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Interview with a RICS Surveyor

February 10th, 2010
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Whilst several indices are pointing to recent rises in house prices lead by more activity in the market place, investors are still finding it difficult to firmly establish the real value of property in the UK.  We were therefore very pleased to be able to interview Charles Dixon – a RICS surveyor with over 26 years of experience in the industry. Charles provides some insightful information of much relevance to UK property investors including a definition of what ‘value’ means in 2010; modern day valuation techniques; due diligence tips; his own thoughts on the property market; regulation of the property industry and much more…

1) Can you explain a bit about your background? I have worked in the property world since graduating from Reading University in 1976 initially in the South Midlands and East Anglia, but for the last 26 years in  the West Country counties of Cornwall, Devon, Somerset and Dorset.   I have always worked within a private  professional practice with a wide range of clients as well as participating on regulatory and ethics  committees with the RICS nationally.   I have always enjoyed this part of my career and, more recently, have been able to witness the surveying profession evolve into a system of self-regulation during a period of huge change in the property industry.

2) Why did you decide to write the book?  I was introduced to Peter McGarrick, the founder of Quicklook Books, by a mutual friend. Peter was looking for someone to write a Quicklook@property and I was attracted to the project.  Having never previously tried my hand at writing and thought that a modestly sized publication of this type might be within my capabilities as a novice!   I am often asked about the Property profession as a career and it always strikes me how little school leavers and graduates understand about the very wide range of different activities in the property world – and so this book will help to inform those interested in entering the profession or anyone just curious about the UK property industry.

3) What is your definition of ‘value’ in the 2010 UK property market? Here is the non technical answer (the technical answer is the definition in the RICS Red Book):  The UK property market is a largely open and free market made up of thousands of individual transactions made by people and organisations  with wide-ranging objectives.  A free flow of information in the market is essential in informing the decisions behind those transactions. The internet has revolutionised the availability of information on transactions and has made it accessible to everyone; whereas before only people in the industry had such information. This has enabled many more people to join the property owning community.  Value is what one person will pay to another for a property and, if value is not to be distorted, both parties must be well informed and acting in an arms length relationship.

4) Would it be fair to say that most surveyors are taking a conservative view on the valuation of property due to the uncertainty of the market?  Surveyors base their assessment of value not only on comparable evidence of  similar transactions but also on their assessment of current market sentiment, the volume of properties available and being traded and of course many external factors that bear on the individuals undertaking a property transaction – for example: the general state of the economy, interest rates , taxation policies etc.  If surveyors are taking a conservative view, this should reflect a conservative approach that parties are taking in actual negotiations and transactions and reflecting the uncertainty of the market of which they form part.

5) The majority of investors reading this are residential property buyers – one difficulty that has emerged as a result of the low market activity is the ability to obtain comparable sold data.  What are the best steps that can be undertaken from your point of view?  Data on property transactions is available through many free websites and through the Land Registry. Statistics on trends are also available free from the Department for Communities and Local Government and indices on house price movements from Halifax Bank and Nationwide Building Society. There are also subscription websites giving additional data which further knowledge about local markets (such as ‘Hometrack’). Agents are generally willing to help with information on transactions in their area provided they are approached tactfully and they are not restricted from giving information on a transaction by confidentiality. The current situation is dramatically better for individual investors than it has ever been and over time it is likely to improve further with the further development of the internet. However when there are so few transactions as we are currently experiencing, it is difficult find comparable evidence. This is a difficulty for professional Valuers as much as the general public. It needs deals to be done to establish the market. In these conditions investors may be taking greater risks as their decisions are less well informed. Property transactions have never been risk free and it may be that, after a long period of a rising market before this recession, some people became too complacent and assumed that their property transactions could not fail.

6)  Can you talk through the processes that you would undertake prior to visiting a property in terms of your own due diligence?  Terms of business must be agreed with the client before visiting the property. Very often the client is pressing to have the advice/ survey/valuation as quickly as possible so that office based research sometimes happens after a visit rather than before. In any case, the Surveyor can target his research more efficiently if he has first visited the property and actually it and its location. Depending on the purpose of the report, the Surveyor will want to consider most of the following:

  • planning consents;
  • short, medium and long term planning issues in the area;
  • recent works of repair / improvement to the property;
  • available consents;
  • guarantees;
  • boundaries and related responsibilities;
  • location and routes of utilities;
  • environmental issues;
  • contamination issues;
  • presence of mines;
  • flood risks;
  • subsidence risks;
  • details of construction if it is non-standard;

Much of this information and more is available through a local Authority search and website enquiries from various organisations.

7) Similarly, if you are requested to undertake a ‘desktop’ valuation what steps would you take?  Surveyors should be very wary of desktop valuations which can be misleading to the recipient if the basis of the valuation is not properly understood. In general, such valuations should only be undertaken when the property has been previously inspected and preferably not too long before. Such valuations must clearly state the assumptions on which they are made. They are best avoided when a surveyor is dealing with the general public who will probably expect the same level of knowledge of the property as if it had actually been inspected and may feel let down if they subsequently find changed conditions which had not been identified through the lack of an inspection. Having said that, Valuers will often give informal market advice on a property without having seen it recently or maybe at all, however investors generally understand the difference between a formal Valuation Report and  an  informal opinion often expressed verbally.

8)On the back of the last two questions, do you think residential house prices in the UK are still over-valued?  In my opinion, residential house prices are too high in relation to salary levels – particularly if as a society we wish to encourage a home owning culture. This is not a fault of the property market, but of external factors that bear on home buyers such as a lack of new homes available to buy thus restricting supply. In an open market such as the property market in the UK, home buyers are competing for the available homes to buy with other types of purchasers such as foreign investors, buy to let investors, holiday home buyers etc. Unless the government intervenes to disadvantage these other types of purchasers (which I would not advocate) they key to reducing prices is to increase the supply of homes on the market.

