Asset rich and cash poor, how many times have we heard that phraseology?  But what about ‘We can afford to pay it (the interest) and repay it on time but don’t have any money to put in’?  The concept of self certification mortgages has finally been put to rest and are no more, but we are still being asked to help businesses that espouse the latter scenario in that they will make good money from what they are doing, so repayments are easily covered, and will make a significant profit a short way down the line, but the lenders don’t like this approach.

The old saying about a banker is that he is someone who lends you an umbrella when the sun is shining but wants it back when the rain starts falling, very apt, but it should be remembered that is what they are, bankers, not property investors, not widget makers, not housing developers, so to expect them to take an entrepreneurs view rather than a risk takers view is wishful thinking.

Bankers want to see their borrowers share some of the risk, which is why even if a property can be bought cheaply, under what is deemed to be its market value, it is unrealistic to think that ALL of the money can be borrowed so some lenders have reverted to their ideal which is to lend a percentage of the market value or the purchase price whichever is the lower so that in every case the borrower is risking something, even if it is not cash but a charge on some other assets they own.

A good development deal is another case in point, the end profits may be good, but if the developer is taking no risk at all at any stage, even if they actually recoup it later, lenders won’t either.

Borrowing is a partnership, so put something of value on the line and you will get the support, try to do it without and the project will never happen.

The market has changed but realistic borrowers will still get the support their project deserves, they may just have to put the banker’s hat on for once.

If you have a proposition that merits investigation, do visit our contact page and get in touch, we will be honest enough to let you know what can be achieved.

Prospective clients often find their way to us as they have approached their own bankers to support their borrowing requirements and are astounded after years of loyalty to the bank concerned, their applications are being rejected.  Indeed according to the Institute of Directors “… nearly 60% of businesses seeking bank finance in 2009/10 were rejected by their bank”.

According to research from a credit reference agency often used by the banks and the Forum of Private Business (FPB), a fifth of all small business owners who have been refused a loan are completely in the dark about why they were rejected.

The most common reason given to businesses that are told why their loan was denied is inadequate security. More than 40% were given this reason but the lenders are not pursuing the government backed opportunities to get around issue.

Computer Says NO!

A further 30% were dismissed because the sector they operate in is deemed “high risk”, while 27% are let down by their credit score. 

The former is difficult to challenge because it is subjective and we have no access to the lenders own level of experience in the relevant sector, we can only rely on general business sentiment and I think in certain circumstances that is all the lender’s underwriter is doing. 

The latter is again difficult to challenge as despite what an individual business’s (or the owner’s/director’s) credit score is, the lender sets the threshold level to suit their purposes.

Martin Williams, managing director of credit reference agency Graydon UK, said: “It is vital that business owners and managers enter into a conversation with their bank in order to find out where their perceived business challenges lie. This will allow them to address these issues in future applications, considerably improving their chances of securing funding”. 

We would add here that this is an admirable approach but one often where one comes against a brick wall as your own bank contacts (the ones you got on well with before) are now so divorced from the underwriting process they are often in the dark themselves as to the thinking behind the decision as to be in a difficult position to advise.

We always suggest that some form of feedback is obtained why the refusal of support was given, and indeed we ask for it if it is not volunteered, but unless we were the originators of the application, the lenders will not tell us and it is up to the business owner themselves to get the right answers, and if they feel they are out of their depth here, we can help.

Phil Orford, chief executive of the FPB, said business owners needed to make sure they were presenting proper financial information, but also called on the banks to provide detailed reasons when loan applications are turned down.

“We have entered a new business landscape where a more collaborative approach between businesses and banks is required if the future of enterprise and the economy is to be a healthy one,” he said.

“Securing finance is the main priority of the vast majority of small businesses. Economic conditions remain extremely tough and, even when the economy does recover substantially, growth finance will be important to allow them to keep up with demand.”

Our aim at CFA is to ensure that all viable applications are presented in a format that the lender will understand, with all the background information we know will be sought and explore the options open to the applicant moving forward.  We are generally successful in obtaining a workable lending solution, but only because we have done our homework and preparation first to ensure we are painting the right picture, and of course do not waste everyone’s time submitting applications to lenders who patently have no appetite for our applicant’s business.

We can help at the early stage in preparing a robust business plan that not only looks at the strengths and weaknesses of the proposal, but goes deeper into the micro and macro opportunities and threats that need to be addressed.

If you have had a challenge, working with your existing bank, give us a call and let us see if we can help.

