3 – PROPERTY TRADER (FLIP)

I Vital Statistics

Introduction

You will like to hear what I have to say about this business model:

A LOT of money can be made if you know what you are doing.

The reason being is that trading properties is just that.  You do absolutely nothing to the property.  You simply buy and then sell.  No refurbishment, no extensions, no loft conversions etc.  There is no need to pander to the whims of an owner occupier interested in your property regarding décor or location as you will be dealing with property businesses.

The success of this business is all in the buying.  If you buy right then the rest is all taken care of.  So what is buying right? Buying right is:

CHEAP!

The property has to be bought cheap so as it can be sold cheap.  You make small margins on each property and you focus on volume.  That is to say you are better of selling 10 properties to make a quick 10% on each one rather than holding out for 100% profit on one property and realising none.

There are plenty of buyers of cheap properties even in a credit crunch.  As long as you have bought well enough to even factor in a further decline in prices then you will make money.

I know of property traders who are able to buy properties at 15% of market value.  Yes 15% of market value.  These guys are committed to the deal.  When they get whiff of a bargain property and they know that the vendor perceives their options as limited they show no mercy!  They will pay the least they can.  This game is for vultures who are determined to succeed.

1. The formula

You have to:

1. buy at maximum 50% of market value
2. sell at minimum 60% market value
3. do it in the quickest time possible

If you can achieve this then you will become wealthy.  I know of plenty of property traders who do just this.  NEVER getting their hands dirty.  Just shuffling a few bits of paper between solicitors and lenders and creaming off 10 to 20% gross profit each time they trade.

And remember we are not talking 10% of a small figure.  We are talking property prices.  So assuming an average transaction value of £100k then each trade can make you £10k a go and sometimes a lot more.

Now let me explain the formula in a bit more detail and why it is so.

1. a) buy at maximum 50% of market value

This game is all about buying right.  I deem right as 50% of market value.  This means basically half price of what a property is worth today.  This means any property.  Take the following properties available in a property auction:

Fire Damaged 3 bed semi in Grimsby – Guide £5,000

City Centre apartment in Glasgow 2 bed – Guide £50,000

2 bed house in Hull rented for £300 per month – Guide £25,000

Do you think those guide prices are reasonable?  Do you have any idea or would you be just guessing?

Now you have to know what each property is worth in its current condition in todays market to spot whether it is a bargain.  This I will show you how to do.  It involves getting in to the mind of an investor to really work out what these properties are worth.  It is these investors who will buy from you so you need to know what makes them tick.

Now before you wonder why an investor will not buy a property before you then think again.  The property market is a very imperfect market.  That is to say true market prices are hard to realise.  The property game does not have the equivalent of the London Stock Exchange where a near perfect market exists.

The Property market exists as a mass of mini platforms such as property auctions, estate agents and private sales.  All littered with arbitrage possibilities.  That is to say you can buy from one mini platform and sell to another and make a profit for doing so.

So as long as these mini platforms exist then there will always be opportunities to make money simply by buy and selling properties.  This is a B2B trader game.  Nice and clean and plenty to make.

1. b) Sell at minimum 60% market value

I deem 60% market value to be good for 2 reasons:

1. it guarantees you at least 10% profit on your deal.  10% will net you at least 5% profit after all fees on an average purchase price of around £100k.  This equates to £5k per deal which really should be the minimum you should expect from each property transaction.
2. 60% of market value is a bargain to an investor.  There should be no reason why you should accept anything less.  If the investor is the end user i.e. the investor expects to buy it and hold on to it then they will be more than happy to accept something that is at 60% of market value.  If they want more of a discount they are simply being greedy and tell them so……and if you are not brave enough say I said so!

60% of market value should result in a swift sale which is what any property trader would want.  I will explain the reasons why in the next bit.

1. do it in the quickest possible time

A trader makes their money by selling.  If all a trader did was buy then they would make nothing as they would not have realised a sale.  So for example if you had a trader who bought correctly at 50% of market value but wanted to sell only at 100% of market value then this trader could wait a very long time.

