those same friends and relatives now say to us, ‘well it’s alright for you, you got in at the right time.’ They have forgotten what they said before, their delusional minds cannot let them know that they missed out and we told them so, as then they would have to do the unthinkable and ADMIT THEY WERE WRONG!

So what do you want to be?

The one who goes against the tide of lemmings, or the one who takes the easy route and goes along with them (the easy route is just the long route in disguise :-) ). Don’t worry afterall if you choose the easy route, your mind will cover up your mistake for you, don’t worry the chances are it will find a way of completely wiping the memory of this article from your mind. If you chose to go down that route you will not regret it, as you will forget this was ever said to you, as it is just part of our natural survival instincts.

Or you can ‘Act Boldly, And Unseen Forces Will Come To Your Aid!’

One of the broadcasts I still receive is from a man called Phil Gosling. I was fortunate enough to speak on the same platform as him a few years ago and found him to be quite inspirational. Phil really does look at things differently, a broadcast he sent out the other day told the story of the TV show Grand Designs. Where constantly people bite off far more than they can chew, and in a lot of cases have no idea where they are going to get the funds from to complete their homes.

So it is touch and go for them, and they undoubtedly cause themselves problems to make it actually happen in the future. The sensible thing seems to be to quit and walk away, licking their wounds, but ALL of the people keep going, they ALL complete their dream homes, they ALL say it was worth it in the end.

So what is the difference between the people who do and the people who don’t?

Well those people have planned their home, their success down to the minutest detail, so they have visualised their home finished in their minds, they have seen themselves living in it.

Watching them achieve it against all odds should be inspirational to any that understand it. That is the message that the show unknowingly is sending out, if you are not blind to it. They are looking for reasons to succeed, not reasons to fail, so their mind is closing off the failure doors and only presenting them with the success doors. Are they delusional? Well probably, but that can be what it takes, it did with us. I forget who said it now, but when you see a great big result that means somebody took a great big risk.

If you want mediocre results, then go with the crowd. Join the lemmings and get mediocre results by not taking action. As with the crowd it is a certain way to end up with a mediocre result. If however, you want great big results then act boldly and expect to get them.

If those people believed they were going to fail, then they would. But instead they believed they were going to succeed. Whatever you choose to believe will become your reality.

So if you do believe right now that it’s the wrong time to get into property investing, or if you have been infected by the poison being spread, then don’t worry your brain will look for the reasons to justify that decision for you in the future. And this ’supposedly’ rich madman who told you to buy when everyone else was telling you the market was a disaster was simply wrong and delusional himself.

Before I was wealthy I longed for rich people to tell me how to do it. But all I was presented with was very rich property investors. So obviously I ignored them, and kept thinking when will I be presented with someone rich to tell me what to do?
Well if you are reading this, then you have that right now, but are you as blind as I was?

Will you wait for 11 years as I did before acting on the information that is being shown to you?

I’ve had emails from people saying they waited 30, 40, 50 years, with each passing decade they found another reason not to act (now that’s a true crime!).

So will you wait 50 years?

I said in the book if you don’t do this within 12 weeks of reading then you won’t do it at all. Well, was I right?

Or less likely for the population but more likely for you if you are reading this; is that you are simply uninformed and confused. So right now you are trying to get a handle on what you should do, your instincts are telling you, ‘now’s the time’, but everyone else is telling you ‘no it’s not!’ So you have a confused mind, and a confused mind never buys.

So the question you have to ask yourself, is, who do you trust?’

Or personally the better question is (cashflow aside) has playing it safe and not acting given you the result you want for your life and the lives of the people close to you?

Once again for those who can’t remember, or may have just temporarily forgotten:

It’s always a good time to buy property!

But will your mind let you believe that?

Best wishes

Andy

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Could This Be The Piece Of The Puzzle That Fixes The Credit Crisis…Or Is It Just A Licence To Print Money?

By Andy Shaw | January 23, 2010

Originally Posted 21st April 2008

Well , I was honestly shocked this week ;-) to read that the Fed have finally moved the goal posts to support the banks affected by the credit crisis. I mentioned in an earlier article how the Central Banks following the Latin debt crisis of the 70’s allowed the banks affected to actually move the down valued assets off their balance sheet. So in effect just counting them as if they really were worth what they originally were lent for.

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The US Government Comes Up Short Yet Again!