Many times the pervading view is that bargains can be had when buying at auction however, property auctions are not for the faint hearted and the risk can be that you go overboard in the heat of the moment.

Some bargains can be had at auction but usually only for those with the skills to capitalise, namely builders and developers who can add value to the stock and overcome the challenges that are often the reason why the property went into the auction in the first place.

I have seen 1st time buyers looking for a property that they can “do up” to live in but the fundamental point is that a lot are not mortgageable by standard means and often involve bridging for a short time until they are. A point to be aware of here is that some lenders, if strictly following the Council of Mortgage Lenders guidelines, may not be prepared to finance you out of the bridge for 6 months, so you need to know that the deal will stack up with 6 mths worth of bridging costs potentially being included.

A lot of stock ends up in the auction because there may be title issues, condition issues or in the case of a lender repossession they have to be seen to be getting the best price on the day, which the open auction is designed to achieve.

You also need to factor in that the 10% has to be paid on the day in cash (or draft) and you will lose it if you cannot complete because the fall of the hammer is deemed the actual exchange of contracts. Some auctions are also 14 day completion so watch out for those.

So what I would say is don’t discount it out of hand if you do not class yourself as experienced in these things, but do your own due diligence. Get the auction catalogues, select some suitable properties, view them critically, and decide what you think they are worth with all the tools that are available on the internet, go to the auction BUT DON’T BID! Just see what they go for and what sorts of people are buying them.

I would suggest you need to visit at least 5 or 6 auctions as an observer first to get a feel for things. If it is then right, surround yourself with the people who can help you, a capable broker like ourselves, a solicitor used to completing in auction timeframes (extremely important) who can also scrutinise the legal pack first, possibly a tame surveyor who might look at the property for you for a “drink” and maybe a builder who can give you the “warts and all” costs to turn the property into something that will have value.

The bane of my life is the amateurs who have watched only a few episodes of “Homes under the Hammer” or Sarah Beeny’s “Property Ladder” and think they can do anything.  Good luck to them if they enter into this sort of transaction, as long as they go into it with their eyes wide open, but many don’t, and remember the auctioneer’s guide prices are just to get people through the door and put “bums on seats”, they often bear no resemblance to what these properties may go for, but they alone obviously get some potential purchaser’s juices going.

We are often asked to help with funding auction purchases for commercial or investment purposes and we frequently need to resort to some form of bridging or short term funding to achieve that.  Do give us a call if you have seen something in an auction catalogue that catches your eye, but do it early on and we can do our best to guide you through the process should you intend to be successful bidding at auction.  Contact us here for further details.

Surveyors expect to see rent rises in the New Year as the number of rental properties coming onto the market fell for the first time since January 2008, says the latest RICS Lettings Survey.

The following from the RICS Website -

Shortage of new instructions bolsters rental outlook

• Tenant demand picks up speed but the new instructions net balance turns negative for the first time since the early part of 2008
• Downward pressure on rents appears to be easing with the forward looking rent expectations series moving smartly back into positive territory
• London is leading the turnaround in rental expectations followed by the North and the South East

Tenant demand for residential property picked up speed in the three months to October. A net balance of 16% more surveyors reported a rise in new tenant lettings over this period compared with 11% in the previous three months.

Within this aggregate figure, demand picked up particularly sharply for the renting of houses; the positive net balance in this sector of the market jumped from 6% to 22%.

Meanwhile, the net balance of respondents recording a rise in demand for flats remained unchanged, albeit still in positive territory, at 12%. More significantly, the latest survey shows the new instructions net balance to have fallen for the first time since the early part of 2008.

The Full Link to the RICS Survey download 

Landlords are both taking out more mortgages, with new deals being launched to serve them, and feeling more positive about the next 12 months.  Generally this is because their returns have come out of the red and are back in the black

Lending is on the up

Lending in the Buy to Let (B2L) sector grew in the third quarter of this year for the first time in two years, according to data published last week by the Council of Mortgage Lenders (CML).

It totaled £2.1bn over the quarter, 10% higher than in the previous quarter. This latest period also saw the first increase in two years in the physical number of B2L loans advanced, from 21,600 to 23,700.

It is better news, albeit from a very low base compared to 2007 lending levels.

Lending within this sector was up for both purchases and remortgages, with house purchase lending ‘appreciably stronger’ according to the CML – that’s not surprising when many borrowers are reverting to low standard variable rates (SVRs) and deciding to sit tight until rates rise.

With no B2L deals available at over 80% LTV, anybody with less than 20% equity would be unable to remortgage, whether they wanted to or not. Lucky for them that many SVRs are low!