9) Should residential property investors take more of a ‘value’ based approach – as is what is more common in commercial property?  If the motive for purchase is property investment then yes, a value based approach is the best advice.  However, when people buy for their own occupation and use they apply many different subjective criteria and will sometimes ignore the rational behaviour of the market and pay in excess of what the property could be resold for. This is a valid part of a diverse open market that sometimes makes it unpredictable for those observing it from a distance.

10) You are a major advocate of regulation of the property  industry – and your book discusses this in detail – what kinds of measures do you think should be in place? I am an advocate of the proper regulation of individuals working within the property industry particularly to protect the inexperienced general public who occasionally participate. I do not particularly advocate regulation of property itself unless there is a clear need . In many parts of the property industry there is a clear need and obvious benefit from various types of regulation, however in general I feel that there has been excessive and too complex regulation in recent years to the extent that some people ignore areas of regulation or the regulation restricts the market. Regulation should be proportionate to the benefit achieved and should be simple and straightforward so that it is accessible  and understood by everyone.

11) Is there a difference, in your opinion, between regulation to install professional principles into the industry and the government just sticking their oar in?  Governments are motivated to regulate where they feel that consumers are adversely affected or if the market is acting imperfectly or against policy objectives. Governments are also motivated to find ways to tax property which is a good store of private wealth and an easy target for the raising of public finance. Sometimes Governments will regulate in pursuit of social policy objectives. In general, the government in the UK has not regulated much in pursuit of encouraging professional principles, but rather has relied on the industry self-regulating itself through its professional bodies such as the RICS and NAEA. The Government has resisted the temptation to statutorily regulate Estate Agents which it could have done at any time by using powers in the  Estate Agents Act of 1979.   This means that the professional bodies need to be constantly looking at themselves critically to ensure that they are reflecting public opinion and public concerns by adapting their regulatory arrangements to keep up with best practice.

12) Can you please explain more about your book and how readers can access it?  The Quicklook Books series is designed to wet the appetite of the reader by giving a broad view of what may be a deep and complex subject by giving a brief overview in a light and readable format. Being purchased over the internet gives the reader a  range of convenient formats ranging from printing their own copy to reading on a PC or e-reader. The quicklook series are excellent value for money at £2.99 each and enables  the reader to investigate a subject without spending fortune on an expensive textbook. The e-format will enable the Authors and Publisher to regularly review and refresh the content to keep it relevant and uptodate without the usual costs of conventional printing and publication. There has been doubts raised by many in the publishing world about whether fiction publishing will move easily into e-books, however technical and business publishing is already well developed on the internet and Quicklook books is a new development of this growing trend for the accessing of information.

Quicklook@property takes the reader through the history and structure of the UK property market. The working of the market is explained and the roles of some of the main occupations in the industry such as Architects, Surveyors and Town Planners. The book goes on to discuss the regulation of the property industry and explains the workings of the development industry. I have highlighted just a few of the well known people and property development projects of the last half century in order to illustrate the level of complexity and sophistication that the property industry has achieved in the UK. The reader is also invited to mentally participate in the execution of a fictional development project in “Exchester” and considers some of the likely future areas of evolution for this key sector of the UK economy.  Quicklook@property is available from by clicking on the following link:  purchase the Quicklook@property for only £2.99.