By Andy Shaw | January 23, 2010

Originally Posted 21st April 2008

I’m sitting in Cyprus at the moment and writing articles on the information that is coming to me via newsletter, as I have no news over due to the satellite dish being blown off axis (apparently). So last week I predicted some intervention by the US government and before I could publish the article they intervened…well I said things were moving fast.

Unfortunately as with any government action they have fallen far short of what is needed. Or to put it another way, if 100% action was needed to resolve the problem then 50% is all we will do.

Here are the major provisions of the bill that they are putting before congress, with my comments attached, followed by my solution to the problem, which does involve parts of their bill.
(PS This gets a little heavy going so may not be of interest to all :-) )

1. To assist homebuilders and other businesses (including banks) affected by the housing slump, there is a provision to expand the ability of these businesses to use current losses to offset past profits and recoup taxes paid in previous years. Presumably, this will mean that more of these businesses will be able to stay afloat.

This is probably the worst bit of all, the bill allows for homebuilders, banks and the mortgage companies that were involved in subprime mortgages to get back past taxes to cover current business losses. How does that benefit current homeowners? It doesn’t! Which lobbyist managed to get this tacked onto the bill? This will not stop in any way home repossessions, which was the purpose of the bill. This bill is being called The New Mortgage relief plan, maybe they should have looked at the name of the plan before sticking this bit in. This is why people think politicians are crooks, and this is why all good politicians end up being tarred with the same brush as these bad ones!

2. The bill also provides for a new standard property tax deduction of $1,000 for couples and $500 for single taxpayers who do not otherwise itemise their deductions for income tax purposes. Another tax provision would give a $7,000 tax credit spread over two years to those who buy and move into foreclosed homes! The goal of this tax benefit is to keep foreclosures from remaining vacant, which can lead to other problems such as further downward pressure on the value of nearby homes.

While this may sound nice but small, even at the maximum income tax rate of 35%, a $1,000 deduction will only net $350 (and it got smaller!) and that would be available only after income taxes are filed and a refund is received (and it’ll be worth less then as inflation takes its bit). I don’t think that many people have a monthly mortgage payment that low, and most subprime homeowners won’t be in the maximum income tax bracket. Thus, the “bailout” may help make a partial payment…one month…next year…in other words this is bl**dy useless!

Then, any new family buying the newly refurbished home may qualify for a $7,000 tax credit which, unlike the property tax deduction given to the homeowner, reduces taxes dollar-for-dollar. So??? If the purpose of the bill is to help individuals struggling with subprime mortgage loans, I have to ask why this huge tax benefit is not given to the original homeowner! If the goal is to prevent a glut of vacant housing, aren’t the original owners just as good at this as new owners? There is something else going on here, or the politicians are just downright stupid. What a con!

3. The bill also includes other provisions aimed at preventing the blight that might accompany a glut of foreclosed or abandoned homes. $4 billion in block grants were authorised so that communities will be able to buy and refurbish vacant homes, as well as $10 billion in federal tax-exempt bonds designed to provide mortgage resources to lower income first-time home buyers, as well as a way to refinance existing subprime mortgages.

So after they have lost their homes the original homeowners may get some comfort knowing that their local government can use some of the $4 billion in grant money to buy and refurbish their home for resale! Morons! But I bet there’s a good reason for them doing this. I’m sure one of the senators business interests gets to benefit from this otherwise next to worthless idea. As for the $10 billion, talk about a drop in the ocean!

4. Next, the bill makes another $100 million available to provide counselling for homeowners who are facing financial problems and possible foreclosure. Supporters of this provision claim that such counselling can help to avert foreclosures for many.

I agree that this could be useful, but the problem is they won’t be able to give the advice needed to really help them survive, it’ll just be text book stuff. Still any financial education is a good thing. But if people simply do not have the money then counselling won’t help, and frankly this sort of thing should already be available right now, so the fact that it isn’t is a testament of bad governing.

5. For returning war veterans, the bill extends the length of time a lender must wait before initiating foreclosure proceedings from three months to nine months after the veteran’s return.

Americans love their armed forces, which I think is a good thing but is it really just a way of educating the future generations that if you serve then you are a better class of citizen – subliminal?

6. Finally, the bill contains a broad re-write of the Federal Housing Administration (FHA) law that raises the dollar limit on mortgages that FHA can insure from $362,790 to $550,000. The limit had temporarily been raised to $729,750 by the economic stimulus bill, but the increase in the mortgage bailout bill will be permanent.

