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					The Times
February 2008

Meet the investor making money from repossessions
The current downturn can bring big profits for smart bargain-hunters
Susan Emmett

More than one million overstretched borrowers will struggle to pay their mortgages this year as the credit crunch
deepens and the banks tighten their lending criteria. That was the ominous warning from the Financial Services
Authority this week.

The financial regulator said that one third of the 5.7 million people who borrowed a mortgage between April 2005 and
September 2007 are in danger of defaulting. According to the watchdog the risk could be even higher when you take
into account the numbers paying higher interest rates. About 1.4 million borrowers will see their mortgage repayment
soar by an average of £210 a month when their low fixed-rate loans come to an end this year. Add to that the Land
Registry’s announcement on Tuesday that house prices continued to fall in December, and the earlier forecast by the
Council of Mortgage Lenders that the number of repossessed homes would rise by 50 per cent to 45,000 homes this
year, starts to look like a conservative estimate.

But not everybody is glum. Sanguine negotiators are taking advantage of the rising numbers of repossessions and
falling property prices to knock off up to 20 per cent from the market value of homes seized by lenders from
borrowers struggling to pay their mortgage.

Some of these bargain hunters are first-time buyers grabbing their first decent opportunity to get their foot on the
property ladder. Many more are investors hoping to resell their repossessed property at a profit.

By the end of the year, 45,000 homes will have been repossessed from overstretched borrowers as the credit crunch
deepens and the banks tighten their lending criteria. That is the depressing forecast from the Council of Mortgage

Among those out looking for deals is Heenal Lakhani (27), managing director of Fenwold Properties Ltd, a property
investment company. “As a rule of thumb, you can get them at 15 per cent below market value, if not 18 per cent,”
says Lakhani. “Not many people like to buy them because they are often sealed up, cold and damp. You can’t see
them properly. The plumbing might not work. The electricity might be down. It puts buyers off.”

His recent deals include an ex-council one bed flat on the top floor of a mansion block near Tower Bridge which he
bought for £250,000 before Christmas and just sold for £285,000 without changing anything. Towards the end of last
year he also bought a two bedroom ground floor flat in Shoreditch for £270,000 even though it was valued at
£330,000. He is keeping that property to let.

But for Lakhani, some of the most profitable deals take place when he buyers in bulk. This is one example of how it
works. In March 2007 Lakhani bought four similar flats in the same block near the City for an average price of
£445,000. All four had all been repossessed from another investor who had run into trouble. Lakhani sold all of them
for "far more than I paid. “I had to compete with another buyer who was prepared to pay £50,000 more for one of the
flats. But if there is a bulk of properties, the banks like to sell it to one person who they know will act quickly,” says
Lakhani. So the bank got its quick sale. The estate agents got two lots of fees from the same property and the Lakhani
got the deal over somebody else.

In theory, banks, surveyors and estate agents have a legal duty to sell a repossession at the best possible price and are
in danger of being sued by the former borrowers if they do not fulfil their obligations. Estate agents readily tell stories
of successful sales of repossessed homes.

Cory Askew, an estate agent at Chesterton’s Docklands branch where 25 per cent of the fees come from selling
repossessed homes, says that 10 of the 15 repossessed flats they sold last year went to sealed bids and fetched more
than the asking price. He recently sold a nice little flat to a first-time buyer working in the city who paid close to
asking price. Ed Mead of Douglas & Gordon in West London sold a repossessed one bedroom flat in Chelsea for
£250,000, £75,000 more than the asking price, even though there were only eight years left on the lease.

But such stories represent a tiny fraction of the market as a whole. According to Julien Holmes, managing director of
Crown Mortgage Management which chases debt for sub-prime mortgage lenders around the country, most
repossessions are impossible to sell at full market price. He says: “If it’s an unpleasant repossession, the occupiers
quite often trash the place. They take all the kitchen units, pull out the bathroom fittings, smash the windows, take off
the doors and worse, much much worse. Often, we have to clean up and have the place repaired to sell it on the open

The properties in the worse state tend to either go straight to auction or end up there after an unsuccessful stint in the
open market. Here they will sell at an even great discount, if at all.

Holmes explains that the sales price of one of their repossessed homes is currently five to 10 per cent lower than it
would be if the borrower had sold it themselves. There is a further drop in price of between six and 10 per cent if the
property goes to auction. “Of course there are exceptions, we are sometimes able to sell at full price if the property is
in good conditions and the losses might be greater if the property has been ‘vandalised’ before the occupiers leave,” he

As the property market weakens and house prices drop, a greater number of repossessed homes are likely to end up at
auctions at even lower prices. Tony Webber, auctioneer at Eddisons in Leeds, says: “This time last year most of the
repossessions were selling well through estate agents. But as the credit crunch deepens and the lending situation
changes, more repossessions are coming to auctions. We have to set the guide price at 20 per cent the market value to
get people in the room.”

Even after the discount many are failing to sell which suggests that investors are waiting in the sidelines for prices to
drop even further. “We are selling 60-65 per cent of our properties compared with 85 per cent at the peak of the
boom,” says Webber.

The CML expects the number of repossessions to rise by 50 per cent in 2008, from 30,000 in 2007. These are levels
not seen since the mid-1990s when the property market was recovering from the recession earlier in the decade. But
the number of repossessions is still down from the heights reached in the early 1990s, after the property crash when
80,000 homes were seized by banks. At the time many were sold through auctions at rock bottom prices to buyers who
made handsome profits from the decade-long boom in prices that followed.

It is unlikely that we will see a repeat of the 1990s property crash in 2008. The most gloomy prediction come from
Capital Economics which forecasts a 5 per cent drop in prices. But even this brings plenty of opportunities for those
with the strongest stomachs. As Lakhani puts it: “I think there is still good value in the market. There are a lot of
desperate people out there.”

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