Can you explain a bit about your background?
I have worked in the property world since graduating from Reading University in 1976 initially in the South Midlands
and East Anglia, but for the last 26 years in  the West Country counties of Cornwall, Devon, Somerset and Dorset.
Over this period I have worked for a wide range of clients and undertaken a very wide range of professional work.
I have always worked within a private  professional practice . I have participated on regulatory and ethics
committees at the RICS nationally and have enjoyed this work, particularly seeing the way in which the surveying
profession has evolved a system of self-regulation during a period of huge change in the property industry.
Why did you decide to write the book?
I was introduced to Peter McGarrick, the founder of Quicklook Books, by a mutual friend. Peter was looking for
someone to write a Quicklook@property and I was attracted to the project, having never previously tried my hand at
writing and thought that a modestly sized publication of this type might be within my capabilities as a novice!
I am often asked about the Property profession as a career and it always strikes me how little school leavers and
graduates understand about the very wide range of different activities in the property world – and so this book
will help to inform those interested in entering the profession or anyone just curious about the UK property
industry.
What is your definition of ‘value’ in the 2010 UK property market?
Here is the non technical answer ( the technical answer is the definition in the RICS Red Book):
The UK property market is a largely open and free market made up of thousands of individual transactions made
by people and organisations  with wide-ranging objectives. A free flow of information in the market is essential
in informing the decisions behind those transactions. The internet has revolutionised the availability of
information on transactions and has made it accessible to everyone; whereas before only people in the industry
had such information. This has enabled many more people to join the property owning community.  Value is what one
person will pay to another for a property and if value is not to be distorted both parties must be well informed
and acting in an arms length relationship.
Would it be fair to say that most surveyors are taking a conservative view on the valuation of property due
to the uncertainty of the market?
Surveyors base their assessment of value not only on comparable evidence of  similar transactions but also on
their assessment of current market sentiment, the volume of properties available and being traded and of course
many external factors that bear on the individuals undertaking a property transaction – for example the general
state of the economy, interest rates , taxation policies etc.  If surveyors are taking a conservative view, this
should reflect a conservative approach that parties are taking in actual negotiations and transactions and
reflecting the uncertainty of the market of which they form part.
The majority of investors reading this are residential property buyers – one difficulty that has emerged
as a result of the low market activity is the ability to obtain comparable sold data.  What are the best steps
that can be undertaken from your point of view?
Data on property transactions is available through many free websites and through the Land Registry website.
Statistics on trends are also available free from the Department for Communities and Local Government also the
Land Registry and indices on house price movements from Halifax Bank and Nationwide Building Society. There are
also subscription websites giving additional data which further detailed information (such as ‘Hometrack’). Agents
are generally willing to help with information on transactions in their area provided they are approached tactfully
and they are not restricted from giving information on a transaction by confidentiality. The current situation is
dramatically better for individual investors than it has ever been and over time it is likely to improve further
with the further development of the internet. However when there are so few transactions as we are currently
experiencing, it is difficult find comparable evidence. This is a difficulty for professional Valuers as much as
the general public. It needs deals to be done to establish the market. In these conditions investors may be taking
greater risks as their decisions are less well informed. Property transactions have never been risk free and it may
be that, after a long period of a rising market before this recession, some people became too complacent and assumed
that their property transactions could not fail.
Can you talk through the processes that you would undertake prior to visiting a property in terms of your own
due diligence?
Terms of business must be agreed with the client before visiting the property. Very often the client is pressing
to have the advice/ survey/valuation as quickly as possible so that office based research sometimes happens after
a visit rather than before. In any case, the Surveyor can target his research more efficiently if he has first
visited the property and actually it and its location. Depending on the purpose of the report, the Surveyor will
want to consider one or all of the following : planning consents / related policies applying; recent works of
repair / improvement to the property; available consents; guarantees etc. A plan of the boundaries and
responsibility for the boundaries. location and routes of utilities.  A search for environmental or contamination
issues in the area including possibility a mining search and certainly a flood risk search. The risk of subsidence
in the location. The details of construction if it is non-standard. Much of this information and more is available
through a local Authority search and website enquiries form various organisations.
Similarly, if you are requested to undertake a ‘desktop’ valuation what steps would you take?
Surveyors should be very wary of desktop valuations which can be misleading to the recipient if the basis of the
valuation is not properly understood. In general, such valuations should only be undertaken when the property has
been previously inspected and preferably not too long before. Such valuations must clearly state the assumptions
on which they are made. They are best avoided when a surveyor is dealing with the general public who will probably
expect the same level of knowledge of the property as if it had actually been inspected and may feel let down if
they subsequently find changed conditions which had not been identified through the lack of an inspection. Having
said that, Valuers will often give informal market advice on a property without having seen it recently or maybe at
all, however investors generally understand the difference between a formal Valuation Report and  an  informal
opinion often expressed verbally.
On the back of the last two questions, do you think residential house prices in the UK are still over-valued?
In my opinion residential house prices are too high in relation to salary levels, particularly if as a society
we wish to encourage a home owning culture. This is not a fault of the property market, but of external factors
that bear on home buyers such as a lack of new homes available to buy thus restricting supply. In an open market
such as the property market in the UK, home buyers are competing for the available homes to buy with other types of
purchasers such as foreign investors, buy to let investors, holiday home buyers etc. Unless the government
intervenes to disadvantage these other types of purchasers (which I would not advocate) they key to reducing prices
is to increase the supply of homes on the market.
Should residential property investors take more of a ‘value’ based approach – as is what is more common
in commercial property?
If the motive for purchase is property investment then yes, a value based approach is the best advice, however
when people buy for their own occupation and use they apply many different subjective criteria and will sometimes
ignore the rational behaviour of the market and pay in excess of what the property could be resold for on the
open market. This is a valid part of a diverse open market that sometimes makes it unpredictable for those
observing it from a distance.
You are a major advocate of regulation of the property  industry – and your book discusses this in detail – what kinds of measures do you think should be in place?
I am an advocate of the proper regulation of individuals working within the property industry particularly to
protect the inexperienced general public who occasionally participate in the industry. I do not particularly
advocate regulation of property itself unless there is a clear need . In many parts of the property industry there
is a clear need and obvious benefit from various types of regulation, however in general I feel that there has been
excessive and too complex regulation in recent years to the extent that some people ignore areas of regulation or
the regulation restricts the market. Regulation should be proportionate to the benefit achieved and should be
simple and straightforward so that it is accessible  and understood by everyone.
Is there a difference, in your opinion, between regulation to install professional principles into the industry
and the government just sticking their oar in?
Governments are motivated to regulate where they feel that consumers are adversely affected or if the market is
acting imperfectly or against policy objectives. Governments are also motivated to find ways to tax property which
is a good store of private wealth and an easy target for the raising of public finance. Sometimes Governments will
regulate in pursuit of social policy objectives. In general, the government in the UK has not regulated much in
pursuit of encouraging professional principles, but rather has relied on the industry self-regulating itself
through its professional bodies such as the RICS and NAEA. The Government has resisted the temptation of statutorily
regulating Estate Agents which it could have done at any time by using powers in the  Estate Agents Act of 1979.
This means that the professional bodies need to be constantly looking at themselves critically to ensure that they
are reflecting public opinion and public concerns by adapting their regulatory arrangements to keep up with best
practice.
Can you please explain more about your book and how readers can access it?
The Quicklook Books series is designed to weet the appetite of the reader by giving a broad view of what may be a
deep and complex subject by giving a brief overview in a light and readable format. Being purchased over the
internet gives the reader a  range of convenient formats ranging from printing their own copy to reading on a PC or
e-reader. The quicklook series are excellent value for money at £2.99 each and enables  the reader to investigate a
subject without spending fortune on an expensive textbook. The e-format will enable the Authors and Publisher to
regularly review and refresh the content to keep it relevant and uptodate without the usual costs of conventional
printing and publication. There has been doubts raised by many in the publishing world about whether fiction
publishing will move easily into e-books, however technical and business publishing is already well developed on
the internet and Quicklook books is a new development of this growing trend for the accessing of information.
Quicklook@property takes the reader through the history and structure of the UK property market. The working of the
market is explained and the roles of some of the main occupations in the industry such as Architects, Surveyors and
Town Planners. The book discusses the regulation of the property industry and explains the workings of the
development industry. The book highlights just a few of the well known people and property development projects
of the last half century in order to illustrate the level of complexity and sophistication that the property
industry has achieved in the UK. The reader is invited to mentally participate in the execution of a fictional
development project in “Exchester” and considers some of the likely future areas of evolution for this key sector
of the UK economy.  Quicklook@property is available from http://www.quicklookbooks.com
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Posted in Business Management, Due Diligence, Tips for Property Investing, Viewing a Property | 1 Comment »