This is good, as it is a move in the right direction. Don’t see it helping many people facing imminent repossession though.

Personally I think if 100% action was required then they haven’t got close to doing 50%, they have just produced something that they can now hang their hat on and say, ‘well we did put that bill through congress’. These politicians are fiddling while their economy is burning. This is a big mistake not to have included some or all of what was cut out. This is far, far too little, far too late. They will achieve less than 10% with this waste of time. They need to take appropriate action or American will fall into depression, and a worldwide recession will become a certainty. I was hoping they would take good appropriate action, but clearly they do not understand where their inaction will take the economy.

Here are some of the things that were left on the cutting room floor that should have been in the bill, still hopefully they’ll add them in amendments as the crisis continues to get worse:

There was going to be a provision that would have allowed bankruptcy judges the power to cut interest rates and principal balances on problem mortgages to help subprime borrowers keep their homes. Current bankruptcy law allows judges such leeway on investment properties and vacation homes, but not on primary residences.

Now this isn’t the complete answer but this would solve 80% of the crisis, and therefore would effectively solve the crisis, it does hurt the mortgage companies, but then they caused the problem by their inappropriate lending so they should be the ones that pay.

However, the bankruptcy provision was met with stiff opposition from Republicans and the mortgage banking industry (what a surprise!). They say that allowing bankruptcy judges to modify the terms of primary residential mortgages would require the mortgage industry to factor that contingency into their pricing, potentially increasing the costs of mortgage borrowing for everyone. They argue that the last thing the housing industry needs is another impediment to obtaining a mortgage loan.

They are desperately trying to stop this provision and they have for now, as this is clearly what would undo their inappropriate actions, so now they are spinning it to say they will have to pass costs on to everyone and they will have more difficulty loaning in the future – two things that are an easy argument to prove (even though it’s not necessarily true) and very difficult to disprove (they are the arguments I would probably have come up with – they have a good lobbyist working for them)

Another provision that didn’t make it was one supported by House Member Barney Frank that would have expanded the FHA’s (Federal Housing Administration) ability to provide foreclosure assistance by providing $300 to $400 billion in new loan guarantees. Democrats are expected to re-introduce these two provisions in future bills, or maybe even as amendments to the current bill before its final passage.

This bit really would have helped ease the pain (but needed a lot more money) whilst the economy starts to show signs of recovery and then goes on to actual recovery, if these two cuts had made it into the bill, then there is a good chance if the bill had been pushed through really quickly (and I mean fast) that this would have reversed the situation. As it stands this bill will do nothing to hold back the tide and is a disgrace. The problem is that by the time they change their minds and add these things in, which they will almost certainly have to, then time will have passed and the situation would have gotten worse and these two items won’t be enough to hold back the tide. I’m sticking a stake in the ground here and I’m going to say later that I told you so.

This lack of action is not good news for us or the world as a whole, as I said in a recent article; a new administration was probably needed to take the action necessary to survive. The trouble is they won’t be in until January, so the chance of them getting anything through by this time next year is very unlikely. And frankly, the damage will have been done by then and a year delayed here will probably cost two or three added to the end of a recession.

On to how to solve it

There are different grades of mortgages obviously and I am going to simplify the solution here, as there would have to be some recourse and some variations. So what I’ll do is take the middle ground with say the occasional missed payment whilst in the teaser rate.

As they come to the end of their teaser rates the Fed should step in and offer to guarantee loans to these people. Therefore, lenders can now lend on these deals, and they should offer a 7 (less is too risky in the current American market) – 10 year fixed mortgage at say 1.25% – 1.75% above US rates. If people still default on that deal then they should be allowed to fail on their mortgage.

As the mortgage lender is now protected and can make a profit then they can get their money for the deal from the money markets, as with a Fed guarantee, then the money market will be confident to lend. The homeowners can now pay and stability will start to return to the market.

There should be some sort of fine to the original lender who lent on a no documentation loan when it fails at a figure of say $10,000. This goes to a fund to provide the local councils with capital to refurbish and sell on the property. This will hurt the lenders but will hurt them less than the current crisis is doing. This will stop future high risk borrowing as lenders won’t want their fingers burned. If a lender persists in getting their fingers burned then they should have a 3 strikes and you are out policy (obviously very over-simplified :-) ).

