Buy right to sell right, is an old maxim true of all investments and property is no exception.

Making sure your below market value (BMV) property deal provides expected returns and stands up to every scrutiny during and following purchase, also succeeds or fails at outset.

Hardly a week goes by without the media reporting that someone was convicted of mortgage fraud (see www.mortgagesolutions.co.uk). 

 

This article looks at how staying the right side of the law and how to make sure the math works favourably, is critical to becoming a successful, long-term investor/landlord. 

Obtaining a mortgage lawfully. Though most major lenders offer mortgages both sides of Hadrians Wall, how they use and rely upon the Royal Institute of Chartered Surveyors (RICS) report differs between countries.

In England & Wales, lenders don't accept a RICS report other than those they have instructed. This is why property agents south of the border generally use desk-top valuations and don't pay for a RICS report.

A lender RICS report does not require a structural survey but simply an assessment of value and rental income. Even though the buyer pays for the lenders RICS report, they have no legal rights to it whatsoever and may not rely upon it in law (see http://www.clydeco.com/attachments/published/58831/Scullion%20v%20Colleys_June%202011pdf]. 

Should the buyer want peace of mind and any line of redress concerning the integrity of a property, they must instruct and pay for an independent structural survey.

A lenders RICS report only values a property at the purchase price, irrespective of real asset value. This means a below market value property will be valued at its discounted price, which rarely reflects its true open market value. Undertaking ones own due diligence is essential to satisfy oneself of true open market value thus, immediate capital gain.

Mortgage applications require the purchase price to be stated: making any false statement a criminal offense. Prudent mortgage planning includes evidencing deposit funds.  A deposit being the balance of the purchase price less the mortgage offer.

In Scotland however, lenders currently accept a RICS valuation/rental report instructed and paid-for by the seller or their agent at the time the property goes to market.  

 

The sellers RICS report belongs to them, can include structural assessment and may be relied upon in law by the buyer to the extent the report formed part of the sellers contract of sale.  

 

Should the sellers report not include structural assessment. it remains the responsibility of the buyer to instruct an independent structural survey, if they wish to rely upon it as evidence of property fault later discovered.

A lender in Scotland's offer of mortgage is based on the sellers RICS report, which generally reflects open market valuation.

Capital Value, should indicate a property's real market worth on any particular day and in that particular town/neighbourhood. Genuine BMV discount is only as good as a properties true open market value.

 

Same type, good condition property should be similarly valued. Significant differences will occur where same type, poor condition applies.

For example, a key-ready, 3-bed, family home with front and rear garden located in a good position may be valued at £125,000, offered at a purchase price 25%BMV. A similar type neighbouring property requiring improvement in any of the kitchen, bathroom, decorating or garden maintenance may carry the same refurbished value of £125,000 but attract a lower purchase price i.e. 35%BMV.  Refurbishment costs deducted from open market value before BMV discount is applied. 

Immediate capital gain for typical, key-ready, BMV property is 33%. To calculate, divide the discount in pounds by the purchase price e.g. £100,000 at 25%BMV means £25,000 divided by £75,000 = 33%.

Rental Yield, is how much income is produced expressed as a percentage of purchase price.  To calculate, take the monthly rental income, multiply by 12-months to annualize, then divide it by the purchase price e.g. £500 pcm times 12-months divided by £93,750 (£125,000 less 25%) = 6.4% yield per annum. 

For investors new to property, or those with less than five properties in their portfolio, combined rents need to provide all on-going costs including mortgage payment, letting management fee and, in the case of leasehold property, the service charge. 

 

Excess rent will provide additional income, some to set aside for ongoing property maintenance and some to enjoy as after tax spending money. 

We recommend newer investors to BTL property focus their initial buying attention on Income rather than Capital Growth (though both generally apply to good BMV property).

 

Most pundits today suggest rental demand is not only increasing but accelerating, and will continue to do so for the foreseeable future. Until a stable portfolio with adequate rental income is established, it is prudent, within the current economic climate, to seek deals with at least £150 pcm excess rent at time of purchase. 

Subsequent exceptions might include property added to an established portfolio that focuses on Capital Growth. These properties are generally sourced within the major inner cities of the UK but purchase prices will be higher.

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