The Truth About Sandwich Lease Options

January 27th, 2010
1 Comment

The use of sandwich lease options has become an increasingly popular strategy for investors who are looking to not only help home owners sell quick, but also assist those who want to get on the ladder (and thereby enabling the investor to make a decent profit in terms of rental income and future capital gains – the so called ‘win-win-win’).  Yet, it has also left many scratching their heads with regards to the best way to conduct the transaction as well as the future legal implications for all parties involved. Please see below an interview with Richard Spencer, a commercial lawyer and one of the UK’s thought leaders on effectively making the use of lease options in their various forms:

“I am a partner in the Commercial Property team at BPE Solicitors LLP (BPE).  BPE is a commercial law firm based in Cheltenham, Gloucestershire and acts for a range of clients including property investors,  developers, PLCs and entrepreneurs.
I have advised property developers in the use of option agreements for 6 years.  I started to offer options to property investors around 18 months ago, as conventional mortgages became more difficult to obtain.”
2)  Sandwich Lease Options have been very popular in the US and Australia but have only, perhaps in the last few years, become increasingly popular in the UK.  What are the fundamental legal aspects that people need to be aware of?
Sandwich options involve the use of two option agreements.  The vendor grants the first option to the investor.  A second option is granted to a tenant buyer, who occupies the property under an assured shorthold tenancy agreement.  Many investors have been lead to believe that sandwich options are the holy grail.  Personally, I would avoid them.  They are complex and difficult to put together, the risks for the tenant buyer are high and there is a much higher chance that the investor’s back-end profit will never materialise.  However, some deals may require a sandwich to make the figures stack up.  The only way I can think they can possibly work is to ensure that the legal owner grants both options, so that the tenant buyer can later show its lender that the seller has owned the property for over six months and that payments have been made towards the full purchase price and not towards an investor’s profit.  The fact that the seller then has to account to the investor for the difference between the two prices, should not (in theory!) affect the tenant buyer’s disclosure to its lender.
By granting an option to a tenant buyer the investor is limiting the price he can later sell for.  Why not just take a purchase option and rent out the property?  At least that way, the investor can retain any capital appreciation for himself.
3)  What are the essential documents that need to be in place?
An investor taking an option needs the following:
- option agreement
- irrevocable power of attorney for each vendor (although if there is more than one vendor, there needs to be more than one attorney)
- form RX1 signed by the vendor
An investor may also ask the vendor to sign a Transfer Deed (TR1) in case the vendor later disappears.
An investor granting an option to a tenant buyer just needs an option agreement and AST.
The use of an irrevocable power of attorney does not guarantee that the investor will be able to sign documents in the name of the vendor.  The vendor may later suggest that he was under duress to sign and a court may quash the power.  However, it’s worth having one signed as back-up.  The best way to complete a sale is to have the vendor sign the Transfer Deed in the traditional way.
Also having a Transfer Deed signed now does not guarantee that this will be capable of registration at the Land Registry.  The Land Registry changes the look of the form now and again and if the form changes, an old version will not be registered.  Also, on registration the investor’s solicitor needs to show on form AP1 which solicitors acted for the vendor on completion.  If no firm acts, the vendor must complete and sign form ID1 and provide a passport style photograph.  This form needs to be partially completed by a solicitor who has checked the vendor’s ID and certified the photo to confirm it is a true likeness of the vendor.  Form ID1 was introduced to combat property fraud.  The simplest solution is for the option agreement to confirm that the investor will pay the seller’s legal fees on completion and also to leave a ‘carrot’ for the seller on completion, to motivate him to instruct a solicitor and complete the sale.  Some investors offer a small percentage of any equity or a percentage of the proceeds in excess of a certain sale price.  All of this needs to be set out in the option agreement.
4)  How can investors ensure that their position is protected when undertaken a sandwich lease options?  Are there certain clauses in the contracts that need to be in place in order to be legally binding?
- The main risks lie with the tenant buyer.  The investor should ensure he registers an agreed or unilateral notice to protect his option and also a Restriction to stop any further dealings with the property.  The tenant buyer will also want to register a notice to protect his option.
5)  Are there any circumstances where you would not recommend an investor going ahead with a sandwich option agreement?
- Many commentators advise investors to avoid any option deal whether the seller already has severe financial difficulties.  Also, it is common sense but investors should carry out all of the usual checks on a tenant buyer as they would a normal tenant.
6)  Do you have a set option period that you recommend to your clients – or does it depend on the deal?
- The length of the option depends on the deal.  The option period needs to be long enough to allow for the value to increase enough to make a good profit, unless the investor is only interested in cashflow.  The period also needs to be long enough to avoid paying any early redemption penalties.  An option merely gives certain control over a property.  An option is not as good as legal ownership, so an investor should aim to complete the purchase as soon as possible.  Whilst the option is in place, plenty can change and cause the deal to fall over.
7) As an investor, can you assign a sandwich option on to another party?
- An option can be assigned to a third party, so long as the contract expressly permits this.  An investor will need a Deed of Assignment to assign the option.  Following an assignment, the investor must also give written notice of the assignment to the vendor to ensure that it is effective in law.
8) Do the courts view a tenant buyer differently to any other tenant (should any issues arise – ie, because of the fact they have an interest in the property)?
- The tenant buyer is a normal tenant under an AST.  The option is merely a bonus but, so long as it is set up correctly, the option gives the tenant buyer an interest in the land.  The option should clearly state that it may be terminated by the vendor if the tenant breaches the AST or if the AST is lawfully ended.  If the option does not allow this, the AST may end but the tenant buyer may continue to have an option to purchase!  For this to happen, he would also need to continue to make the monthly option payments.
9) With regards to option credits (ie. rental supplements which will go towards the tenant buyers purchase price) – how should this be managed to keep everything safe for all parties?
- The safest method for tenant buyers is to ensure that all monthly option payments (as opposed to rent) are held by the investor in a separate bank account and on trust for the tenant buyer.  This will need to be documented either in the option agreement or in a separate deed.  This method is similar to commercial property landlords who hold rent deposits.  As the funds are held on trust, they should not form part of his estate on death or insolvency.  However, if the investor goes bust the tenant buyer may need to bring the trust to the attention of the official receiver or trustee in bankruptcy before he takes the money.
- Some options also allow further credits or allowances towards the purchase price.  For example, in one option I worked on the investor allowed the tenant buyer a further 70% of the option fees paid, so long as the payments were made on time (up to an agreed maximum).  So if the tenant buyer paid £100, the investor allowed a further credit of £70 towards the price.  Some caution needs to be exercised here, as lenders may not allow credits to be made in this way, just as the don’t always allow gifted deposits or incentives made by developers.  The option should deal with this scenario and allow the tenant buyer the discretion to choose between an allowance or a price reduction.
10)  Would you recommend investors taking on a tenant buyer that has been repossessed or made bankrupt in the past?
- Investors will be better placed than I am to choose tenant buyers.  Some multi-millionaires were once bankrupt.  The checks needs to show whether the tenant’s income is sufficient to make the payments under the option and the AST.  If there are going to be problems, they usually start early in the option period, so investors should grant six month ASTs.
11)  How can investors get hold of you Richard?
I can be contacted on 01242 248232 or by email at richard.spencer@bpe.co.uk.

