18th November 2007
Sunday Express – Is risk – free buy–to-let too good to be true?
MARK ANSTEAD warns would- be investors that mortgage lenders are clamping down on incentives such as rental guarantees, paid stamp duty and cashback schemes
WHEN GRANT BOVEY started Imagine Homes two years ago he based it around a simple idea – he would offer a generous 7.5 per cent rental guarantee for the first two years of ownership. Rather than target owner-occupiers, Bovey saw the opportunity to buy up whole apartment blocks at a discount and beat developers at the sales game by selling them on to inexperienced investors.
He wasn’t the first to come up with this idea – other developers have played at offering rent guarantees, but not on the scale of Imagine. With developments in most of the large UK cities, including London, Birmingham, Manchester, York and Newcastle, Bovey sees the potential to convert each purchaser into a repeat customer.
Lured by the promise of high returns in the first two years, inexperienced buyers can be expected to be targeted by Imagine to buy property in other parts of the country with the same peace of mind. This strategy has been the path to rapid business growth for Bovey, better known as Mr Anthea Turner.
Backed by HBOS bank Imagine Homes employs 150 people and buys, Bovey claims, half a billion pounds worth of property a year.
But now his strategy is under threat due to a slowdown in the property market. Mortgage companies are tightening their lending criteria and beginning to look suspiciously upon developer incentives such as rental guarantees.
‘Banks and building societies are keen to advance funds based on an accurate valuation of a property ’, says Bernard Clarke of the Council of Mortgage Lenders. ‘ If there are incentives such as cashback, offers to pay stamp duty or high rental guarantees , surveyors should inform the lender of the incentive’s value and it may reduce the amount of advance’.
Imagine also finds a tenant, whom you can take over when the guarantee runs out. The concept is marketed as ‘Buy already let’.
‘Essentially you’re buying an insurance policy and paying a premium for it,’ says Neil Young of property investment consultants the Young Group. ‘ Whatever incentive a developer offers, whether it’s a high rental guarantee , paying your stamp duty or including the cost of furniture , we tell our clients it is better to strip this out and negotiate the price down instead , especially now that lenders are tightening up’.
Guidance issued last month by the Council of Mortgage Lenders specifically mentions concerns about rental guarantees as an ‘indirect incentive’. When it comes to valuing a new- build apartment, the guidance states that the existence of a guarantee may lead to a mortgage offer being withdrawn or amended.
Grant Bovey insists that this has not happened to any investor purchasing an Imagine Homes property. But the recent credit crunch in America and resulting turbulence in financial markets means he may have to revisit his business model.
The market is flooded with apartments built on brownfield sites,” says Jeremy Claridge, head of specialist mortgages at Alliance and Leicester. “There are too many, so developers are forced to offer incentives to sell their stock. We are worried that a rental guarantee may lure borrowers into a false sense of complacency.”
One Imagine investor now feeling the chilly winds of a reduced rental income is 40-year-old Andrew Edwards, a housing association officer. Andrew bought a one-bedroom flat two years ago with his partner Andrew Smith, a 34-year-old financial analyst, at Imagine’s St Peter’s Court development in Bristol for £150,000.
During the first two years Imagine paid the couple 7.5 percent in the form of two £11,250 lump sums. Imagine found a tenant to rent the apartment and charged a further tenancy management fee of eight per cent of the rent payments in place of a letting agent’s fee.
This month responsibility of the tenant passes to Andrew who will collect £650 a month instead of £937.50 under Imagine’s guarantee, which amounts to a whopping £3,450 less a year. With an interest-only mortgage to service of £120,000, plus annual service charges of £650 to pay, the new rent only just covers his outgoings.
“I don’t mind – I walked into the deal with my eyes open,” he shrugs. “We wanted an investment that would be hassle-free and this has been no trouble to us whatsoever.
“We didn’t have to find our tenant or worry about any voids and now we are keeping the tenant so it’s been very simple.”
Mr Bovey says his idea for Imagine began when he realised he wasn’t prepared to take the plunge into buy-to-let himself because he was worried about void periods. He insists Imagine does not front-load the price of its properties with the value of the rental guarantee.
“Imagine is now four years old and we started handing back properties to owners two years ago,” he says. “We manage 1,000 properties and 98 per cent of them are let and 95 per cent of landlords keep the tenants we found for them. So we must be doing something right – it’s the strength of our research.
“We don’t recover the cost of our incentive through the sales price – each apartment is independently valued by the mortgage company and we can’t control the outcome of that. We genuinely take a risk – if we can’t find a tenant we will lose money.”