Please see below an interview with Lisa Orme from Keys UK Limited – a genuinely experienced investor that is often referred to as the ‘expert’s expert’. We discuss her history as a professional property investor; the risks of a bottoming market; whether property today is only for the cash rich; newbie investing / entering the market with low cash reserves; no money down in 2011; tips obtaining mortgage finance in a challenging market; improving your credit rating for the buy to let lenders; the FSA’s ‘Mortgage Market Review’; property options / impending regulation; the base rate rise and some advice for highly geared landlords.
1) For those that do not know, can you give our readers a bit of background about yourself? I’m Lisa Orme but you may also see me referred to as Lisa Williams. I can assure you I’m one in the same person! Orme was my maiden name and Williams is my married name. Most people in property circles know me as Orme so I tend to stick to that. My husband, Stuart and I, started Keys UK Limited almost ten years ago. We read ‘Rich Dad, Poor Dad’ by Robert Kiyosaki and that was our epiphany moment. Wanting to ‘get into property’ we started the letting agency working from home in addition to both having full time jobs but quickly realised it was the landlords who were making the money. So we sold an endowment policy that would never give us the promised returns and used the £40k it gave us to buy a property to refurb. We sold it and made a £40k profit – a 100% return on our investment. We got the property bug and spent the next 8 years or so investing in and developing property in the Midlands. When the credit crunch hit and things went quiet we started our own mortgage brokerage. A lot of people thought I was completely mad but it’s a brilliant addition to our business strategy and I had no idea how much I would love it.
2) It has become increasingly apparent that the property market is close to the bottom which many people are seeing as an excellent opportunity – but what do you perceive are the main risks? I actually think its got a way to go yet. We still have the fact that the banks have to repay all of their loans, the VAT increase and massive cuts in the public sector which will knock onto the private sector (especially in the construction industry) and affect confidence which will further affect jobs and incomes and ultimately mean people losing their homes thus creating further falls in the market. That doesn’t mean its not a good time to buy however; prices are low and if you’re either in and out for quick profit or in it for the long haul you can’t go wrong if you buy sensibly.
2) Do you the property investment market today is only for the cash rich? There’s no doubt that cash is king but not in terms of being able to move quickly on deals but in terms of the levels of deposits being demanded by lenders. But that’s not to say that there aren’t ways to buy property without you having the cash yourself and I’m not talking about so called ‘no money down’ schemes. If you have cash rich joint venture partners then this is a great way to be able to profit from someone else’s cash if they can profit from your knowledge and experience. Partnering together on mortgages is perfectly legitimate way to work together. Buying cash then remortgaging or topping up the difference on bridging then selling or remortgaging are also good and totally legitimate strategies.
3) For newbies – do you think it’s advisable to enter as a property investor without savings or some kind of cash back up fund? Absolutely not. Even if you fall for a no money down scheme property is still a very cash intensive business. If you have a couple of months void period, a boiler breakdown or what happened to me with one of my first tenants trashing the property leaving £10,000 worth of damage and £6,000 of rent arrears then you’re going to be in trouble! You should ensure you have several thousand pounds of cash available for these eventualities at the very least. And the more properties the bigger the reserve should be.
4) Should a new investor wish to enter the market with a small amount of cash reserves – what would be your best advice? Ensure you have a back up supply of cash whether that be a JV partner or relative, a credit card or an overdraft. Not that I’d recommend getting into debt other than the mortgage for a property but to go into property with no reserve at all is just crazy.
5) What are your thoughts on no money down in the current market (for example using a secured loan to bridge the deposit and very other strategies being used)? As long as there is full disclosure to the lender of your ACTUAL purchase price then I don’t have problem with it. The problem is none of the schemes I have seen do this and all involve non-disclosure which is potentially mortgage fraud and is being committed by the applicant. There are lenders that may consider more creative deal structures using borrowed money for deposits, vendor gifts or alternative assets/security being used as the deposit but none of these will be the main buy to let lenders. These will be commercial type lenders that will want to know every aspect of the deal before agreeing to it and probably charge significantly higher rates and fees as a result.