There has also been a continued improvement in the number of arrears in the B2L sector as well which serves somewhat to allay the Doom and Gloom Merchants, principally helped by the current lower rates. According to the CML the number of mortgages with arrears of more than 1.5% of the balance, dropped for the third quarter in a row, falling in from 22,900 to 20,500 representing 1.7% of all outstanding B2L mortgages.

The CML points out that while the recovery in the sector is only modest is does show that B2L is “here to stay”.

Landlords feeling a little more Bullish

The positive stats are supported by happier landlords, with many feeling much more optimistic about the sector in the third quarter of this year.

According to B2L lender Paragon Mortgages who have not been actively lending throughout the Credit Crunch, landlords expect the net value of their portfolios to increase over the next 12 months and have been taking advantage of lower house prices since the first quarter of 2007.

On average they owned 11 properties at the beginning of 2007, which increased to an average of 12 properties by the third quarter of 2009.

Plus they are feeling good about the future with a third of landlords now saying that tenant demand will grow over the next 12 months, and 57% predicting it will remain stable.

Paragon added that it is unlikely that the mainstream  mortgage market will recover for a number of years, which is something we have been advising our investor clients for quite a while now, and that this means that large number of people will continue to be excluded from buying, and will need to rent property.

Positive returns at last

Landlords have even more reason to feel cheery following the latest rental index from property company LSL property services. It says that annual property investment returns turned positive in October for the first time since the UK fell into recession.

After taking rental income and the fall in house prices into account, a landlord investing in property in October 2008 would have made an average annual return of 2.4% – the last time the return was positive was way back in July 2007 before all this blew up.

The rental index also showed that tenant arrears have improved – an issue that has been a huge problem for landlords during the recession.  By the end of October, arrears had shrunk to 495,000 or 14.6% of UK tenancies, the lowest level since LSL began calculating these figures one year ago.

What about mortgages?

More good news is that  the mortgage market is also improving with lenders offering more B2L deals.  According to financial information provider Moneyfacts, there were just 179 B2L mortgages in September 2009 and now there are 239 available.

But that’s still a drop of 93% from the peak of the market two years ago, when there were over 3,600 B2L deals on offer from a multitude of lenders, many of whom are no longer anywhere to be seen, and don’t have a business model that could be adapted to the current financial climate..

Maximum LTV ratios are still tight but there are a couple of deals available up to 80% LTV from sister lenders Yorkshire Bank and Clydesdale Bank. For any real choice though landlords still need to find 25% upfront and 30% if they want the more attractive deals that are on offer.

This is a world away from the market two years ago where 85% and 90% mortgages accounted for 65% of the B2L market. Plus lenders are still tightening some criteria, such as restricting the size of portfolios that landlords can have.

But if you want a B2L deal, there are some options around, provided you have that all-important equity of course and we are more than happy to explore the options that are currently available, especially if you are an experienced portfolio landlord.  To do so click here to contact CFA

The recession could be over for the buy-to-let market, as mortgage lending to the sector picks up once again and landlords look to take advantage of more affordable property prices and high tenant demand, says Lettingsearch.co.uk

Buy-to-let investors are beginning to fight their way back into the property market as prospects for the sector improve following a sustained period of restricted financing and, until recently, weak rental yields. With banks finally increasing their buy-to-let lending in quarter three, a period of sustained investment in the industry is set to follow.

Many professional landlords still have liquid cash available to invest and are now likely to look to expand their portfolios over the next few months, buying property at the more affordable levels before prices climb too far. Investments in other asset classes continue to under-perform, and as a result, city bonuses will also be channelled into investment property, bolstering the buy-to-let sector further.

Investment in the sector will be underpinned by strong and rising tenant demand for lettings accommodation, as homeowners and first time buyers turn away from the sales market and will fuel heightened activity in the property market as a whole.

Phil Calderbank, Director at lettingsearch.co.uk, comments:

“Mortgage lenders are once again recognising the important role lettings has to play in the property market and as investors with liquid cash make a move to take advantage the affordable property, strong tenant base and improving returns, I think we can safely say that the recession is now over for buy-to-let.

“Many so-called reluctant landlords have discovered a new income stream and we believe some of these people will stay in buy-to-let and even expand their portfolio. This will further strengthen the buy-to-let sector.

“The current rate of house building cannot meet the demand from potential buyers, and while lending to homeowners remains scarce and the uncertainty over unemployment looms on the horizon, we will see people choosing lettings from every rung of the ladder.”

© MyIntroducer.com 2009