Golden Glove Extra (Rev 25/8/09)

 "What should I ask or know about property deals I am offered?"

•1.     General

This section applies to all property deals, not just HMO Daddy Deals. As with all business propositions there is a significant risk and there are rarely guarantees, and even when there are, what are such guarantees really worth? Be warned: the HMO business is not for the faint hearted or the rule orientated but for those who are prepared to take risks to achieve in the medium and long term extraordinary returns. 

Firstly, I would always advise you to check out who you are dealing with and only deal with people you trust. A crook might suck you in by offering a fantastic deal to start with but then rob you. If it is such a good deal then why are they selling it? Does it make sense? What experience do they have in what they are doing? Have they made it work themselves? Is it tried and tested or is it like City Centre flats - massively over-developed with uncertain demand? Always go away and think about the deal before deciding.

Secondly, physically visit the property - does it look and feel right? Talk to the tenants. If it is off-plan or untenanted there is a far greater risk as you cannot see it or know it can be let.

Thirdly, talk to others who know the business and are familiar with the area and type of business. (I know these people are not easy to find and if in the same line of business will not welcome competition so read between the lines.) I don't know why I suggest you do this because I did the same in the 1990s when I started to buy and all the local landlords I spoke to said not to buy! They believed the market had already peaked and expected a crash back to 1970s' prices! This is why I stuck to HMOs as I knew I would get a good cash flow irrespective of the value of the property.

Fourthly, do not accept what professional advisors tell you. Do ask them and listen to what they have to say but remember they are always looking at the downside and their professional liability insurance so they are bound to be negative. I am continually surprised how clueless professional advisors often are, especially solicitors and valuers. I missed most of Mortgages Express's BMV bonanza because my solicitor refused to do it saying it was mortgage fraud and money laundering. As one solicitor said to me when I went against his advice in case where I had a dispute with a company, sued and won: "I get paid the same win or lose, but if I said sue and you lost I would have difficulty getting paid!" All business deals are risky and we can all be wise in hindsight. Deals which made massive returns looked crap at the time - otherwise everyone would have bought into then. Property is like education, is an act of faith: you invest now believing it will pay dividends in the future.

Fifthly, use the same yard stick to compare deals. So often I see investors ignoring voids and rent defaults, repairs and service charges on single lets and massively over estimating these when analysing HMO deals. Even worse leaving all senses out of the equation when assessing a property in Spain or some other exotic location yet pouring cold water on a UK deal

Finally, make your own decision; getting good impartial advice is very difficult. I missed out on the boom in 80s because I relied on the opinion of others. ("Do not buy; property has no future.") The property business is not glamorous, doing deals is fun but the day-to-day job of landlording is a grind - you're nothing more than a door mat. However, you will wake up one morning in the future and find your properties have doubled or tripled in price. In the meantime you are stuck in the business, property is not easy to sell if you want out. It is a long-term business so do not buy unless you are prepared to stick at it for at least 10 to 20 years.

•2.     Will the property rent?

What is the demand from tenants in the area and what kind of tenants are they? I have no sure way of predicting this unless I have property in that area. I buy and if it lets quickly then I will buy others in the same area. Everything lets eventually if you are flexible as to who you are prepared to take, but if the property is slow to let I am not keen to buy in that area again. Town centres generally work better but not always. Perversely, some of what appeared to be my worst buys turned out to be my best properties but please do not read into this that you should buy the worst property in the worst area!

•3.     What rent will I get?

Look at the rent role of the property you are buying and the pattern of payment - often it is a case of "suck it and see." If letting to professionals or students the property websites give a good indication but to others the only available guide is LHA/HB rates, so if you are letting to LHA, look at the published rates. I have had enormous arguments with valuers over what rents are achievable. One insisted I could not achieve the rents I was achieving at the time (about twice the HB rates) even though I had over 10 properties in the area all achieving the same level of rent!

Eight years ago I bought two existing HMOs. The owner was a lovely lady who owned the properties for decades and I believe she was selling them as they had become a liability. I ran into her solicitor who had sold me the properties and he laughed at me for being such a sucker in buying the properties. When I sarcastically agreed with him that the properties were a bad deal, and told him that I had only doubled the occupancy rate by splitting the large rooms into two and increased all the rents by 50%, the look on his face was priceless! The point of the story is that this experienced landlady did not know the potential of her own properties and nor did the solicitor but then why would the solicitor know? (See my forth point in section 1)

•4.     Occupancy rate and rent default rates

This is often a matter of management. Manage it yourself and generally you will do far better than the so called "professionals". Two landlords next door to each other could have wildly different performance rates because of the different enthusiasm and dedication they put into running the properties. I have 80 HMOs and the void and rent default rates vary between properties from zero to as bad as 50%. When voids exceed 10% there is generally a good reason i.e. the property has recently been converted into a HMO, the whole property was let to a company and they left etc. Rent defaults generally vary with the quality of tenant: professionals tend to have very low rent default rates whereas with blue collar workers and LHA tenants you find a higher rate. However, even with the latter group good close management can still make an enormous difference to the rent collection rate.

