Advice for the novice landlord
Lenders should take more responsibility in advising borrowers when selling buy-to-let mortgages. David Lawrenson explains why
As author of a book which is about how to be a landlord and make a success of letting property, I have always thought the mortgage lenders strategies in the buy-to-let market were a little unusual and could be improved.
In particular, I find it hard to figure out how landlords today can still get a buy-to-let mortgage yet get little or no advice at all about how to make a success of the now very complex business of letting a property successfully and meeting their legal responsibilities.
Being a landlord is a lot harder than it was when the first buy-to-let mortgage was born.
Just in the last few years landlords have had to add tenancy deposit schemes, licensing / HMO (houses in multiple occupation) requirements and energy performance certificates to the list of things they have to comply with.
Lack of advice raises default risk
A dearth of advice surely reduces a landlord’s chance of being successful. And landlords who get things wrong lose money and will be more likely to default on their mortgages, which in turn hits a lender’s arrears book.
Mortgage customers who go into a high street bank or contact a call centre or enquire on line about a buy-to-let mortgage still get little help and advice from most lenders.
Once the sales clerk had finished telling the customer all about the rates and (the now ubiquitous) product fee, the customer may try asking the sales clerk for help with information about tenancy deposit schemes and reference checking tenants.
They will either get a blank look, or, if lucky, may be referred to a letting agent which is fine if the letting agent is a good one. (In the private landlord side of my consultancy, I get at least one email a week form a hapless landlord who trusted to a rogue letting agent who then found him the “tenant from hell.”)
This hands-off way of doing buy-to-let lending could reflect the past dominance of mortgage brokers – they had the relationship with the customer so maybe it was a fag for the banks and building societies behind the loans to get involved in giving landlords advice once the loan was set up.
“Gurus” step into the information vacuum
So, where does this lack of advice leave the would-be landlord?
Alas, not in a good place. In the past, many novice landlords wishing to get rich quick in property investing would join the many seminar programmes promoted by the sharks that fill the big information gap in the still unregulated buy-to-let advice arena.
In the years from 1999 to 2003, following the advice of sharp suited salesmen many newbie landlords bought oversupplied identikit new build flats in inner cities. Others, especially after 2003, paid thousands of pounds up front for leads for access to supposed “below market value” deals which never materialised or were not great value after all.
Off plan new build
Ten years ago, private rented sector experts like me warned that too many new build inner city flats were being built and they were being hugely overvalued by valuers, at least on a forward valuation basis.
But the banks and building societies carried on regardless and issued buy-to-let mortgages on them anyway.
By 2007 and 2008 the oversupply of stock of this type was apparent in many locations and huge lots of this type of housing stock ended up being sold at auctions in 2008 and 2009 at prices far below what they were sold for when first built.
Promised rents were rarely attained either and lots of “have-a-go” landlords lost thousands (and some mortgage lenders lost millions, with some being forced into rescue deals with other lenders.)
Add into the mix a fair bit of fraud on the new build buy-to-lets too and we can conclude that the performance of quite a few lenders and valuers in the new build flats end of the buy-to-let market was not their finest hour.
For many years I have spoken at big property trade shows, such as the Property Investors and Home Buyers Shows and the London Landlords Show.
The Property Investors Shows from 2000 to 2006 were big events - they have since been downsized by the recession and credit crunch.
The shows attracted a mixture of some great advisors but also rather a lot of slick gurus who sold seminar programmes where the main call to action was “Get Rich Quick in Property Investment.”
For a number of years a common theme of the gurus was to encourage novice investors to buy property “below market value” from desperate sellers using “No Money Down” techniques financed by bridging loans and “next day remortgages.” Naturally, the gurus provided the leads and bridging loans for big fees. The last lender standing in the next day remortgage business was Mortgage Express but for a long time it was not the only one in play.
In my view these were risky mortgage loans because the mortgagee had invested no equity; and they were made doubly so where the vendor had become a tenant - in what were called sale and rent back models.
In sale and rent back the vendor would rent back from the purchasing investor and this was risky because the vendor-turned-tenant already had a history of non-payment - which is, of course, the reason why they were selling their property cheap in the first place.
The marketers of the property shows (whom I got to know quite well over the years) really wanted lenders to come to the shows to exhibit or even to speak. But whilst a few brokers attended, to my knowledge they never succeeded in getting banks or building society executives to come down.
