I've received quite a few emails recently from companies suggesting they can help me buy property at up to 70% or more off current market valuations. Are these deals too good to miss or just balderdash?.
In case you don't feel like reading the whole article I'll give my conclusion first - in my view they're largely balderdash. The market value of any
asset is (in an efficient market) the price someone is prepared to pay for it, so notional 'discounts' are pretty meaningless. Even desperate sellers are
unlikely to sell property at a lower price than someone else will pay them.
But, for the sake of completeness, let's take a look at the types of deals the emails I've received are generally referring to:
Repossessions
If you see an advert for property at around 25% (UK) or 70% (US) below market value then we're almost certainly talking about repossessions. Lenders
often prefer to offload repossessed property at less than top dollar to ensure a quick sell and minimum hassle. And some homeowners, fearing
repossession, will try and offload their home before their lender does it for them, in the hope of getting a better price.
Now desperate sellers are music to buyers' ears. And, in a buoyant property market repossessions can, sometimes, make decent investments. A quick
refurb can see a property back on the market at a profitable price within months.
But we're in a depressed property market (especially in the US), with many buyers staying away due to difficulty getting finance and/or concerns that
prices will fall. So your 'bargain' repossession could end up sitting on an estate agent's shelf and leave you struggling to make a profit net of the
purchase price, fees and money you've spent making it presentable.
And, let's face it, why would a potential buyer pay extra for your property when they can buy a similar repossessed property themselves for less?
What about the valuations that are often mentioned in the ads?
Most UK property will be advertised at a percentage less than a recent 'RICS' valuation. RICS (Royal Institute of Chartered Surveyors) valuations are
produced after a basic property inspection, but while arguably more meaningful than an estate agent's guide price they're still a broad estimate. And
bear in mind it's very difficult to value property in the current climate because so little is selling.
The US property valuations mentioned are often more vague and might be little more than pre-credit crunch prices or asking prices on similar
properties that have no chance of selling at that price in this challenging climate.
Suffice to say, take any valuations with a massive pinch of salt and remember the only valuation that matters is the price someone is prepared to pay
now.
Off-plan property
Buying off plan means putting down a deposit on property that has yet to be completed. In rising housing markets this can be profitable as by the time
the property is finished it might be worth more than you've paid. But in the current climate forget it. Prices are more likely to fall than rise and
there's an increased risk of the developer going bust before the property is built.
Land without planning permission
The name of this game is to buy land in the hope planning permission to develop it will one day be granted. The potential rewards are very high - an
acre of land costing a few thousand pounds could be worth hundreds of thousands of pounds if planning permission to build homes is granted.
But, of course, it's not that easy. Planning permission can be very difficult to obtain and this type of investment tends to be highly speculative,
perhaps taking 20 years or more to come to fruition, if ever.
The three main categories of land are 'brownfield', 'greenfield' and 'greenbelt'. Brownfield sites are those that have previously been built on.
Planning permission may be more likely but you might incur demolition and/or decontamination costs. Greenfield land has never been built on and is
typically farmland. Planning permission will probably be a lot harder to attain, but the potential rewards much greater. Greenbelt land is protected by
government policy stipulating development must only occur in exceptional circumstances, so planning permission is very unlikely.
Location is key. Land on the outskirts of a growing town stands more chance of being developed (one day...) than a field in the middle of nowhere. And
it's important to understand the local long term planning policy to get a feel for the likelihood permission will ever be granted.
Both above factors will have a big influence on price. This is a well developed market with plenty of professional investors, so land where planning
permission is more likely will be priced accordingly - finding a bargain is rare.
Having said all this, provided you pay a sensible price for agricultural land it's unlikely to be a disastrous investment. If food prices continue to
rise then demand for agricultural land should remain robust, protecting prices. Just don't pay over the odds for a site assuming you'll get planning
permission.
To get a feel for land market prices (don't take a property adviser's word at face value) take a look at portal websites like www.uklandandfarms.co.uk and www.uklanddirectory.org.uk.
Land with planning permission
Someone else has already taken the risk and done the hard work of getting planning permission, but perhaps they can't afford to develop the land
themselves, or they just want to pocket some profit.
Given someone else has already made a juicy profit from attaining planning permission the aim here is simply to benefit from rising land and property
prices over time, unless you want to develop the land yourself. If house prices rise faster than the cost of building them then land with permission to
build should appreciate. Conversely, if house prices plunge then you'll probably struggle to find a buyer for your land, at least at an attractive
price.
So it's a bit like investing in property, but without the potential for rental income until you sell.
Warning! You've little protection
Property advisers are seldom authorised or regulated by the Financial Services Authority (FSA). And unless they are be extra wary - as if anything
untoward should happen you'll be on your own without the safety net of the FSA's consumer protection rules, the Financial Ombudsman Service (FOS) or
Financial Services Compensation Scheme (FSCS). Although consumer protection won't help if you buy an investment that simply falls in value.
Is there any money to be made?
Although the outlook for property and land prices is hardly rosy at present, they should be fine over 10-20 years. When buying in this uncertain
climate just be careful to pay a sensible price and be certain that you won't need to sell in a hurry. And, of course, if you're lucky enough to buy land
that does eventually get planning permission you could hit the jackpot.
And, if a deal looks too good to be true...
It almost certainly is. If the potential returns on offer are so amazing then why would a salesman waste their time trying to get others in on the
action...
Read this article at http://www.candidmoney.com/articles/article193.aspx
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