1)  Can you start by giving us a bit of information about your firm and how long you have been dealing with lease options? I am a partner in the Commercial Property team at BPE Solicitors LLP (BPE).  BPE is a commercial law firm based in Cheltenham, Gloucestershire and acts for a range of clients including property investors,  developers, PLCs and entrepreneurs.  I have advised a range of  property developers in the use of option agreements for 6 years.  I started to offer options to property investors around 18 months ago, as conventional mortgages became more difficult to obtain.

2)  Sandwich Lease Options have been very popular in the US and Australia but have only, perhaps in the last few years, become increasingly popular in the UK.  What are the fundamental legal aspects that people need to be aware of? Sandwich options involve the use of two option agreements.  The vendor grants the first option to the investor.  A second option is granted to a tenant buyer, who occupies the property under an assured shorthold tenancy agreement.  Many investors have been lead to believe that sandwich options are the holy grail.  Personally, I would avoid them.  They are complex and difficult to put together, the risks for the tenant buyer are high and there is a much higher chance that the investor’s back-end profit will never materialise.  However, some deals may require a sandwich to make the figures stack up. The only way I can think they can possibly work is to ensure that the legal owner grants both options, so that the tenant buyer can later show its lender that the seller has owned the property for over six months and that payments have been made towards the full purchase price and not towards an investor’s profit.  The fact that the seller then has to account to the investor for the difference between the two prices, should not (in theory!) affect the tenant buyer’s disclosure to its lender.  By granting an option to a tenant buyer the investor is limiting the price he can later sell for.  Why not just take a purchase option and rent out the property?  At least that way, the investor can retain any capital appreciation for himself.

3)  What are the essential documents that need to be in place?  An investor taking an option needs the following:

  • an option agreement;
  • an irrevocable power of attorney for each vendor (although if there is more than one vendor, there needs to be more than one attorney)
  • a form RX1 signed by the vendor

An investor may also ask the vendor to sign a Transfer Deed (TR1) in case the vendor later disappears.  An investor granting an option to a tenant buyer just needs an option agreement and AST.  The use of an irrevocable power of attorney does not guarantee that the investor will be able to sign documents in the name of the vendor.  The vendor may later suggest that he was under duress to sign and a court may quash the power. However, it’s worth having one signed as back-up.  The best way to complete a sale is to have the vendor sign the Transfer Deed in the traditional way.

Also having a Transfer Deed signed now does not guarantee that this will be capable of registration at the Land Registry.  The Land Registry changes the look of the form now and again and if the form changes, an old version will not be registered.  Also, on registration the investor’s solicitor needs to show on form AP1 which solicitors acted for the vendor on completion.  If no firm acts, the vendor must complete and sign form ID1 and provide a passport style photograph.  This form needs to be partially completed by a solicitor who has checked the vendor’s ID and certified the photo to confirm it is a true likeness of the vendor.  Form ID1 was introduced to combat property fraud.  The simplest solution is for the option agreement to confirm that the investor will pay the seller’s legal fees on completion and also to leave a ‘carrot’ for the seller on completion, to motivate him to instruct a solicitor and complete the sale.  Some investors offer a small percentage of any equity or a percentage of the proceeds in excess of a certain sale price.  All of this needs to be set out in the option agreement.

4)  How can investors ensure that their position is protected when undertaking a sandwich lease options?  Are there certain clauses in the contracts that need to be in place in order to be legally binding? The main risks lie with the tenant buyer.  The investor should ensure he registers an agreed or unilateral notice to protect his option and also a restriction to stop any further dealings with the property.  The tenant buyer will also want to register a notice to protect his option.

