Caveat Emptor /seller beware too
Caveat emptor for the non-linguists means ‘Let the buyer beware’. Loosely translated: ‘watch your back when you buy a property, because if you miss anything – tough!’ Hence most of us employ a solicitor to trawl the legal ‘undergrowth’ to ensure that we don’t end up with a property ‘dog’. The minefield is particularly treacherous when it comes to buying a leasehold property with many layers of ownership and control. Added to this a purchaser needs to be aware of the scope of the managing agent and if relevant; that of the management company. I digress though.
A property seller needs to be aware too
At this point I would now like to make the case, that there should also be a phrase to warn sellers of a dodgy buyer.
Such a phrase would go something like caveat auctor. I say this because whilst I’ve never had a problem buying a property, I have on several occasions had prospective buyers try and ‘pull a fast one’. The script normally runs. I’ll buy your property. Then several months down the line nothing has happened. Sounds familiar?
Landlords are particularly vulnerable
Most property (over 70%) in the UK is in the hands of owner-occupiers. Owners live within the property they are selling and therefore if the sale falls through, they simply carry on living in their home. They might have lost out on the ‘castle of their dreams’ but hey, life goes on and they then go out and look for another one. Landlords on the other hand are often in the unenviable position of having to remove their tenants prior to sale in order to give vacant possession. Unfortunately, this will probably mean having to continue to fork out mortgage payments, whilst not receiving any rent. This is expensive and can result in considerable financial stress. Therefore, when a suitable offer comes along, most landlords are relieved and look forward to the completion of a swift sale to bring the haemorrhaging of cash to an end.
Landlords need to watch out for unscrupulous purchasers
This is where the fun can start. If your purchaser is a ‘whiley’ and slightly unscrupulous operator, there are several techniques they can employ to whittle away your capital and profit margin. The main one is to lull you into a force sense of security that the sale is proceeding even to the extent that you might have committed capital tied up in your property. Then, at the very last moment, they come up with an un-surmountable problem. This they maintain is so great that the only way to overcome it is through a commensurate reduction in the property’s price. This exact scenario has happened to me when I tried to sell apartment in Birmingham. Then the landlord is left with the choice of either agreeing the price reduction or having to loose the sale and remarket the property. The problem being that even if you found a buyer the next day; you would have to spend at least a further 2 months without rent. Such buyers often pick their time to pounce. The lead up to Christmas is always a popular one. They know that by threatening to pull out then there is very little prospect of you finding a buyer during January and February, making your void period even more protracted.
Woolwich research on negotiating a price reduction The Woolwich has previously conducted research that highlights the five points that buyers are most likely to negotiate money off a purchase:
1. new roof needed 77%
2. ‘dodgy’ electrics 70%
3. rising damp and timber/dry rot 50%
4. length of leasehold 42%
5. conifers dispute 35%
I would add to this a further category. This relates to not having the consents or relevant correspondence in respect of alterations carried out to your property. It could well be that these alterations didn’t require permission. Buyers however can still manipulate this situation by pointing out that without documentary evidence they are exposed to the risk of enforcement action by the Local Authority. Equally and probably more importantly if the property is a leasehold and you or a previous owner have made alterations such as knocking down walls or moving a bathroom then this is likely to require the freeholders consent. If this is picked up by the purchaser or more likely their solicitors the landlord / leaseholder is very likely to delay the whole process unless you as the seller are prepared to pay a large fee to freeholder to expedite the process. #expensive!
This is why it is so important to have written confirmation that works don’t require permission, even if this seems slightly pointless at the time. The absence of records still shouldn’t necessary be a ‘deal breaker’. This is because it is possible to insure against any action taken by the local authority in respect of the alterations. This will protect them against any financial loss as a result of this. One of the main providers for these legal indemnities is Aviva. What are the other ways that I can guard against the actions of an unscrupulous buyer?
There are a number of practical measures that landlords can take to reduce the likelihood of suffering selling pains.
1. You can attempt to sell the let property as an investment. This is ideal when the investment & owner occupier markets have similar valuations and where there is strong investor demand. It is also more common as the number of landlords and property investors has grown and both banks and investors are more comfortable buying a property with an existing tenant. There are certain legal formalities that your solicitor will need to take care of such as: the apportionment of rent, the transfer of the tenants deposit,
2. The Government has just dropped the need for a compulsory house condition survey from the Home Information Packs (HIPs) to be introduced next year. The surveys were intended to help reduce the number of abortive transactions, but were thought largely unworkable. However, the principle still holds. If you have an older property that will clearly require some updating, then to have a surveys report that highlights the extent of the work required will ensure that any buyer is fully aware of any problem with the roof, etc before committing to the purchase. In this way the scope for the buyer to pull a fast one at the end of the process is much reduced.
3. Consider re-capitalising your portfolio in a way the property being sold has no mortgage. This way you are less exposed to sharp practices by potential buyers as you have the comfort that your cashflow is under control.
4. Don’t discount the fact that many tenants are aspirant homeowners. I’ve recently sold a property to one of mine. The great advantages are no voids and no legal or estate agency fees & no ‘dodgy’ buyers either.
5. Don’t give in to ‘bully boy’ tactics. If you know your property is ‘realistically’ worth x, hold out for the right price even if the buyer tries to knock you down. If it is priced reasonably, you will eventually get another buyer.
The lesson for landlords is clear; caveat emptor & caveat auctor.