Looking for a house through a magnifying glass - isolated over white

Beware of Irresponsible Property Sourcing Companies

Over the last five to ten years the property investment world has been filled with dream-selling hype, delusions of grandeur, get rich quick schemes and irresponsible ‘fake it until you make it’ guru’s all trying to lure you in to a false sense of security to extract your hard-earned cash, no matter how little of it you have to invest.

One of the biggest problems with this hype is that it has paved the way for the rise of the property sourcing industry. This may not have been a bad thing but when you couple the above with the low barrier to entry to this industry, we have a potential recipe for disaster.

I have seen the effects of this first-hand hundreds of times in recent years and have spent hundreds of hours frantically trying to help investors limit the damage of this.

I am at a point now where I feel it is time to expose these sharks.

You could say what I am about to discuss is the straw that broke the camels back.

For over 5 years now, I have been educating my clients on the ethics of sourcing companies. However I want to get something clear right from the start.

There are some fantastic sourcing companies around who really know what they are doing, they are very professional and often offer some form of accountability to their clients with controlled refurbs and even management thereafter.

It’s not these companies I have an issue with, I want to talk about the other lot.

Firstly, What is Property Sourcing?

In a nutshell, this is buying a lead to a property deal that otherwise you would not have known about. Generally or rather historically, these are direct to vendor properties that have a price agreed between the vendor and the ‘trusted’ property sourcing company.

However, more often than not, these days, they are simply properties that are on the open market for sale with an agent, live on Rightmove for anyone to view.

The caveat being “there is a good argument to say that you were most likely never going to come across this property, so there is value in that, I suppose”.

So how does property sourcing work?

Simply put, you register with a sourcing company that sends you a deal or property, usually by email as and when they find come ‘source’ it.

They will charge you a ‘finders’ or ‘sourcing’ fee and then pass the property lead over to you for completion.

Generally, this fee (for standard single let properties) is C.£3000 but can rise significantly for larger refurbs, flips or commercial to residential properties. It’s not unheard of to pay upwards of 20-30k for a large development.

As you will see below, the deal is presented with some basic information regarding purchase, refurbishment and sourcing costs. It will highlight any potential increase in value and the achievable rent.

So what’s my issue with property sourcing companies?

I have absolutely no issue with sourcing companies in the same way that I have no issue with builders, roofers or plumbers. What I have an issue with is the rogue traders of the property world, much in the same way I do with the rogue builders, roofers and plumbers.

Unfortunately, since there is so much awareness these days through the hyped-up BS on Facebook and YouTube, there is a mass of irresponsible sourcing companies out there who are using you as a ‘cash-cow’ to build there own property portfolio or to ‘cash in’ on your emotional attachment to money.

Much like anything else connected to making money, there are responsible and irresponsible ethics involved.

The barrier to entry for a property sourcer can be as low as watching a YouTube video, designing a spreadsheet and loading up Rightmove.

Herein lies the problem. Property investing is more on the ART spectrum than it is on the SCIENCE spectrum.

These people have no experience in or desire to finding suitable properties. They don’t know what makes a suitable property a good investment, but the scariest thing is that they have no idea what makes a bad investment.

If we could assess a property’s suitability via mathematics alone, then this thing we call property investing would be as easy as 123 and the multi-million-pound training industry attached to it would crumble overnight.

The STRAW that BROKE the camels back

A few weeks back, a previous mentee reached out to say that he had been offered a property in my local town here in Darlington and would I mind casting my eye over it. He mentioned that something didn’t add up and since he had spent a year under our wing he knew his hunch was probably right.

“Of course, Samuel, no problem, send it over, and I’ll gladly offer my opinion.”

Regrettably, this took up several hours of my time, not what I was expecting, but I had to get to the bottom of this deal. Furthermore it’s now taken several more hours, but the silver lining is that I get to educate people that bit more and hopefully help some of you avoid these companies

It’s worth mentioning that I have no intentions of exposing the sourcing companies name; that’s not my style.