There should be a government funded body set up to look into the affordability of redemption penalties – needs a realist at the helm! This is specifically to cover ‘overhang’ loans where people are offered a discount rate for 2 years but redemption penalties for 5 (personally I think these should be banned outright). Then the body has the right to reduce or remove the redemption penalties. Or if they think the borrower should be allowed to refinance then they halve the redemption penalties and add them to the new loan (with a new lender) and the Fed secures it.

The barriers should come down on lending and be based on affordability and not 3, 4, 5 times the income. If a borrower locks into a 10 year fixed rate at 4.25% then they can afford say 10 times the income for example and this should be taken fully into consideration when lending. The percentage of their income used to service a loan on that affordability basis will still be less than 3.5 times the income on a 13% loan – or thereabouts :-) .

If some people still can’t pay the full amount of their mortgage, say up to 25%, then the Fed should step in and make the payment, or a new lender with a Fed guarantee makes the payment. Interest should be allowed to roll up, and be added to the principle sum (or both). Or the Fed begins to take a small percentage of home ownership and carries a further Fed base rate loan (the percentage the Fed owns is increasing as they make the balance of the payment to the lender monthly) and the person be given the remainder of the new 10 year loan to repay the Fed by refinancing, if possible, or they sell the home when the market has recovered.

This won’t appeal to all, but may appeal to most ordinary people. The management of all of this should be done by people who have nothing to gain from it (that’s the difficult bit). This does not get over the political problem of helping out those that have lied on their mortgage applications, but it will stop the crisis dead and return confidence to the market. In which case we live to fight another day!

Unfortunately they won’t do this as that would solve the problem and they only ever want to do 50% of what is needed. But I think there will be some amendments to the bill as things get progressively worse over the next few months.

So lets wait and see what happens next as, for all I know, sitting here in Cyprus watching the sun come up and looking forward to another day of temperature in the high 20’s, the Fed may have already changed the rules of the game once again while I’ve been writing this.

Best wishes

Andy

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What If Interest Rates Go Up?

By Andy Shaw | January 23, 2010

Originally Posted 14th April 2008

This article is taken from my reply to a question which was asked on the forums recently. I have included it in this section so that other site members can also benefit from it.

Question: What If Interest Rates Go Up?

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How The American Property Market Actually Ends Up Affecting The British Market Even Though They Are Totally Different

By Andy Shaw | January 23, 2010

Originally Posted 14th April 2008

Despite the fact that our property market is so very different from the US, and some would say unique in the world, if looked at from a superficial viewpoint then our market appears to follow the US. And this, I believe, is because that when the US market hurts it hurts so badly that it affects their economy, which in turn affects our economy, which in turn affects our property market. This is the way it really affects the UK market as our market otherwise is extremely different to the US.

So what will affect us from their market?

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If A Dead Cat Bounces When You Throw It Off A Building Has It Come Back To Life?

By Andy Shaw | January 23, 2010

Originally Posted 11th April 2008

I’ve read a lot about the American market to see which areas affect our own. There was a lot of chat from journalists last year saying that as the American market was falling ours would fall too as we followed suit to America. As our property markets were linked in some way if you like.

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Buy To Let Landlords Have Not Been Shaken Or Stirred By The Credit Crunch!

By Andy Shaw | January 23, 2010

Originally Posted 10th April 2008

A recent article in ‘Agreement’ Magazine which is an ARLA’s letting agent’s magazine said:

“Buy to let landlords have not been shaken by the credit crunch. Nine out of ten surveyed during the last quarter of 2007 state they have no intention of selling their properties for seventeen years. Four out of ten of them expect to invest further in the private rental sector this year.”

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Will 2008 Be Looked Back On As Worse, Or Much, Much Worse Than 1929? Part II

By Andy Shaw | January 23, 2010

Originally Posted 27th March 2008

Ok, following on from yesterday when I said, ’so what does all that mean for us on the other end of the scale borrowing money?’

If you are active in the mortgage market at the moment then you can’t help but notice how the mortgage rates are being pulled seemingly every five minutes. Which means every time I try and post some info the damn stuff is already out of date!

Well, what happened to the Feds change in criteria could mean that we get a trickle down effect as the banks can now start lending again in America (this is still to be seen, but the foundations have been laid). If confidence returns to the market and trust goes back into the balance sheets of the lenders then this could happen.