6) As an experienced mortgage finance specialist, do you think the main buy to let lenders will continue to accept these kinds of applications (knowing that investors are leveraging themselves)? Lenders DON’T accept these type of applications at all. They are submitted subversively. Lenders are duped into believing the client is paying x for a property when they are in fact paying y. If the lender was informed (as per their terms and conditions) of the ACTUAL purchase price then they will most likely refuse the case completely but at best only lend based on the ACTUAL purchase price.
7) In terms of obtaining mortgage finance, what would be your suggestions for an investor to improve their positions in the eyes of the buy to let lenders? A good credit score is only half the story and I’m fully aware of people with over 900 on their credit files failing and those with much lower scores passing. Lenders will be looking at your score and your credit profile combined as well as a number of other factors. Any one of these alone may not have that dramatic an impact but combine two or more and you could find yourself being rejected by lenders:-
- Ensure you are on the electoral roll;
- Avoid moving house frequently – the ideal is one address covering the last 3 years;
- Keep your current bank account clean; by this I mean avoid late charges, going over overdraft limits, ensure you have plenty of credits and debits on a regular basis and that they all get paid;
- Ensure you have at least one utility bill in your name – there’s a tendency for one adult to take responsibility for all bills in many households but this can work against you so put them in joint names or split them between you;
- Watch those credit cards and loans – even if you have never missed a payment lots of unsecured debts will adversely affect your applications;
- Similarly if you have lots of credit cards and aren’t using them cancel a few – lots of available unsecured debt can have the same detrimental affect;
- NEVER miss a mortgage payment – unless you have a very good reason for this and the evidence to back it up this will certainly result in a declined application;
- Avoid missing credit card and loan payments – the odd one over several years is unlikely to have that bad an effect but lots of them or a regular habit of missed payments will mean no.
It’s not true that those with large portfolios can’t borrow as many of my clients could testify and given we are extremely busy with everyone from brand new investors through to investors with multimillion pound portfolios I know lenders are still lending and clients are still borrowing!
8)Can investors and landlords expect to feel the effects of the FSA ‘Mortgage Market Review’? The Mortgage Market Review is primarily concerned with residential mortgages but we are seeing lenders be overly cautions for example self cert was only mooted as being targeted by the FSA but in order to pre-empt the FSA hatchet the lenders just withdrew from self cert and there is now no self cert residential mortgages available at all! There are rumours about banning interest only mortgages and there are many buy to let investors rightly concerned about this but again it is very unlikely to apply to buy to let and more likely we will only see changes in residential lending and already have. The impact is therefore that lenders pull the plug prematurely and withdraw from problem areas or areas that they see as requiring more effort. Buy to let is certainly one of those areas which is why we are left with so few lenders. And those that are left tightening criteria and reducing lending levels. But there are some new players too and likely to be more in the coming few years so all is not lost for buy to let; on the contrary I think the future holds great promise.
9) You are very well known for your understanding of property options – what would be your advice to people looking into this strategy for the short to medium term future? Short would be the operative word for me. We will now only do option deal where there is a very defined and relatively short term exit ideally under 12 months. A perfect example might be a redemption penalty situation; the clients can sell for say £120k which suits you if it were not for a redemption penalty that adds an additional £6,000 to the debt and finishes the deal for you both. This is a perfect example of where I would use an option to seal the deal, let out the property and then complete on the purchase when the redemption penalty expires. The clients have moved on, there’s a clear and defined exit and they will be motivated to complete on the deal.
Too many lease option deals are being done where debts are involved and often the sellers get sellers remorse once you have taken away the immediate pain. I am aware of many investors who have lost a lot of money on options that they will never get to complete on because the owner has refused to exercise the option. Taking these to court is a waste of time and money.
