Is it worth using a property sourcing service?
It’s easy to think that the process of finding an investment property is simple - why spend a few thousand on property sourcing when you can save the money and do it yourself?
As with most things in life, there is always a balance to be struck between doing it yourself and knowing when to utilise a professional.
In this blog, we wanted to highlight some of the things you need to consider when investing – and when and why you might decide to employ professional help.
The idea for this piece started because we were out looking at some HMO’s for a couple of our sourcing clients and found a very familiar-looking bathroom…
A short history lesson on HMO conversions in Leeds
Between 2005 and 2008, hundreds of HMO conversions were created in Leeds, predominantly in LS4 and LS6. They were sold as ‘quality investment HMO properties’ for what subsequently turned out to be inflated prices to investors.
Bedrooms were crammed in (no space standards like there are today) and in some cases rents ‘pumped up’ with what was probably falsified tenancies – and it seems like almost every single one had this exact bathroom installed!
We have dealt with countless properties of this kind over the years.
As the promises of a ‘quality investment’ failed to deliver the inflated expectations, the owners were left very disappointed. Unfortunately this coincided with the 2008 financial crash and subsequent reduction in house prices throughout the UK. Landlords of these properties in particular found themselves in negative equity, compounded by only achieving a fraction of the projected rent. Some Landlords handed the keys back to the bank, others managed to pay down the debt or adapt and try to make it work, others sold the property and crystallised their loss.
For Landlords that bought these underperforming properties, they found themselves with a huge amount of stress, misery, loss of life savings/pensions, regret, anger…it affected thousands. Even now, some are worth less than the original purchase price.
Despite their past performance, the houses themselves now make for a decent investment, when bought at the right price and reconfigured. We have done this numerous times over years.
We have acted for thes owners of these properties and acquired others for our clients and the general theme was that a lot of the people that bought those houses were, to some extent duped. Many that we have dealt with purchased without viewing, checking the rents in the area, basically not completing the required due diligence.
But... could the risk of this outcome have been reduced? In short YES
Its important to note that since 2012, Leeds has had an Article 4 Direction, HMO License requirements have changed, and will continue to, SO there are more pitfalls to watch out for than in the early 2000’s!!
Going it alone
With over 15 years’ experience in HMO’s, investors will frequently get referred to us for a chat about an HMO property they have just purchased or are considering purchasing.
They may want to understand more about the management/letting aspects of the investment; or to get advice on potential works and upgrades; or to learn about the rents that they could achieve.
In many cases, they have been looking at properties and presented with ‘a great HMO deal’.
Potentially, we have spoken with them in the past about our sourcing service, but they didn’t want the ‘expense’ of paying a third party to find and secure their investment.
Even so, we will do our best to help. Some free advice can go a long way. It’s a lot of money at stake and we’ve seen, first hand, the impact it can have if it goes wrong.
The conversation generally goes a little like this:
Investor: “I’ve been offered a 4-bed, it could be a 5-bed HMO, it’s well presented’ or ‘I’ve offered on a nice 6-bed, I just want to check the rent”
Property Elevate: “Have you got the details? I’ll take a quick look. What’s the C4 history and does it have Lawful use as it’s in the Article 4 Direction area?”
Investor: “What’s C4? What’s Article 4 Direction?”
Property Elevate: “The kitchen/living room doesn’t look big enough to meet the HMO space standards, also there is a really small bedroom.”
Investor: “What minimum space standards?”
Property Elevate: “It looks pretty dated, that’s why the rent is low. It really needs updating, have you budgeted for that?”
Investor: “The photos look nice and I’ve been told it’s been updated fairly recently.”
Any one of these elements in itself is potentially a very very costly issue, combined, they could be a disaster, not to put too fine a point on it, but these conversations have happened, a lot!
There are MANY more things to consider when looking at a HMO. Such as: historic occupancy levels, location, rental strategy vs tenant profile/location, remedial works, compliance, cosmetic upgrade costs vs rent & capital return, the target market… and so on and so on!
It’s easy to see how people can wind up spending their hard-earned savings buying a HMO investment they plan to contribute to their retirement, or as an additional side income for when their kids go to University, but it turns out to be a burden that causes massive stress and potentially serious financial loss!!
There are checks during the buying process that may prevent that outcome, but at what point and at what cost?!!
People say ‘You learn best from failure’
While that adage may be true… it can also be very costly!
