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.
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:
- Take note of the frontage of the property Road > Path > GARDEN/YARD > Door
- Take note of the LARGE bay windows
- Take note of the ‘CURB appeal.’
- Take note of the POSTCODES DL**HJ & DL**HH
- Take note that #85 is an END TERRACE
- Take note of the FLOOR AREAS in M2
- 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’
- These ALL have the large bay windows
- They are ALL are between 65 & 69m2 closer to the 60m2 that was sourced but STILL all larger
- 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
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.
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?