The trouble,  however, is that no one trusts each other’s balance sheets, because there are still so many sub-prime losses to be accounted for. A few weeks ago a hedge fund collapsed. As my regular readers will know I’ve been predicting this for a while now. Well this particular hedge fund was extremely conservative. It lent money only to America’s richest borrowers for mortgages on large homes. I.e. they just lent to the top 2-3% of the American market; it doesn’t get much more prime lending than that.

Their mandate, if you like, was to only lend to A credit ratings and above. As with any mortgages there are always under-performing loans (that’s only because they haven’t figured out how to get round this bit yet :-) )  so their security dropped its rating from triple AAA (the best) to something below A, which meant they had to sell because of their mandate – the principles by which the hedge fund was set up and acquired cash – This is the principle reason why I believe this crunch is constructed, because of this rule which effectively states that you know an opponent has to give in if you force him below a certain level of play. Then all there is to do is have enough control of the game (i.e. big enough) to force play below that level, and then it’s easy to pick your opponents/competitors off.

Well of course when they went to sell their MBS there were no buyers for their otherwise exceptionally strong portfolio. So in a market where there are no buyers they had to reclassify the asset value which, of course, on their balance sheet made them insolvent and so a domino falls (Granny just went bankrupt in monopoly, she had good property assets, several hotels, and if someone had just landed on them then she could’ve handled this short term cashflow problem, but she couldn’t handle it right now, and in business right now is what counts).

Well if a hedge fund with that level of security can fall in a market what do you think can happen to the ones that have pushed the envelope?

Sorry, back to the point, but do you see what I mean about so much going on at the moment, which bits are relevant? If a hedge fund fell when this wasn’t all going on then that would be pretty big news, today it doesn’t even get mentioned by the mainstream media.

You probably haven’t missed the fact that at the moment when the banks lower interest rates, then the mortgage lenders seem to be hardening their criteria and even raising interest rates. This is because the Bank of England’s primary market mover has little effect in a liquidity crisis (as all of the central banks are beginning to see). So the BOE are effectively stuffed, they want to lower rates to stimulate the economy, but their mandate for inflation is at 2%. So Mervyn seems to have finally talked Gordon into letting inflation go up to help the economy out but at a time when the banks don’t want to lend.

The only thing that will have a real effect right now is clear direction from the BOE and Gordon Brown (not easy from one of the world’s greatest ditherers :-) ) which means we need good management right now. Despite my thoughts towards Mervyn King I think he has the intelligence to do it. Unfortunately, the person pulling his strings is a moron and I can’t predict what the moron will not do next!

Here’s what they should do to resolve the problem now, but that doesn’t mean it’s good for the long term as I haven’t properly considered that. The BOE, our central bank, needs to lower their lending criteria to the banks and provide a safe home for their mortgage backed securities. If they do this effectively then banks can borrow again and confidence should/will return to the market.

Then what will need to happen is exactly as the Fed has done: slash interest rates. At least stimulate the economy for a couple of years before reigning in inflation. So will they do it? On the interest rate front, I doubt it. In my opinion they will go some way towards the reduced security, but I doubt they will go far enough to prevent it being a really long and drawn out painful experience for us all. As they only want to give 50% of what is needed, they are believers in the budge an inch and they’ll take a mile example.

I think, however, they will take a wait and see policy. I do think they will cut interest rates again this month, but unless they take other action then this will have little effect. They will wait and see what happens to the Americans and then decide what it’s best to do. Of course this fiddling whilst our economy burns can only be done for so long and if we do end up in a recession, or worse, it will be because of inaction by our central bank, the Bank of England.

Moving on to how to profit and obtain opportunity from this, it’s easy. I had a meeting with our acquisitions department last week, were they were all doom and gloom. So I said to them, ‘what’s the problem?’  I said that we are up to date with the no. of purchases required, we are buying cheaper now than we were 6 months ago, and we are still achieving the values we want and actually pushing them higher. ‘So why are you depressed? Frankly we’ve never had it so good with the exception of mortgage lenders.’ They said ‘yes, but we are getting worried.’ And when I asked why, they said because of the feeling that was in the market?? What happened is that they had let the media get to them, so I picked them up again and showed them the right direction to head in.