However, everything that follows in this BLOG is 100% accurate.

THE DEAL

Please see below;

X XXXXX Street, XXX XXXXX Darlington

  • 2 bed terrace BRR
  • Purchase: £50,000
  • Revaluation estimate: £90,000
  • Gross rent: £525
  • Net cash flow: £199
  • Refurb estimate: £21888 (including VAT and 10% contingency) 
  • Money left in: £11,914
  • ROCE: 20.04% 

Square metre: 60

Refurb: The property needs a full refurb, including full rewire, boiler and new central heating system. The refurb will entail a new kitchen and bathroom, full house plaster and painting.

Please always do your own due diligence.

Below are the Properties in the Sourcing Companies Comparable List:

#93 £97k DL***J (74m2)

#94 £90k DL***J (71m2)

#101 £106k DL***J (80m2)

#157 £90k DL***H (80m2)

#85 86k DL***J (60m2)

What you should note from the images and subtext above:

  1. Take note of the frontage of the property Road > Path > GARDEN/YARD > Door
  2. Take note of the LARGE bay windows
  3. Take note of the ‘CURB appeal.’
  4. Take note of the POSTCODES DL**HJ & DL**HH
  5. Take note that #85 is an END TERRACE
  6. Take note of the FLOOR AREAS in M2
  7. Take note of the NUMBER of COMPARABLES (5)

Below is the Property that was Offered/Sourced.

I am sure you will see immediately that the property is NOT comparable with the ones above in the comparable list.

It is simply Road > Path > Door

You’ll note there is no large bay window on the front of the property, the curb appeal is significantly inferior and the observant of you may also note that the property is only 60m2

What I haven’t mentioned is that this property is a complete different postcode to the comparables too (DL***Z)

I suppose now the logical question is WHY did the sourcing company decide to highlight comps from the other end of the road a huge road with hundreds of houses on separated by a main through road?

Well…… Here is the answer

Below are the Last Five Comparables for DL***Z

#79 XXXXX Street – Nov 2020 – £58,500

#25 XXXXX Street – Apr 2018 – £43,000

#9 XXXXX Street – Dec 2017 £49,000

#73 XXXXX Street – Oct 2017 £60,000

#29 XXXXX Street – Sep 2017 £51,000

The Average Price of the LAST Five SOLD Properties is £52,300.

Ok, yes, currently we are in a buoyant market, and some of these comps date back to 2017.

Arguably though, being a local investor, having a large amount of knowledge and owning #9 in the sold list above, I would say that the market is in a similar position now in 2021 as it was back then in 2017. However, I digress because this is still not the point I would like to highlight.

The sourcing company have decided to ignore the comparables in the same postcode since it did not support their argument of a revaluation of C.90k.

But, what is far worse for me is that since they used alternative postcodes, why didn’t they include all of the comparables in these postcodes?

Well, once again, we have the answer, courtesy of nethouseprices.com

#36 XXXXX Street – DL***A – Nov 2020 – £68,000

#80 XXXXX Street – DL***A – Mar 2020 – £59,000

#78 XXXXX Street – DL***A – Jun 2020 – £43,000

#74 XXXXX Street – DL***A – Apr 2019 – £63,000

#72 XXXXX Street – DL***A – Mar 2019 – £65,000

The Average Price of the LAST Five Properties is £59,600.

Things you should note with the above ‘unincluded comparable list

  1. These ALL have the large bay windows
  2. They are ALL are between 65 & 69m2 closer to the 60m2 that was sourced but STILL all larger
  3. All were in rentable condition and #78 was in immaculate condition when sold

Our Comparable #9 in the Same Street

We refinanced our property at #9 last year. We had the property valuation come back at £69k. This property had just undergone a FULL refurb.