During this time the trader would make no money as no sale has taken place.  In the meantime the following could and/or will happen:

1. the property market in general may have dropped – this will mean you will have to revise your asking price downwards.  If you do not then you will never sell until the market recovers and that could be ages away.
2. the property itself degenerates – the longer you hold the longer something can go wrong.  As the owner you assume all the risks of ownership.  This means if there is a burst water pipe destroying all the fixtures and fitting then you have to pick up the bill.  If you have insurance then you may be covered but there are quite a few exclusions so be prepared to pick up some of the bill.
3. The longer you hold the more interest costs you pay.  This cost directly eats in to your margin.  So if your interest costs are £1,000 per month and you think it will take you 6 months to get £3,000 more on the selling price then is it really worth it?  A trader should always want to minimise their holding costs and opt for a swift and quick sale.
4. Exposure – this is a term to state whether a trader is in the market or out.  If you are a trader holding £1m worth of property that is up for sale then you are in the market.  You are exposed.  No lets just say the credit crunch hits.  Now depending on how quickly you can sell by slashing prices and cutting your losses you could find yourself in the bankruptcy courts.  This has happened to a lot of these traders who simply got too confident.  As a trader you want to keep your exposure to the minimum.  If you had sales going through at 60% market value during a credit crunch you would still be able to sell probably as the buyers would still appreciate that it is still a bargain regardless of the climate.  There is enough of a safety buffer zone for everyone when you are at 60% of market value.

So I hope you can see that the idea of a trader is to buy very cheap, don’t be greedy, sell cheap and do it very quickly.

So lets get in to what is very cheap.  You need to be able to work out what market value is with a certain degree of accuracy to then establish what very cheap is.

1. Determining Market Value

So what is market value?  When you are a B2B trader I deem market value to be what market value is to an investor.  An investor deems market value to be what sort of return they want to get from an investment.

Returns Wanted By Investors

The minimum return on average an investor wants from an investment is:

12%

Now there will be variations to this.  In some areas a higher return is wanted and in other areas a lower return is wanted.  So for example where I invest in Hull I would want a 15% however another place I invest is Harlow and a 10% return would do.  But on average a 12% return is pretty damn good.

In pre-credit crunch days a 5% return was touted out as good.  All change.  Sensibility has come back to the market.  I would never buy at such a low return and nor did any professional investor back then.

Market Value of Rentable Properties

So accepting that a 12% return is universally acceptable to a professional investor you can then work out what market value is.  You simply fill in the missing numbers to this equation:

Market Value = (Monthly Rent x 12) divided by 12%.

So if there is a property that commands a monthly rent of £500 then its market value would be calculated as:

(£500x12) divided by 0.12 = £50,000

So the price to pay for this property is 50% of this market value.  So the buy price is:

Buy Price = 50% x £50,000 = £25,000

So if you see the property for sale at anything below £25,000 then grab it.  You will find an investor who will pay at least 60% of market value being £30,000.

Now this would assume it is in rentable condition.  Properties that require work need to calculated in a different way.

Market Value of Properties Requiring Work

Now lets say the same property that commands a rent of £500 a month has now been seriously fire damaged.  The cost to repair is £20,000.  Then the price to pay is:

Buy Price of Property Requiring Work = Buy Price - cost of refurbishment

So the buy price works out to be:

£25,000 - £20,000 = £5,000.

So if the fire damaged property came to auction (which is where they usually end up) the max price that can be paid id £5,000.

If the refurbishment cost was £30,000 then you would have the buy price of the property requiring work as:

£25,000 - £30,000 = -£5,000

That’s a minus figure.  Hence the property is worthless and you would have to be paid £5,000 to take it on.  This explains why there can be plenty of properties that will just sit empty as they will never find a buyer.  The only way these sort of properties can ever come back to life is if the council provides grants to would be purchasers.  If these grants are not forthcoming then the bull dozers come in and knock the properties down.

Now you have to be able to estimate what the cost of the works will be.  This is where the skill comes in.  if you over estimate you will deem the buy price too low.  If you under estimate you will deem the buy price too high and end up buying something you cannot sell.

Now there are plenty of books that can help you estimate the costs but as a rule I use this scale:

Full redecoration of a property - £10k

Fire damage - £20k

Re-kitting out a shell of a property - £40k

These are very rough prices and I have ignored size.  I just attribute a general figure which I apply to any property that comes my way.  So if I see a 2 bed flat which has old décor then I would guesstimate the cost of the refurb as £10,000.  I know I could do it for less than that but it allows for any unexpected problems.

Now these refurb costs assume a housing benefit claimant living there.  So the finish is basic. Do not expect to get a Versace bathroom out of these budgets!  If you are thinking of trading anything over a purchase price of £125k then I would adjust the refurb costs to match the intended person who will be living there.  So if a fire damaged flat in Mayfair comes up expect to spend a little bit more than £20k!

1. Finding the properties

It will come to no surprise to you that the UK is not overflowing with properties at 50% market value!  There are 2 sources of bargain properties:

i). Auctions

ii). Desperate Sellers

i). Auctions

The reason why bargain properties can be grabbed here is because reserve prices can be low and the competition can be low.