10) With the increased media attention options have receiving this year – can we expect to see regulation come into play (as with sell and rent back a few years ago)? This is extremely likely and the FSA already have their eye on these. It’s not going to happen just yet as with sale and rent back it will be when a number of cases are highlighted in the press or to organisations such as Shelter. This is not likely to come about until we see a wave of repossessions when interest rates rise or when house prices go up. In the former case investors who have taken on properties due to a low rate on the underlying mortgage will find their cashflow stretched and will walk away (as the option legally though not morally allows them to do) leaving the ‘seller’ in the lurch and probably not realising that this could happen.
In the case of house prices most investors are only going to want to exercise the option when house prices have gone up sufficiently to make it worth their while. At this point seller remorse kicks in and the seller realises how much equity they’re giving up. A quick call to citizen’s advice or their solicitor to check on the validity of these agreements or going to ground will prevent many investors being able to exercise their options.
The real concern comes where there are also tenant buyers who may have paid deposits that investors have spent and/or paid higher rents expecting those to be credited towards their home. I’ve already seen several examples of investors heading towards bankruptcy and tenant buyers being unaware that their money is lost and option worthless. It is when all this starts to unravel we will see regulatory changes; all too late of course but the fallout has the potential to be huge and to damage the industry further.
11) What is your advice to people who maybe on tracker / variable rates and are concerned about the eventual base rate rise? Assume rates are going to rise! It would be unwise to get comfortable on the current low rates. Preparation is key; it’s no good when rates rise saying ‘I never saw that coming’! If that means selling some or even all of your properties then do it! If it also means not buying any more and consolidating them so be it.
12) And – for the highly geared landlord concerned about the slow recovery of house prices – would you be able to provide some potential risk mitigation strategies? There are a number of things landlords can do but they all involve assessing the situation and getting real with yourself – there’s no quick fix once you have decided to bury your head in the sand. Some suggestions include:
- Getting a job!
- Expanding your services – manage property deals or refurbishments for other investors;
- Curb your spending (personal and property) – if that means getting rid of the sports car or downsizing your home so be it;
- Budget and monitor your expenses like a hawk;
- Improve cashflow – can you increase your rents? Can you offer added incentives or a new fixed term tenancy? Can you let to LHA tenants (although be careful of the changes next year)?;
- Manage your properties yourself to reduce management and letting fees;
- Convert single lets to Houses of Multiple Occupation (HMOs);
- Remortgage – whilst many people are on low base rate trackers, I’m constantly surprised by how many aren’t. Speak to your mortgage adviser about the current products on offer – you may surprised at how low some of the rates actually are and with LTVs up to 80%, things aren’t as bad as many make out;
- Refinance – it may be better to pull out some cash as a reserve for tougher times now than not be able to later. Don’t spend it of course but placed in a decent savings account, it may help you out if times get tough;
- Insure against rate rises – it’s possible to take out an insurance policy to hedge against rate rises. You simply determine when you want the insurance to kick in and they’ll cover the payments over and above that point. Its nowhere near as expensive as investors believe it to be, for example: to cover £1,000,000 worth of interest only mortgages 2% beyond where they currently are (e.g. current rate 2.5% so insurance will pay anything over 4.5%) will cost just £262 a month;
- Finally do talk to your lender even if you haven’t missed any payments yet. They don’t want to repossess, especially not in the current market. If they can help they will, and will help you do a portfolio review, determine a strategy going forward and a ‘what if’ should the worst happen.
For mortgage advice and information contact Lisa at firstname.lastname@example.org or call 024 7617 0096; please mention PSI.
The above is for information purposes only; rates can change and may not be applicable at the time of publication. Please consult appropriate professionals and contact us for up to date quotations. Keys (UK) Limited is an Appointed Representative of Julian Harris Mortgages Ltd. Authorised and regulated by the Financial Services Authority in the conduct of mortgage and general insurance business with FSA No. 304155. Your home may be repossessed if you do not keep up repayments on a mortgage or other loan secured on it. Think carefully before securing other debts against your home. Buy to let (pure) and commercial mortgages are not regulated by the FSA.
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