5)  Are there any circumstances where you would not recommend an investor going ahead with a sandwich option agreement? Many commentators advise investors to avoid any option deal whether the seller already has severe financial difficulties.  Also, it is common sense but investors should carry out all of the usual checks on a tenant buyer as they would a normal tenant.

6)  Do you have a set option period that you recommend to your clients – or does it depend on the deal?  The length of the option depends on the deal.  The option period needs to be long enough to allow for the value to increase enough to make a good profit, unless the investor is only interested in cashflow.  The period also needs to be long enough to avoid paying any early redemption penalties.  An option merely gives certain control over a property.  An option is not as good as legal ownership, so an investor should aim to complete the purchase as soon as possible.  Whilst the option is in place, plenty can change and cause the deal to fall over.

7) As an investor, can you assign a sandwich option on to another party? An option can be assigned to a third party, so long as the contract expressly permits this. An investor will need a Deed of Assignment to assign the option.  Following an assignment, the investor must also give written notice of the assignment to the vendor to ensure that it is effective in law.

8)Do the courts view a tenant buyer differently to any other tenant (should any issues arise – ie, because of the fact they have an interest in the property)?  The tenant buyer is a normal tenant under an AST.  The option is merely a bonus but, so long as it is set up correctly, the option gives the tenant buyer an interest in the land.  The option should clearly state that it may be terminated by the vendor if the tenant breaches the AST or if the AST is lawfully ended.  If the option does not allow this, the AST may end but the tenant buyer may continue to have an option to purchase! For this to happen, he would also need to continue to make the monthly option payments.

9) With regards to option credits (ie. rental supplements which will go towards the tenant buyers purchase price) – how should this be managed to keep everything safe for all parties? The safest method for tenant buyers is to ensure that all monthly option payments (as opposed to rent) are held by the investor in a separate bank account and on trust for the tenant buyer.  This will need to be documented either in the option agreement or in a separate deed.  This method is similar to commercial property landlords who hold rent deposits.  As the funds are held on trust, they should not form part of his estate on death or insolvency.  However, if the investor goes bust the tenant buyer may need to bring the trust to the attention of the official receiver or trustee in bankruptcy before he takes the money.

Some options also allow further credits or allowances towards the purchase price.  For example, in one option I worked on, the investor allowed the tenant buyer a further 70% of the option fees paid, so long as the payments were made on time (up to an agreed maximum).  So if the tenant buyer paid £100, the investor allowed a further credit of £70 towards the price.  Some caution needs to be exercised here, as lenders may not allow credits to be made in this way, just as the don’t always allow gifted deposits or incentives made by developers.  The option should deal with this scenario and allow the tenant buyer the discretion to choose between an allowance or a price reduction.

10)  Would you recommend investors taking on a tenant buyer that has been repossessed or made bankrupt in the past?  Investors will be better placed than I am to choose tenant buyers.  Some multi-millionaires were once bankrupt.  The checks needs to show whether the tenant’s income is sufficient to make the payments under the option and the AST.  If there are going to be problems, they usually start early in the option period, so investors should grant six month ASTs.

11)  How can investors get hold of you Richard?  I can be contacted on 01242 248232 or by email at richard.spencer@bpe.co.uk. Our website can be found by clicking here: BPE Solicitors LLP.

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The Property Investors Report 2010

December 17th, 2009
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Property Investors Report 2010

Please click on the above to access our latest report aimed at anyone with an interest in UK investment property (note that you would have to be a member of the Property Investor Hub to download it).

We have started by giving a detailed account of the events of this year in terms of both the housing market and the economy.  After that, we look at what the all major house price indices / housing organisations are saying about 2010 as well as some predictions for the economy in general (including relevant observations from the late 2009 Pre Budget Report). We then look at several investment property acquisition strategies (including lease options) followed, finally, by effective methods to conduct accurate due diligence in the year ahead.

Click here to gain direct access to the report and we would very much appreciate if you would forward the following link to your investor / prospective investor contacts who may not know about us:

http://www.psinvestors.co.uk/resources/property-buyers-toolkit/2010-property-investors-report.pdf

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Hometrack Reports for Property Investors

October 21st, 2009
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PS Investor Services are very pleased to announce its partnership with the UK’s leading housing data specialist, Hometrack.   We are able to offer unlimited access to the reports at a very low cost of £25 per month (including VAT).  As a property investor using this service, you will be able to access a significant amount of information that is not available on the web. For more detail, a sample report and our FAQs please click on the following link :

Hometrack Reports for Property Investors (Unlimited Access)

Please also see an interview with National Sales Manager, Ben Squire, below:

How long has Hometrack been established for? Hometrack was set up in 1999…

How do you conduct your research? The national monthly housing market survey is based on a monthly survey of estate agents and surveyors across all postcode districts across England and Wales (e.g. SE5 and CB1 etc).  The survey was first published in mid 2000 and the results are based on the answers to a standard questionnaire of 11 questions which has been in place since the index was first created.  This approach to monitoring prices and other key market indicators is different to that employed by other published measures of house prices in that it tracks trends in areas where there are both strong and weak levels of market activity.

The questions are designed to capture a range of variables on local market conditions as well as the average price e.g. average time to sell, achieved price as % asking price, change in property listings, change in registered applicants, viewings per sale.  Hometrack look to obtain a minimum of two returns for each postcode district. In some areas they obtain many more than 2 returns.  The average monthly sample size is around 5,000-6,000 returns.

Who is responsible for the research and analysis you undertake as an organisation? Richard Donnell is Hometrack’s Director of Research and we also have an analyst who works alongside him.