Sellers in auctions are:

Banks

Other investors

A property ends up in auction as a last resort.  Auctions are great for sellers as exchange of contracts happen at the fall of the hammer and the buyer is financially committed to the purchase.

If you compare that to the traditional way of buying where exchange of contracts does not happen until the near end of the purchase.  Lots of sales fail to make it to exchange as buyers change their mind, fail to get finance etc.

So a seller entering their property for auction is already primed up to accept a lower price.  Some sellers may even be desperate and this is the sellers only chance of realising some cash quickly.

Banks only really care about getting the amount they lent back plus fees.  This could mean only £25,000 is needed on a property worth £200,000.  So a property could be entered worth £200k with a reserve of only £25k.  This property will be sold to the highest bidder.  If there aren’t many bidders then BINGO!

This all results with some, but only some, properties with low reserves.  It is these properties that can be had as bargains.

Now it is not enough to find properties with low reserves.  If there are plenty of bidders in the auction room then the property will get bid up and sell for well in excess of the reserve.

You want to find auctions where there are not only low reserve properties but:

Few buyers

Imagine an auction hall that is empty and there you have the perfect auction hall.  This will mean that you will be the highest bidder in every scenario and all you need to do is name your price.  When your named price is in excess of the reserve then you have a match!  Now most will not but some will.

Now what I have described is an imaginary situation.  However there can be times when there are:

1. few buyers for specific properties
   1. few buyers in general

You want to be in an environment where either of the situations above can occur.  This is when there are few buyers for specific properties or few buyers in general.  This can occur in the three different types of auctions.

There are three types of auctions:

National

Regional

Local

National auctions are where properties from all over the UK get auctioned off at one Auction event, usually in London, and are used by big sellers such as the well known banks and large investors.

There are times when you may get a property in a little known town being auctioned off sandwiched in between a mansion in Hampstead and a Block of apartments in Birmingham City Centre.  This little property may have low interest levels and Mr Local Landlord from this little town is simply not there to bid.  So this property will either get no bids (which is very common) or your bid!

So look out for these large national auctions.  It is here where you can benefit from the situation of having few buyers for specific properties.  If you have the time and are patient you could just grab a bargain that everyone else misses.

Regional Auctions

These are auctions that are held regionally.  So typical regions are:

Scotland

North West

South East

London

These auctions can be as large as the national ones.  They can throw up some bargains if there a few people attending.  Going to these auctions during the summer months and the ones either side of Christmas can be great.  While the others are on holiday you can be buying!

It is here where you can benefit from the situation of having few buyers for specific properties.

Local Auctions

These are auctions which sell local properties only.  So these will be town or city specific.  Now these auction halls can be baron.  There can be as few as 10 people in the room and you will find that a couple of them will buy nearly everything and leave the rest because they run out of cash or just do not favour the property.

It is here where you can benefit from the situation of having few buyers in general.

So remember you want to find properties with low reserves within a room of few buyers.  Then the bargains can be had.

You can find these local auctions in the reference chapter along with all the regional and national auctions.

1. ii) Desperate Sellers

Desperate sellers are private indivduals who have or about to default on their mortgage commitment.  They may have lost their job or have over borrowed and can no longer afford to pay their mortgage.

These buyers want out quick.  They do not have money to get a HIP, time to muck around with prospective buyers looking for a home or the patience to deal with estate agents!

They want a buyer who will give them the best price which will clear their mortgage and give them a little bit on top so they can go on holiday.

Your only competitor at this stage are other buyers like you.  To beat the competition at this game you need to be fast.

How To Find Desperate Sellers

You need to advertise to find these sellers.  The best methods to advertise are:

1. The Internet
2. National & Local Press
3. Leafleting

The Internet

Just type in google “sell home fast” or “sell home quick” and you will see plenty of websites that will come up offering to buy your home.  Study these as the wording they use you should use.  So things like:

No HIPS

We will complete in 7 days

Up to 90% of market value paid

We pay all fees

They all have an easy to fill out form prominent on the site to capture the desperate seller’s details.  It is these details that will make you the money.  So once you have their details you need to follow up with a phone call ASAP.

National & Local Press

If you look towards the back of any tabloid newspaper you will see the ads next to all the unsecured loans and business opportunities.  Again they will have the headlines “SELL HOME FAST” etc.  To advertise here costs around £200-£500 per day.  You can specialise by region to get a cheaper price.

If you want to start off gently you could consider local advertising.  Every local paper has a classified section and usually they have a property section.  The section you should be going for is “PROPERTIES WANTED” and again use a catchy title that will attract a desperate seller to pick up the phone and call.