•5.     Repairs and maintenance

Look at the current standard of the property and estimate its life expectancy. Normally an HMO needs refurbishing every 7-10 years to keep it to a high standard but if you are letting to HB then it is not so important.

Do the repairs and maintenance yourself and they cost very little, especially if you are prudent and shop around to buy materials. Pre-select your tradesmen on competence and value. Sometimes but not always, second hand is cheaper. (NB Ikea is often cheaper for furniture, especially when they have sales, than second hand.) HB tenants tend to cause more damage but are far less fussy than professionals who often demand the very best.

•6.     Planning

Very few HMOs have formal planning permission and it is a grey area whether a shared house needs planning permission or not. I rarely get planning permission as getting it causes more problems than not getting it. If the units are self contained, i.e. they have their own bathroom and kitchenette they should get established use after 4 years or if shared after 10 years and you will have to prove this if challenged by the planning department.

It is not against the law not to have planning permission, the planning authorities, before they can take action, have to show you are causing harm to the amenity by the change of use, ie the property is causing more harm by its current use than in its previous authorised planning use. So on the whole, enforcement is very difficult. However, the interpretation of words 'harm to the amenity' is so subjective that almost any proposal could be refused or approved and there are plenty of planning decisions to prove this.

Getting planning permission is a double-edged sword. With the property being an informal HMO you can always sell the property as either a house or an HMO. If it has planning permission as an HMO, you will only be allowed to sell it as an HMO unless you get permission to return it to single occupancy. In some areas permission is almost impossible to get to return the property to a single residence, especially where the value of the property as a single house would be higher than as an HMO! Strange that!

Providing the property has been in existence as an HMO for over 12 months and the planning authorities have not taken action then you can obtain contingency insurance against the lack of permission for a one off payment of between £100 and £200 - your solicitor should be able to arrange this.

•7.     Options and lenders

Options to purchase and to sublet are usually done without the lender's knowledge. The reality is that lenders don't care as long as the mortgage is paid. Technically it is a breach of the owner's mortgage agreement to enter into an option agreement without the lender's permission, and a good solicitor should tell you this. Whether to get permission is for you to decide but owners are often reluctant to ask and some lenders are known to refuse or take it as an opportunity to increase the interest rate.

Also, the owner is still liable on their mortgage on the property (if any) until the option is exercised ie. the property is purchased. Because of this, most solicitors will advise their clients not to agree an option and prefer an outright sale.

•8.     Building control

A standard question made by a purchaser's solicitor is along the lines of "Have any alterations been made to the property and if so has building control permission been granted?" If this is highlighted it can scupper the deal. Enforcement of building control is very rare, the local authority only have 12 months from when the works were done to enforce and they have to prove the works were done during the last 12 months. Like lack of planning permission, it can be insured against for a very modest fee, but what is the point?

•9.     HMO Licenses

Many solicitors and lenders believe that all HMOs have to be licensed. This is incorrect: it is only 3 storey HMOs let to 5 or more people who share a kitchen or bathroom that need to be licensed. If the property is only 2 storey it can have any number of tenants without needing to have a license. The problem with licensing an HMO is that you bring it to the attention of your Local Authorities' Housing Standards department (see 10 below) who often over-enforce questionable standards and involve the planning and building control departments.

•10.                         Housing standards

An HMO, like all properties, has to be safe, fit for the purpose, and all HMOs must comply with the Management of HMOs Regulations. Licensable HMOs also have to comply with certain standards stated in the Housing Act 2004, such as one bathroom for every five people. With licenceable HMO's the standards are usually much more rigorously enforced, especially fire precautions, than for non-licensable HMOs, which are instead supposed to comply with the very subjective Housing Health and Safety Rating Scheme (HHSRS). As the Local Authorities do not know about many non-licensable HMOs, most landlords do very little in this respect unless the Local Authority gets to know about the HMO, usually after a complaint is made. An experienced HMO landlord will generally know what is required or what can be got away with. Most of the standards make little sense - look at it as a tax on being an HMO landlord.

•11.                         Others

A solicitor, lender or valuer can always find a reason to scupper a deal or a re-mortgage if they want to. With all properties, especially older properties and even more so with HMOs, there is always something that could be identified as unacceptable. I once tried to sell a 2 year-old new-build flat and the purchaser refused to complete because the Environmental Search showed that there used to be a rubbish tip about a mile away! No-one had objected to this when I bought the property but the purchaser thought it could influence a purchaser in the future and so affect the property's value. He withdrew after 9 months leaving me with my solicitor's costs and lost potential sales to others.

•12.                        Warning

Please only agree to buy my deals if you are fully confident you wish to proceed as the reservation fee is non refundable and there are strict time limits to complete. Also ensure you have sufficient financial reserves to buy even if you are unable to re-mortgage.

If anything else concerns you, please ask. You can contact me at jim@hmodaddy.com fax on 0121 526 2222 or call me on 0121 531 5137 or 0755 445 2790 (best between 5pm & 7pm)