Your ART Reports have a section that refers to ‘estate agents sentiments’ can you explain this a bit further? Each month we ask estate agents to comment on various market indicators. One of the questions we ask them is their sense of  how prices for each type of property are changing month on month. We then display this on a barometer which demonstrates the general sentiment of how local estate agents feel prices are changing in their area. As estate agents are working at the very front of the housing market we find it a useful way of gauging changes in the market as they happen

What other housing market activity signs can you point out? There are many different factors that affect the housing marker and these are always changing. Every month Hometrack release a summary from our House Price Survey along with analysis.  This is the best way to keep up to date with the UK housing market. This information can be seen by visiting:

How important is it to look at sold house pricing data  - such as from the Land Registry – as opposed to what estate agents are stating as values? When a prospective vendor initially looks into selling their property they will often look in the local newspaper and on the internet for an idea on what their property might be worth. However asking prices are often not a true reflection of what those properties are actually achieving when sold. In the Hometrack’s national house price we ask estate agents for data on the % of the asking price being achieved on sales. This figure can vary greatly from area to area based on the local market conditions. The variance from area to area can be as much as 10% which when looked at in monetary terms can be huge. If selling a property it’s essential to look at what similar properties are achieving rather than what the asking prices are. Hometrack’s house price data is updated every month and allows the public to keep track on both prices and market activity in their area.

Hometrack Reports for Property Investors (Unlimited Access)

For more information and to ask any further questions, please feel free to contact our head office at info@propertysolvers.co.uk or 0845-257-7549.

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Google Earth for Property Investors

September 30th, 2009
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Many of you would have already been using the satellite mapping tool for researching your area of investment. For those who have not had the chance to explore the program in the capacity of a property investor, we thought we would highlight handful of ways that it can be of use to assist both your acquisition and management business:

  • Spend some time looking at the surrounding area – a good investment property will be located close to shops, a post office, supermarkets, GP, dentist, chemists, entertainment, parks and other useful amenities;
  • Bear in mind that, generally speaking, if you see that the property is remotely located the rental yield (but not necessarily the value) will be less;
  • Although proximity to transport should be looked at positively – be slightly weary of properties that are close to railway tracks and bus-stops;
  • Look for potential issues close to the property that may affect its value (both positively and negatively). As an example, we were recently offered a hugely discounted property in the North only to see (via Google Maps) that the back garden was adjacent to a gypsy camp who are in a major dispute with the local council;
  • Compare the size of your property to others (as well as its surrounding land and other features – larger driveway, double garage etc.). We have successfully used Google Maps to dispute down-valuations (for example, through proving that the property in question is considerably larger than comparables on its road);
  • Explore your competition by seeing how many similar properties there are to yours and also look out for new developments close to your property which may cause potential issues (such as an increased supply of stock leading to lower rents; lack of parking spaces; traffic etc.);
  • Use Google Maps to explore potential geographical risks such as hills (which could lead to potential subsidence issues); flooding issues (if the property is close to expanses of water); erosion (if property is close to the sea, for example); mine shafts (a problem that has affected some Northern landlords near old coal mining areas);
  • Explore issues that your solicitor may point out in their legal due diligence process (ownership of alleyways between properties, for example);
  • Check that the property demographically matches your target tenant (for example students may love the fact that a pub is very close by but this would not be suitable if your tenants are typically older);
  • Search if the area attractive for other local businesses;
  • Use Google Maps historic imagery to see how the local area where the investment property is located has changed.

(Click here to head straight to the Google Earth home page.  There is a also a wealth of information with regards to maximising your usage of the program on the web – simply search the term ‘Google Earth’).

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Buying New Build Property

September 23rd, 2009
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With much discussion/speculation about whether the market is taking a turn for the better – many investors are reverting back to the potential of new build property as a strategy. Please see our latest guide which discusses the following:
  • the recent history of new builds;
  • current lending practices;
  • the pros/cons of buying new build property;
  • essential due diligence steps that need to be taken.

Members can click on the following link to get direct access: Buying New Build Property. Alternatively, it can accessed at the top of the ‘Property Buyers Toolkit’ via the Property Investor Hub.

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Buy to Let Hotspots – July 2009

July 20th, 2009
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You may have read the ‘Times Money’ article on the top 10 high yielding buy-to-let areas of the UK. For those that didn’t, here’s the list again:

Glasgow – 12% average yield
Houghton Le Spring, Tyne and Wear – 10% average yield
Telford, Shropshire – 10% average yield
Lewisham, London – 8% average yield
Middleton, Manchester – 8% average yield
Barnsley, S. Yorkshire – 8% average yield
Newham, London – 8% average yield
Burnley, Lancashire – 7% average yield
Neath, Wales – 7% average yield
Newcastle upon Tyne – 7% average yield

We thought it would be a good idea to go through each individual area for our investors as well as provide some useful links. The report can be read directly by clicking on the link below:

Buy to Let Hotspots – July 2009

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“Diligence is the mother of good luck…” Benjamin Franklin

March 4th, 2009
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In the ever changing landscape that is the UK property market, effective due diligence has become paramount in any investors strategy.

Part 1 of our ‘Effective Due Diligence’ report will give you a good basis for primary research into a property’s essentials as well as it’s surrounding area – enabling you to make a solid, fact-based decision as opposed to a speculative one.

Please also see an extract from one of our training videos on deducing the open market value and finding out rental figures.

Access the Effective Due Diligence Video and Effective Due Diligence Report.

We would very much welcome your comments below…

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Risk management when doing your first deal

January 13th, 2009
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With a number of budding investors looking to take advantage of current market conditions and build property portfolios, this post aims to provide guidance and advice to deal with some of the concerns and issues that many have when doing the initial deal. Indeed, whilst it could be argued that the lower LTVs and stringent credit requirements have limited peoples ability to invest, we’re nevertheless operating in a buyers market with properties being negotiated at over 50% below their peak value. Moreover, there are several perceived barriers to entry which are more closely related to mindset, preparation and an understanding of the basics – all of which can be eliminated and/or managed.