You could consider display advertising but remember this is expensive.  You have to have your business model down to a tee if you are going to do this.  You should be quite clear how many leads you expect to get for every pound of advertising.  Display advertising is the logical next step once you have made the classified advertising work.

Leafleting

This is where you print up some leaflets and get them delivered to your chosen area.  Again you would put something attractive such as sell your home fast etc. and your phone number.  You could use a call centre and use an 0800 number.  Then the call centre will send on the message via email and the call would have cost the home owner nothing.

Always put an alternative number such as a mobile as well.  Some owners may have had their phone cut off and all they can use are their mobiles and some mobile companies charge hefty for numbers that start with an “08”.

If you are going to give this to someone else to do make sure they are trustworthy.  You do not want to find them in the local bin or spread across the playground park.  I know some people offer the person dropping the leaflets a £100 bonus for every deal they find as a result of their leafleting.  Not a bad idea me thinks!

1. Financing the Deal

Cash is the best way to buy these deals but I am going to assume you have very little.  Even if you do have bundles of cash it is always best to think you do not so as to get the best return on your money by using other people’s money.

The three ways you can buy properties using other people’s money is:

1. buy to let mortgage
2. Commercial finance
3. bridging finance
4. venture capital
5. Buy To Let Mortgage

If I told you the buy to let mortgage market had shrunk over the years then that would be an understatement!  We had 4,000 buy to let mortgages back in 2007 and now at the time of writing we have exactly 59.  The good thing is the only way is UP.

We have several new buy to let mortgages coming on every week and the list is growing.  The one I want to talk about are the refurbishment buy to let mortgages.  These are offered by two lenders but I suspect more will follow:

Northern Rock

The Mortgage Works

These refurbishment mortgages allow you to buy properties that are unlettable by putting down only a 30% deposit.  The mortgages remove the risk of a valuer knocking back a property because of its condition.  When you are trying to buy at 50% of market value it is likely there is going to be some refurbishment required even if it is just light.  This includes even tenanted properties.  The amount of times I have had properties that have been tenanted and perfectly liveable (as proved by the tenant) knocked back by a surveyor as unmortgageable has been quite a few.

These refurbishment mortgages enable you to buy without this worry.  Since you are trying to buy and then sell you want to use a mortgage lender that is not going to baulk at the first sight of a damp patch on the living room wall.

They also give you a back up strategy if you are unable to sell as these lenders will lend you 70% of the value of the property post refurbishment.  They sometimes give you the value at the same time when they value it when requiring work and you sometimes get the absurd happening when the valuer values the property a fair bit higher than what you paid for it.

So for example you could find a property to buy at £50k and they say post refurbishment it will be worth £100k.  If it only takes £5k to refurb then you will have the following:

Purchase Price: £50k

Mortgage Lender lends: 70% x £50k = £35k

Post refurbishment Loan from same lender: 70% x £100k = £70k

Cashback of £70k - £50k- £5k = £15k

If this opportunity arises where the valuer gives a generous valuation post refurb then please be clever enough to spot it and change the strategy (like buy, refurb and sell to first time buyer etc.) to get a better return.

Now you still need to come up with the 30% deposit but it is better than coming up with the full amount.  The great thing is it is easy to rack up a big credit limit with these lenders.  They will probably lend 70% to every 30% you can find.  So if you can get your hands on £3m I would not be surprised if they lent you £7m.

1. Commercial Finance

Commercial finance is where lending is conducted outside of the CML (Council Of Mortgage Lenders) rules.  All buy to let and residential mortgages follow these rules.  The great thing is there are mortgages that do not have to follow these rules.  This is where commercial finance comes in.

Commercial lenders are:

RBS

NatWest

Lloyds

Barclays

HSBC

Bank Of Scotland

Clydesdale Bank

Bank Of Ireland

Allied Irish

I am sure there are more.  Any bank that has a high street presence and is not a building society seems to have a commercial division.  These banks can grant commercial mortgages.  These commercial mortgages can be struck based on commercial terms rather than CML terms. Now here are the three really cool things about commercial mortgages:

1. No minimum valuation – This is how I built my portfolio quickly.  A lot of properties fall under lenders minimum valuations.  Most have the minimum valuation of £50,000 and very few have £40,000.  So if a property worth £60,000 comes up for sale for £30,000 then you cannot get a mortgage from a regular CML buy to let lender.  However commercial lenders are a lot more sensible and will happily lend up to 70% of ANY purchase price.
2. No 6 month rule – This 6 month rule has caught a lot of property people out.  The 6 month rule means you cannot remortgage or purchase a property that has been owned for less than 6 months.  So if you wanted to buy a property worth £60k for £30k and remortgage a day later at a value of £60k you would not be able to.  You would have to wait 6 months to do so.  With commercial lenders you do not need to wait.
3. Tailored Service – the terms agreed are set by you and the lender.  So you agree the rate, LTV, arrangement fees etc.  It is up to you to strike a good deal.  They often offer as a margin over base and you can actually get deals that are much better than your standard buy to let lenders.

