UK Repossession Thread - A detailed journey

[ScottyB]

Good Morning folks,

I have been a member for sometime researching the Australian market and deciding which way I was going to go next on my investment journey. I have decided that I am going to continue to buy in the UK and I am going to use this thread as the place where I document my journey for all to see and learn from, firstly some background:

History:

I am a UK qualified IFA and Mortgage Broker (No longer current) with old networks in Scotland (I will be focusing purely on Scotland) an old career and home I moved away from some time ago but still with active links via investment networks.

It has taken nearly a year to ensure everything was in place to source secure and value add on UK repossessed property.

There are a huge number of routes to source the property from and it has taken longer than we would have liked to peel through the layers to buy as close to source as possible (Avoiding middlemen adding their slice)

We also needed to find reliable tradesmen to bring the properties up to a good standard in a quick timescale (We aim for a 3 month turnaround start to finish) just the same as here in Australia this is easier said than done.

Strategy:

We buy Scottish properties where the asking price from the lender is discounted significantly from the independent RICS valuation (Royal Institute of Chartered Surveyors) anywhere from 25-50% is our aim.

As in Australia the lender has a legal responsibility to achieve as much as possible for the property however there is stock available with these and sometimes even better discounts.

This is only the first stage, as we know Scotland like the back of our hand (Existing portfolio and lived there most of our lives) we actually remove a large number of properties from our interest list due to local factors which we benchmark them on, I can't disclose all of these for obvious reasons but I will say that it is a highly regarded score card system with some local knowledge thrown in.

As an example:

We had the opportunity to buy a 2 bed flat in Bellshill North Lanarkshire (About 10 miles South East of Glasgow City Centre)

The independent RICS valuation was at 60k (GBP) and the lender was happy to accept 27k (GBP) which is a huge discount.

With legals and refurb costs we could have had this property ready to flip/keep for 32k (GBP)

On carrying out our due diligence we found that the local area was being ear marked for social housing predominantly for homeless tenants (Ex Eastern Block new arrivals to Scotland) in a high rise literally round the corner from the property in question.

As you can appreciate this discounted it as a property of interest very quickly and we moved on to our next potential purchase.

Options:

We work on 3 potential options which we decide on before we commit to the purchase

1 - Refurb and flip to a fellow Investor with a significant discount from the RICS valuation - Aiming for circa 10k (GBP) profit after all costs

2 - Refurb and sell via a local estate agent for as near as full market value as possible - Depends on cash flow as this may take several months longer than Option 1

3 - Keep the property and rent out at local market rates either to a member of the public via an agent or via the local authority Private landlord scheme

Note on Private Landlord schemes

Every Council in Scotland has the ability to have their own Private Landlord Scheme depending on local area demand. We have several properties rented directly to the local authority under this scheme, it normally entails a 3, 5 or 10 year guaranteed lease with annual increases in line with the Retail Price Index.

The rent is paid quarterly in advance and it is a nice hands off approach to renting. We get paid even if the Council has nobody living in the property.

It would take too long here to explain why this scheme came about but it is a combination of local laws (Every person claiming homelessness must be catered for) and lack of available authority housing (People were given an option to buy their social housing with heavy discounts and did so) therefore the council need Private Landlords to bail them out.

Why Scotland/UK?

Personally I believe it is much better value than the majority of Australia.

Scottish Pensions are just about to be amended to allow property purchases, potentially fueling an increase in property buyers/investors similar to the SMSF boom here in Australia

The UK housing market especially at the lower end where we purchase will likely give good returns when the market recovers (If and when which is why we use Option 3 for 10 year holdings to diversify)

The AUD/GBP exchange rate is circa 1.80 long term forecasts point towards a continued weakening of the AUD which gives as a Forex profit when we sell and move the funds back to AUD.

Next steps:

We currently have a short list of 3 potential properties and will be moving on 1 potentially 2 of these within the next week or so.

As soon as we do this I will post PDF's here for full transparency and for people to follow and ask questions on. I will also post regular updates on closing, refurb etc so that folks can track the progress in real time.

Until then please feel free to ask any questions you may have.

Regards

ScottyB

 

[DavidMc]

Sounds interesting. Looking forward to seeing how this goes. Best of luck.

 

[starter]

What's the financing situation Scotty?

 

[ScottyB]

What's the financing situation Scotty?

Hi Starter

2 sources of funds

1 - SMSF purchasing using available funds 100% of value of the property no lending available as UK property. Taking care to ensure ATO protocol is not breached for overseas property.

2 - Personal funding outside of SMSF in the name of lower tax payer again purely cash initially.

Regards

Scott

 

[ScottyB]

Sounds interesting. Looking forward to seeing how this goes. Best of luck.