Our valuation on this is now 75k MAX

I think this paragraph extract from the sourcing email sums something pretty obvious up

Refurb estimate

Note: This is an estimate based on a 15-minute viewing. An accurate quote must be undertaken on completion once measured and opened up.

No gas/ electrical tests or structural surveys have been completed; there is a risk that further defects may be found at a later stage resulting in additional cost. 

You’re about to risk either 40k via the mortgage route or £77.5k if you lay down the cash to buy, and given that this is a BRR deal, the latter is more of a possibility.

In Summary

Someone is going to get a big surprise in six-months time when they call for a revaluation and the sourcing company mitigate this by inputting a small bit of text informing you to ‘Always do your own due-diligence’ they may hide behind the current market or the comparables but they know that they are not true comparables.

In actual fact though you’re not likely to approach them again and they know that. What’s more is that there are enough people trying to buy BRR that they will make hundreds of thousands of pounds before they are exposed, if in fact they ever are.

Sourcing companies can be an excellent way to build your property portfolio.

This blog is not entitled ‘Beware of Sourcing Companies’. It’s Beware of Irresponsible Sourcing Companies’

The critical thing for me here is the unethical way that this company have sourced this property. They have purposely chosen to ignore the fundamental information highlighting that the deal is by no means what they say it is.

AS ALWAYS do your own due diligence and get proper training and support if this is something that you struggle with. We’re not talking about buying a pair of shoes here. This is tens of thousands of pounds.

What’s the cost of training by comparison?

The idiom or the figure of speech “look for a needle in a haystack” is used to describe something elusive in a large space or a sisyphean task. Magnifying glass on the needle is isolated on white

How to keep a good tenant.

What Makes a Good Tenant?

Good question!

I suppose we all have definitions of a good tenant, in our earlier blog, we called a good tenant a suitable tenant.

They are, for us, one and the same thing.

The word GOOD is too subjective to classify in this instance. We look at a suitable tenant in the same way that we look at a good tenant.

A good/suitable tenant is simply one that pays their rent on time and looks after the property.

We could take this further and hope that the tenant is communicative and willing to do smaller repairs off his or her own back, they keep the property immaculate and even improve its condition by means of decorating etc.

For the purpose of this blog, however, a suitable V good V dream tenant is somewhat irrelevant, in essence, all we can ask of a tenant, and the tenant that at a minimum we all want to keep, is that they pay their rent on time and look after the property, anything else here is a bonus!

Ask Yourself One Fundamental Question

There is no dark art or hidden secret to keeping hold of that ‘suitable’ tenant

Just ask yourself this one question – ‘why would this tenant want to move?’

You will generally find the answer yourself

  • You’re raising rent continually and excessively
  • You are shirking your maintenance responsibilities
  • You are visiting the property too often
  • You will not reinvest in the property during a tenancy
  • You are not allowing them basic privileges upon request

Why do we NEED to Keep Hold of this Suitable Tenant?

In short, and by no means of beating around the bush, the tenant is your profit, they are the cogs of the industry, without tenants we have no business, no profit and a whole heap of liability.

This means that keeping (almost) any tenant has its benefits providing you are receiving your rent, but keeping a suitable/good tenant is increasingly important.

For one, anytime a tenant moves out of your property you are left with some form of expenditure, whether that is merely the council tax liability and subsequent mortgage payments, or it is the cleaning, disposal of goods, repairs and redecoration, it is all expenditure coupled with lost profit.

Generally, the longer the tenant is at your property, the more this will cost you when they move in terms of redecoration and repairs. The smaller repairs that they felt they could live with won’t be tolerated when the new tenant moves in so they will need to be dealt with as well.