Now I bet you are desperate to contact your nearest branch and get some commercial mortgages however here is the bad news:

• You need to have an existing minimum borrowing level of min £250k usually £500k.  They like to deal with full time property people.  A certain level of borrowing usually indicates whether you are serious about investing or just playing.  If you are currently doing property as a hobby but want to be full time can I ask you to re-read part II of the book.  Believe me it can be well worth it just to get access to commercial finance.
• Reapyment mortgages only.  These lenders hate interest only.  I have tried to get interest only many a time but the best you can get is a couple of years interest only and then it reverts to capital and repayment.
• Max term 20 years.  My commercial mortgages are 15 years repayment.  They result in hefty monthly mortgage payments even though the rate is at a sensible 3% borrowing rate.  I am smply paying back the capital over a short period of time.  So make sure you sell the property quick!
• Loan to Values (LTV) are usually around 60%.  So in some circumstances you can get 70% ( I have heard of 80% but is very very rare) but expect 60% as a typical LTV.
• You may need to open a bank account with them.  Depending on how pushy they are being they may want you to switch your business account to them and then charge their banking fees.  Do your sums.  If it is your only option then you just have to do it.  Having a commercial lender is VERY beneficial in the property world.

So weigh up the pros and cons of commercial mortgages and decide on whether it is right for you.  If it is contact a high street branch and they will point you to the right department.  My broker also has links with commercial lenders in specific branches so we can you approved also so do not be afraid to ask!

1. Bridging Finance

Bridging finance is short term finance that people use to buy at auctions.  They advance the money fast to ensure you adhere to the tight completion deadlines set by the auctions.

Bridging finance is fast but not cheap!  They charge you:

Valuation fees £500

Legal Fees - £1,000

Arrangement Fees – 3%

Exit Fees – 1%

Interest – 1.5% PER MONTH

So you can see the costs can add up.

So you must be wondering why I am recommending bridging finance?  The best thing about bridging is that some lenders offer:

70% of the valuation of the property.

So if you had managed to get a property worth £100k for £70k the bridging company would lend you 70% x £100k = £70k.  This is 100% finance.  A bridging lender will lend 100% of the purchase price if the valuation is significantly in excess of the purchase price.

Traditional lenders would only lend you 70% x £70k = £49k.  So you would have to find £70k - £49k = £21k as a deposit.  If you do not have £21k then no deal unless of course you have access to bridging finance!

The sky really is the limit.  As long as you can find the deals then there is no limit to how many you can buy.  The only real limit is the total credit limits set by all the bridging finance companies that want to work with you.

So do you maths very carefully on this one.  I mentioned above you want to sell quickly in this game.  If you get bridging finance then you want to sell doubly quick as you are paying 1 to 2% a month.  On a £100,000 loan that is £1,000 to £2,000 per month holding cost – ouch!  So try and buy really really cheap to factor in a hold of 6 months.  40% of market value would be a good threshold but ultimately its your call.

1. Venture Capital

You may have heard of this type of financing.  If you know the BBC programme Dragons Den then the Dragons offer venture capital.  They venture their capital on your idea.  And guess what your idea is?:

Buying & Selling Property

Now before you reach for the business plan creating software I will let you know that most investors do not property trading or investing ideas.  I am not sure why but whenever I have looked in to the venture capitalists criteria they all say no property business plans.  It could be the climate we are in or the fact that most plans require additional borrowing which scares them as the risk profile changes massively.

However you may be able to find less formal venture capitalists.  This could be:

The Bank of Mum or Dad

Early inheritance from Grandma or Grandad

Friends

People you meet at networking events

There are lots of people around you who want to make money but cannot be bothered to work for it.  They may have some cash tucked away and they want to put it to work.  So a venture capitalist could be closer than you think!

Now I do not have to explain the delicate nature of going in to business with friends or family but just remember to be clear from the start and put everything in writing ESPECIALLY if they are related to you or you know them well!

1. Selling The Property

Now as explained earlier you need to sell the property QUICK.  This means you may not get necessarily the highest price but it will mean you can make a very healthy living.

My strategy to get a quick sale is not to put all your eggs in one basket.  I recommend you use every selling avenue at your disposal.  This involves:

With all of the activities above you should give yourself the best chance of getting a sale.  And remember what I said all the way through this: DON’T BE GREEDY!

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