I am of the opinion that, had they come, the banks executives would have got a closer appreciation of where buy-to-let lending was heading and seeing what some promoters were doing (and the enhanced risk level that resulted for them as lenders) would have been time well spent too.
Thankfully, the worst excesses of the sale and rent back promoters were eventually more or less stopped by the Financial Services Authority when it became news that many cash strapped homeowners, who had sold their homes at well below market value and become tenants under Sale and Rent Back deals, had been evicted. They had not realised, nor had it been explained that they had no security of tenure under a standard assured short hold tenancy agreement or in the event of mortgage borrowers’ default.
Lease options
Since sale and rent back has been curtailed, the gurus have moved on - into property lease options - also known as “the new get rich quick in property route for the short of cash newbie property magnate”.
Again, there is an enhanced risk to lenders. Also, many lease options seem legally shaky and unproven, especially for any would be house buyer if the party on the other end of the lease reneges on the agreement.
Once again, I fear that this is all going on beneath the radars of many lenders.
Regulation
This all leads me onto the regulation of buy-to-let mortgages. Surely, it is the activities of the worst of property clubs, syndicates and gurus that need to be regulated, not buy-to-let mortgages.
However, mortgage lenders could also have a part to play. To this end, we have started work with some of the more forward thinking buy-to-let mortgage lenders to help them make a better job of their buy-to-let mortgage strategies, product marketing and client communications.
We write helpful and relevant content for the buy-to-let sections of a lender’s website and other customer facing materials such as brochures and newsletters, producing guides for landlords and the banks’ own staff.
Also, we provide training for the lenders staff and we suggest market research projects to gauge landlords’ views which create valuable press coverage.
The new world of build-to-let
The buy-to-let world does not stand still for long. The big institutions and the bigger property firms have long eyed a bigger presence in the private rented residential sector.
But the institutions and the bigger property firms, perhaps because they are just more inefficient than the small private landlords (who cannot charge out their time spent doing tenant check-ins and the like) want changes to the tax system - for example, to allow them to build big blocks but just pay Stamp Duty Land Tax at the rate applicable on each unit.
The government will probably acquiesce because big business is attractive and can get lots of houses built and let fast, so helping to solve the housing crisis.
The small private landlords, whilst they have grown the private rented sector (PRS) from 8 per cent of all housing stock in 1988 to over 14 per cent now, will take too long to achieve the growth rate the government demands.
There is an issue of fairness here. Are tax breaks for big property firms fair to small private landlords? How well will the big firms really do and what will they build? What will be the mortgage companies’ contribution to the party? And how will the newly built build-to-lets be managed?
Managers of public housing assets and tenants may be able to help the institutions gain this understanding of managing tenants, but I would suggest that managing tenants in the private rented sector calls for a slightly different approach.
We know this because we also advise local authorities and housing associations on private rented sector access schemes - where they try to get tenants to move to the private rented sector. Whilst many of these access schemes are good on the tenant facing side, they often could do a lot better job of reaching landlords.
In recent weeks we have started working with a few funds looking at build-to-let and we show them how they could manage tenants in the private rented sector.
Capital gains tax and landlords
Finally, a word about capital gains tax (CGT). I see the government is looking to increase the rate of capital gains tax to 40 per cent from 18 per cent and possibly cut the amount of gains one can have before it becomes payable (currently just over £10,000) to say £2,000.
This has led to many journalists asking me question like, “So is this the death of buy-to-let? Won’t thousands of landlords all be now rushing out to sell their properties before the change in CGT hits?”
My answer is “no” to the first question and “unlikely” to the second.
Whilst many landlords may have bought buy-to-lets for capital gains originally, those that bought in the period from 1998 to mid-2007 would now be quite “income rich” because an awful lot of them will be paying mortgage rates somewhere between 0.7 per cent above and 1.75 per cent above Bank of England Base Rate.
With base rate at 0.5 per cent now, this means that many will be enjoying quite a juicy income right now from their buy-to-let investments.
So whilst it is true, they may well have bought for capital gains, the short term income flow from their buy-to-let assets will keep many from selling, unless they really need to sell in the short term for some special reason.
They know that they may as well hang on and keep the incomes that their pre-2007 buy-to-lets are giving them. After all, they can always sell later when Vince Cable has shuffled off and George Osborne (or a Labour successor) has cut capital gains taxes again. (And with Vince and George hardly bosom mates, that may not be too far away.)