Secondly, we have the added factor of hassle. When a tenant moves out we not only have to check them out of the property, we need to inspect against our inventory, deal with any repairs or damage that the tenant has either caused or unreported, we need to deal with the deposit, whether that is claiming against it or simply returning it. If we are claiming against it, we may need to request a statutory declaration if the tenant does not reply to the claim or we may need to use the dispute resolution service if they contest it, all this is a laborious and time-consuming task (see our DPS blog)

If only it was that simple! We also need to transfer the liability of the utilities into our name, there may be debt on the gas and electric meter, meaning that we either have to clear the debt or call the electric company, go through a drawn-out process to have the electric meter reset by means of going to collect a new key from the local shop, using a ‘reset’ code then returning to the property to clear the debt, only then can we return to the shop to add some credit to the key and get our supply back on.

If only the gas was that simple, in most cases the energy company will want to send an engineer out to the property to reset the meter, great huh? NO, this means we have to wait a few days, we also have to return to the property and hang around for the engineer to attend his 4-hour window, in the cold I might add!

We have to transfer the water into our name, notify the council that we are now liable for the council tax, make the decision to hold off payment until we either find our next tenant or we receive our arrears invoice. If we make the payment immediately, in some cases we would then receive the overpayment back in the form of a cheque after finding the new tenant, meaning we now have to go to our bank to pay this in.

OH! Lastly, we have the task of retaking pictures and starting the entire process of listing, advertising, speaking with prospective tenants, viewings, applications, tenant referencing and signing up that suitable tenant all over again! furthermore we can never be sure that they will be as good as the tenant we have just let slip through our fingers.

SO…..How do you Keep a Suitable or Good Tenant

Sorry that the above paragraph was a little drawn out, we need you to appreciate that loosing (almost) any tenant is bad news for an investor/landlord

Returning to my earlier question ‘why would this tenant want to move out’ we have the following:

sometimes matters are beyond your control, and despite your best efforts a tenant may still move on. However, we need to do whatever is within our control to keep this suitable tenant

We need to be a GOOD landlord

  • When a tenant reports a problem, we need to act and act as soon as is reasonably practicable
  • We need to address the more significant issues like a broken boiler with our tenant in mind, especially longer-term tenants
  • We need to show the tenant respect and allow them to LIVE in THEIR home comfortably and allowing them space without constant intrusion
  • When a tenant requests a change or seeks a pet, common sense needs to prevail
  • We need to avoid becoming complacent, the longer the tenant is at the property the more value you should attach to them

This list really could go on, but I am sure you get the picture by now.

Having balance and of course with revenue in mind, you need to do everything within your power to eliminate the controllable reasons why a tenant would want to leave your property.

casio

Making Tax Digital

OK, so you have just sailed through GDPR, used the new stamp duty and tax regime for property income to out manoeuvre your competition; what is the government planning next?  Well, one thing is Making Tax Digital (MTD) also referred to as Real Time Information (RTI) in some press sources.

What is the difference between MTD and RTI?

Well for the purposes of this article nothing really.  Making Tax Digital (MTD) is the name given to the specific government project whereas RTI is a generic term for any recording of information in a digital format thereby making it more accessible and ‘real time’.  It is just the case that MTD will turn accounting information into real-time information (RTI). 

So what is Making Tax Digital (MTD)?

Making tax digital is the government’s scheme to move all our tax accounting onto digital platforms. It was due to be introduced for businesses and landlords in April 2018 but as is so often the case with government IT projects it has been delayed.   

The Government statement on July 13, 2017 read; ‘the changes mean that the smallest businesses and landlords will be able to move to keeping digital records for tax at a pace that is right for them.

Lots of references to businesses, my portfolio isn’t structured as a business?

Maybe not but the legislation is now more often than not lumping the property investor in with any changes affecting businesses.  This appears to certainly be true with MTD.

Then what do I need to do now?

Keep your eyes peeled and remain vigilant, This one is coming. The new timeline is businesses will need to move onto the digital accounting platform in April 2019 to meet VAT obligations.  If you are a non-VAT business the government have stated that you won’t need to move onto the digital platform before 2020. We will of-course keep you fully updated and posted along the way so watch out for our next article on this.