Education – The importance of learning the trade is a fundamental tool to any investment strategy. Reading this blog, our Twitter feed and e-course are good starting points. There is also a wealth of knowledge and information via the property forums, property related RSS feeds, networking events and generally speaking and communicating with anyone who is involved in the business.

Due Diligence / Financial Analysis – as mentioned in a previous blog post, due diligence has become more difficult in the current climate. Generally speaking, you should be conservative with your figures as it would be more than likely a surveyor will be too. Prior to agreeing to any kind of deal, you should ensure that you undertake the correct and thorough analysis of the numbers: looking at realistic market values and rents then calculating your monthly mortgage payments leaving yourself with an adequate level of cashflow to support the investment. Keep in mind the fact that your re-financing ability will be tough over the next few years and always be sure to account for the extra costs which are often forgotten about – such as gas checks, repairs, maintenance, voids.

Start small – as with most things, learning often best comes from action and making errors and for this reason we would recommend that your first few deals are kept relatively simple (perhaps focusing on 2/3 bed houses in visibly stackable areas). In the unlikely event that things do go wrong, you would have minimised your risk by, for example, having lower mortgage payments to meet.

Contingency planning – this is essentially strategising, as best you can, on answers to the ‘what if’ questions that may be lying at the back of your head. Below are some potential solutions to a handful of issues that can arise:

“What if the property gets undervalued?” – have you got solid comparables of properties that have sold and rented within ½ mile of the property (within the last month) to prove your figures to the surveyor? If not, and the yield is good, there are investors that are willing to take on the property (at a less of a discount) which could earn you a finders fee.

“What if I have trouble financing the deal” – you may be able to find a joint venture partner or, again, you could pass deals on and earn fees whilst you work on improving your credit rating (see part 2 of our e-course).

“What if I can’t find tenants for the property?” – always ensure that you speak to a few lettings agents with regards to the demand for tenanted property in your area prior to doing the deal. You may also want to speak to your local council who, by and large, have long waiting lists of housing benefit tenants. You will gain confidence of the fact that any void periods can be negated quickly and easily. Also keep an eye out for local social, economic and political factors which may be attracting or indeed putting off tenants moving into your areas of investment.

Power team – Have in place a good team of mentors, solicitors (who can work fast), mortgage brokers (preferably ones who can package), accountants, financial advisors, estate and lettings agents readily to give you advice on any aspects of your investment decisions and related issues.

Viewing properties – you’ll probably be aware of the fact that property is a numbers game and you should be prepared to view a lot of properties and make lots of offers. Taking a builder/tradesperson with you for your first viewings may help you hone your skills in noticing issues with a house. You may be able to use any potential refurbishments, replacements and repairs as a negotiating tool to knock down your purchase price. See our previous blog post on property defects to look out for.

Understand property management – whether you decide to manage the properties yourself or hand them over to an agent you should have a clear understanding of your responsibilities as a landlord/lady. Some essential duties include:

  • Ensuring that correct procedures with regards to Assured Shorthold Tenancy (AST) agreements are adhered to (we would recommend joining a reputable association such as the National Landlords Association (NLA) or the Residential Landlords Association (RLA);
  • If the property is empty, ensure that a Energy Performance Certificate (EPC) is undertaken;
  • Undertake credit checks on your tenants (using Experian or Equifax) as well as requesting for previous landlord and/or landlady references;
  • Ensure an adequate inventory of the property is undertaken and the deposit (usually one month’s rent) is placed with an approved tenancy deposit scheme;
  • Take a photocopy of the tenants passport or ensure that your lettings agent has;
  • Ensure that the gas safety certificate is renewed on an annual basis;
  • Ensure your tenant(s) have a point of call with regards to any maintenance/repair issues;
  • Ensure that the property has adequate buildings insurance cover.
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What is the open market value (OMV)?

January 6th, 2009
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Prior to the start of the housing slump, it was relatively easy to conduct basic due diligence on a property – particularly with regards to its value. With the hive of activity in the property market, many investors would simply download a report from Hometrack or use one of the many online Land Registry linked property valuation tools such as Zoopla!, Our Property or Net House Prices. By and large, there would be a number of comparables of properties sold within a short distance of the one they were looking at. However, with a severe decline in the number of property transactions actually taking place combined with visible drops in purchase prices and no clear indication of when/how things are going to improve, defining what the OMV is has become increasingly difficult. For this reason, it is ever important to ascertain what is happening in your local property market enabling you to make informed decisions whilst ensuring that you are, firstly, not overpaying and secondly that the yield you are achieving will comfortably cover your monthly mortgage payments. Below are some pointers:

  • Look at the yield of the property you are looking to buy – consider the occasional volatile nature of interest rates and ensure you will be able to meet your mortgage payments long into the future, particularly if you have taken on tracker or variable products (see the following links to patterns of interest rates and historic LIBOR rates);
  • Keep you ear to the ground – regularly monitor asking prices and estate agent stock levels (bear in mind that agents prices are usually over-inflated);
  • Speak regularly to local agents (estate and lettings), property professionals and fellow investors in your area;
  • Go to networking events to hear about how other investors are undertaking their due diligence on the OMV;
  • Keep a close eye on the economy; – economic indicators to look out for include:

o Inflation levels (consumer, and retail price indices)

o Consumer debt levels and spending power

o Affordability indices

o Unemployment

o Household Income / Wage receipts

o Fuel and food prices

o Changes in the area (economic whilst also looking at  social and political)

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