And I said, ‘Well let’s use that to buy even better than we are now; let’s use the next two weeks to ’scaremonger’ the Estate Agents into believing that life as we know it is over and not buy much property, if any!’ I then told them all of what I’ve given you above in this article and told them to go out and share this ‘doom and gloom’ with the estate agents and while they are there put really low offers in on property. Then just when they are about to leave they are restating our benefits as buyers, saying this to them:

”We will do the deal at that price, it may not be to your vendors liking, but we will complete at that price – you know our track record for completing; can the same be said for other potential purchasers? So if something else occurs like another Bear Stearns in the time between us agreeing to buy and exchanging, then your vendor knows we will complete. Can the same be said for any other buyers, especially first time buyers in today’s market? Will your vendor want to come back to us in 12 weeks time when they have lost their first time buyer: Do they think we will still offer what we have offered today?

”I suggest your vendor takes our offer while it’s on the table, as if another event happens then he may look back at this offer we have made now as the offer he should have taken. And we will not hesitate for a second to reduce our offer if the market indicates a further slow-down. Our offer today is based on where we see the market being- given what is currently happening. If it changes then our offer doesn’t stand and we may only be willing to pay less as the market has fallen further.

”We are the best buyer for their property as you well know, and if all they have to do is accept that by taking a little lower price, then they are effectively insuring that they have a sale and their lives can move on past this point. I’m sure you agree?” (Get the agent agreeing with you and saying yes – it really does get them on your side)

What I was doing was first getting the guys to say how bad the market is because most Estate Agents will not even consider that Bear Stearns has any bearing on their lives – as most other people think too (ignorance really is bliss).

Then after the chit-chat when the agent was feeling pretty depressed then they’d look at properties with them, passing comments like, ‘there’s not many people coming into the shop at the moment’, or, ‘don’t the phones ever ring in here?’ Then I’d get them to re-justify why that price is unacceptable in today’s market as there are no first time buyers worth having and doesn’t the vendor realise what the market is like at the moment. Then they would deliver their blow justifying it every step of the way. Then again they state their benefits as a buyer; quick completion, actually going to happen etc. Then just as they get up to leave they restate their benefits as a buyer and get the agent to agree with them.

What they are doing is attacking the Estate Agent from every possible angle so that they are beaten – men are easier to beat than women in these cases – I could go into the reasons why, but I’d be accused of being sexist (whereas I am just emotionless and using other people’s emotions to win the better end of the deal) and I don’t want to detract from the message.

When they leave the agent knows that they have more chance of making the sale and collecting a bonus payment with us than with any other prospect. All they have to do now is sell the vendor using some of the info we have provided to them for free in our chit-chat.

The biggest problem for us all right now is the mortgage lenders. As I have said before, I don’t find a property that works and then go and find a mortgage. No, first I find the mortgage and then I go and find a property deal that fits it. Believe me, this is usually a somewhat easier way to do things. However, at the moment with criteria and policy changing all the time, this is really going from easy to fairly tricky to almost downright difficult.

We have already lost the instant refinance capability with most deals because Mortgage Express has effectively pulled out of the main market by hardening their criteria. They are probably the only lender that allows an instant refinance with ease. What I am hoping is that MX’s owner is just slowing the lender down as they have too much of the market, or they are restricting lending in their last few months of their financial year. What I am hoping is that they will start to lend again in April as they are very liquid. What has happened to them is that they have effectively made themselves the only lender in the market worth going to for the new borrowers and experienced active property investors.

Long term players don’t use MX as much as their arrangement fees are too high and they don’t need as high loan to value ratios. But the real surge came from the more high risk element so I think that is why MX took themselves out very quickly.

So we are now left with the fact that we are tying up money for 6 months or going for other exotic deals similar to daylight bridges, which are not mainstream and therefore tricky to get to work. In my opinion tying up money for 6 months for a certain outcome is better than spending 6 months trying to get one of those deals to work and ending up with zip.

So what the changes that have happened in the last 8 weeks really mean for us is that the financial commitment has gone from 2–4 months to 6–8 months. This will slow things down a bit, but in today’s market I don’t think that this is necessarily such a bad thing.

The message is to educate the Estate Agents, offer lower prices, and be prepared to walk away as you are not surrounded by buyers. Today is a buyers’ market, so present this fact especially well. Frankly, I have never been able to buy property with so much value already locked in ever before!

Best wishes

Andy

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