If the investor is going it alone, without experience or extensive research, some of the issues SHOULD be discovered during the purchasing process - and possibly/hopefully resolved before it’s too late. That’s without employing someone beforehand, or having had a ‘lucky’ conversation with someone who knows the complexities of the type of investment they are making.
The Conveyancer will capture the Article 4 Direction in the searches, but they may only ‘inform’ the investor of it and not explain the ramifications of what is needed. Also, unless specifically instructed, they may not take it further (again we have dealt with this plenty of times when people come to sell - and they find that they can’t as it doesn’t have the required evidence for C4 Lawful Use).
The mortgage company’s Valuer (if there is a mortgage) may also then capture C4 issues, alongside the sizes of the living room (YES, there are minimum requirements for communal spaces for HMO’s in Leeds!!) etc.
If they instruct a decent Surveyor who deals with HMO’s, they will most likely check room sizes and compliance elements, and report back to the buyer. As well as raise the condition as part of their report.
…So, an issue with planning or room sizes has been flagged up, phew!
BUT how much time has the investor spent on viewings, crunching the numbers, the purchase, not to mention the costs of the solicitors, survey, valuation, broker fees, their time out of work and attending viewings, just to get to that stage?
Then, once at that point, what do they do with that information?
Option 1: They pull out and start again. Now they have some experience and idea on what is involved (and it’s ‘only’ cost them £3-4k+ and 5 months of lost time), they go again….only it’s another 6 months later. Hopefully the next one will be fine.
Option 2: They proceed and probably renegotiate, only to find out that the property cannot achieve the rent level expected as it does not meet HMO requirements; or the condition of the property means it does not let. Either way, they’ll have to spend £20k, £30k, or even upwards of £40k to update it to the required specification and compliance… plus, they have to forgo any rental income by voiding it while they complete the work.
That’s not all. They also need to find a suitable contractor to take care of the works, ensure it’s compliant, get it furnished, plus an agent that can competently let and manage it.
Imagine if the investor themselves isn’t even based in Leeds. More often than not they are not local and could be in London, Hong Kong, Scotland, Europe… anywhere across the globe.
The whole process becomes a total nightmare to manage.
When should you use a professional property sourcing agent?
With all the potential pitfalls, and such a steep learning curve to master, is it worth engaging an experienced person/company to secure an HMO?
To answer this question, there are a number of significant factors Investors need to consider:
This is the big one, it’s not just about experience in property investments but specifically experience of HMO’s, the type student or professional, rental strategies, pricing, refurbishments, values, the local market.
To view, research, progress, manage any work, to build the network, all take up a hell of a lot of precious time. Many investors already work long hours, have families, downtime, hobbies, and holidays with little time to spare to dedicate to such an important (and often lengthy) project.
Being local makes it easier, if you are based some distance away then this makes it more difficult. The further away you are will also impact the first two points more.
The majority of our property sourcing clients value their time, want to leverage our skills, network and experience to de-risk their investment, ultimately to provide a decent return, reduce stress and hassle!
Our typical property sourcing client will have cash but little time outside of their already busy lives. Many don’t live locally and property is not their ‘thing’, instead they tend to be busy professionals like an engineer, doctor, teacher, accountant, investment banker or company director.
In a property purchase, let alone a HMO purchase, it’s not unusual for at least one issue to arise – and often it’s multiples of them. When they do come up, it takes time and experience to resolve, or there may not be a solution and so the whole transaction falls apart. It can be very stressful indeed!
Equally ‘when’ an issue does arise, such as a survey report identifying areas for remedial works, nailing down the true cost and negotiating accordingly can ensure that the deal still works.
On balance, working with the right sourcing agent with suitable experience can:
- Significantly de-risk the purchase
- Speed up the process
- Save cost
- Add significant value
- Reduce stress
- Free up time
By employing the skills of a professional, they find that their fees are paid back many times over. After all it’s an investment spanning 10-20 plus years!
A compromise could be to employ a third party for the first HMO investment, get to learn, build contacts and experience for their next one, where they go it alone.
OR
They value the time saved, income produced, stress removed and reassurance provided and conclude it was well worth the ‘cost’ of leveraging the experience and time of said third party after all, and go again.
Why learn from failure when it can be avoided, especially when the sums involved just to purchase a HMO are often in excess of £75k?
Investments carry risk, no one can eliminate them all, there are no guarantees. But there are ways to mitigate risk and reduce them.
Always DYOR (Do Your Own Research!!)!
Click here for a closer look at our Property Sourcing service or reach out to the team on 0113 467 1584 to discuss your options.