Thanks David,

Appreciated

Regards

Scott

 

[MTR]

Hi ScottyB

This is interesting.....

Another suggestion, you could also sell onto an investor, charge a fee for your services (similar to BA fee, ie $5000) and the investor pay for the renovation, however this would need to be itemised, which makes up part of the deal. You could then in effect have huge turnover and not using any of your own funds, this is huge. As currently you are limited by the amount of cash you actually have

What is the gross yield for average property????
If you sell to investors and build a data base of clients they would I assume be looking for high yielding properties.

I purchased 8 properties in USA, just looking at what I purchased and comparing perhaps some similarities to what you are doing in UK. My properties were foreclosures and were sourced directly from the Government, not the Banks, therefore I was able to secure these cheaper than what was on the market and also cutting out the middle man.

Do you have property management in place, this is a huge issue in US, as they do not follow the Aussie model and are in the main pretty bad.

You state that you see this market as much better than Aussie market, perhaps because of the lower entry level, it still is dependent on yield and growth will be a bonus. The down side is you can not leverage, same as in USA, can not get loans. Investors will need to pay cash, unless they have lots of equity/cash they may only be buying 1 or 2??

I am really looking forward to reading much more about this, and I also wish you great success.

Cheers
MTR

 

[Blacky]

Scotty
What if any impact will the pending vote have on the economy in Scottland - and hence property values?

I understand that quite often with this level of uncertainty a lot of investment stops, so the economy slows until there is a clear direction (providing the savy with opportunities), however, what about the long term?

While I dont believe the independance vote will fly, if it does, I believe the economy will suffer in the near term as the UK pulls out a lot of its investment.

It is an interesting strategy. One of my major issues with it is the fact that you are using 100% cash - therefore you lose all the advantages of leverage, which to me is a major factor in realestate investing. You can often find better returns elsewhere $for$ when there is no leveraging involved.

Added in the currency exchange risk... You are relying heavily on future capital gains (or your ability to purchase at a significant discount), However - you have mitigated this by having "insider" knowledge.

Anyway - I wish you all the best with it. Keep us informed.

Blacky

 

[MTR]

Blacky
This is exactly right, similar to USA foreclosures, as you can not leverage you are relying on high yield for income and future growth is a bonus, however prices have now almost doubled now, that's just a bit of luck there.

Certainly makes it a higher risk proposition. I don't know much about the UK market, but need to go in with eyes wide open, similar to US. Many got burnt buying in areas such as Detroit or just buying rubbish, properties in the hoods.

 

[starter]

Thanks Scotty.

I agree with MTR and Blacky, it sounds like a great idea but not being able to leverage would not suit a lot of investors.

I went though a similar decision at the start of 2012, I looked at the US market and was contemplating dipping my toe in. However, only had about 70k at the time which would have only allowed the purchase of 1 property, instead I used it to leverage up and for 2 units in western sydney. The US property would have needed to at least triple in value to get anyway near my return on investment.

 

[Blacky]

Blacky
This is exactly right, similar to USA foreclosures, as you can not leverage you are relying on high yield for income and future growth is a bonus, however prices have now almost doubled now, that's just a bit of luck there.

Certainly makes it a higher risk proposition. I don't know much about the UK market, but need to go in with eyes wide open, similar to US. Many got burnt buying in areas such as Detroit or just buying rubbish, properties in the hoods.

To me the events in the US were quite exceptional. There was a massive crash and a lot of foreclosures, which was an extaordinary event. In the UK the market is fairly stable though maybe in a slow decline(?). I cant see a 'bounce' occuring anytime soon - with properties doubling in value. Hence Scotts reliance on purchasing well below market and adding value.

Added to that the GBP is at (or close to) its long term average price. Therefore IMO there is a 50/50 chance of it going either way. When you were purchasing in the US - the exchange rate was at an all time high... so in many ways, even if the market did nothing a 10-20% increase in (AUD)value was just around the corner.

But like anything know your market, and you have a competative advantage.

I like your idea though, of generating revenue using OPM.

Blacky

 

[MTR]

.... and Starter you did well as you purchased in a rising market in Oz and leveraged so able to buy more than 1 property.

If you could only buy 1 property in US cash then I would also have avoided US, there would be very little point as there are also many costs involved ie legal, accounting etc. One property is suicide in US IMO.

If the UK properties do not provide high yields I really do not see the point.

My total investment in USA was $500K and I bring home around $5000 per month income and leave $2000K in US. Also the Au$ is lower so currently its a win for me.

 

[starter]

Definitely MTR, if I had 500k to play with and income yield was what I was after then it would be a different story.

 

[MTR]

To me the events in the US were quite exceptional. There was a massive crash and a lot of foreclosures, which was an extaordinary event. In the UK the market is fairly stable though maybe in a slow decline(?). I cant see a 'bounce' occuring anytime soon - with properties doubling in value. Hence Scotts reliance on purchasing well below market and adding value.

Added to that the GBP is at (or close to) its long term average price. Therefore IMO there is a 50/50 chance of it going either way. When you were purchasing in the US - the exchange rate was at an all time high... so in many ways, even if the market did nothing a 10-20% increase in (AUD)value was just around the corner.

But like anything know your market, and you have a competative advantage.

I like your idea though, of generating revenue using OPM.

Blacky

I see what you mean, I don't know this market.
I do know some buying in Ireland and have heard this is a good market to jump into, no idea whatsoever?? Once again cash is required.

Yes, leveraging using OPM, is the way to go, however it wont work if the product does not provide the right yield, and the right set up to make it attractive to investors.

 

[MTR]

Definitely MTR, if I had 500k to play with and income yield was what I was after then it would be a different story.

Makes sense, That $500K is now worth close to $1M.

So if you invested $70K its probably worth around $140K now, was it Atlanta??, Though I am sure you have made much more in Oz. West Syd gone crazy nuts... noice

Leverage is so powerful.

 

[starter]

Have you thought about what 500k leveraged into West Sydney would be now!?

Great timing though on your entry and the steady income stream is very noice!

 

[MTR]

Have you thought about what 500k leveraged into West Sydney would be now!?

Great timing though on your entry and the steady income stream is very noice!

I purchased in West Syd 3 years ago and I purchased about 6 development sites in Perth during the rise, and 1 in Melb all rising at the same time as West Syd. I had to make up my mind whether to continue in West Syd, but I chose to become a property developer and realised it was far more sensible to stick to my own back yard Perth, which was just as hot as West Syd at that time. Fortunately I was able to mix US property stuff with Aussie stuff which was the plan.

 

[Blacky]

I purchased in West Syd 3 years ago and I purchased about 6 development sites in Perth during the rise, and 1 in Melb all rising at the same time as West Syd. I had to make up my mind whether to continue in West Syd, but I chose to become a property developer and realised it was far more sensible to stick to my own back yard Perth, which was just as hot as West Syd at that time. Fortunately I was able to mix US property stuff with Aussie stuff which was the plan.

Remind me again where is the MTR interview?

Thats amazing. 20 properties over the course of a couple of years - spread around the country and the world.

Great stuff!

Blacky

 

[MTR]

Thanks Blacky, very sweet. However, am not that keen on interviews whatsoever, its just not me. I have a couple of people I am mentoring and that is fulfilling. I have had plenty of free help/advice during my years of investing, my turn to give back, and its fun

 

[starter]

Echo Blacky's post, what a great result achieved in the last few years MTR.

 

[ScottyB]

Great conversation guys and good to see.

Here are some answers to some points raised:

Gross Yields are averaging at circa 15% (Varies by 2 to 3 % each way depending of course on purchase price and reno costs)

Property Management in the UK is in hand, we have worked our way through a large number of so called agents over the last few years and have now settled on a company who deliver to our needs and have done consistently over the last year or so. The good news is that "Central Scotland" where we focus is not particularly big so can be serviced from 1 or 2 satellite offices which these guys have.

Our aim is to always have the property "Ready to rent" e.g. Gas and Electrical Safety Inspections completed, local authority registration submitted and tenant found, insurances etc in place so that any Investor Buyers have an easy entry.

Of course one of the options relies on Private Leasing back to the State which is more hands off however not without it's red tape.

Great conversation on access to funds, the SMSF funds are of course limited, however purchases outside of SMSF for me have the biggest opportunity.

Being UK citizens but Australian residents with an existing relationship with the HSBC we are looking to leverage off cash purchases and have Lines of Credit secured on them releasing 70% of their value allowing leverage going forward. Obviously we can't do this with SMSF purchased properties, they will just be cash cows contributing a monthly return to the SMSF.

Ah yes Scotland voting for independence, a bit like turkey's voting for Christmas if you ask me

It is a risk absolutely and could have a significant impact on the Scottish economy, personally I think the vote will be a no all be it tighter than most people would like and I am comfortable with the risk at this time and have made a conscious decision to keep purchasing on that basis.

Great observation on the Buyers Agent type set up, we had considered this from the off however would prefer to walk the walk ourselves first with demonstrable success and then if others wish to engage us to assist them do the same then we would of course look to provide a service.

I wouldn't feel comfortable doing it any other way.

Regards

ScottyB