Come Ons!

Hard times makes the real state business start looking at new ways of generating interest and whilst working harder, promoting better and improving service are all genuine there are some “come ons” that are rather less so. Here are a couple that need watching;

1.         Guaranteed rentals. Sounds like a great inducement to buy a property for investment. Buy today and get a guaranteed rental income. Better than money in the bank? Not necessarily. The trick here is for the seller to be either the developer or have an option to buy the property. They set the price to include the first years rent which they guarantee you so in effect they are only returning your money to you and in year 2 when the guarantee has run out, so does the rental income. 

In any case like this you need to look at the true value of the property as well as the promised rate of return. You also need to question what happens when the period of guarantee expires.

2.         100% Mortgages. In the current climate banks are very reluctant to lend anything to anyone and if they do give you a mortgage it will typically be for no more than 50 – 60% of the lower of purchase price or valuation. Where however the bank is in possession of, for example, blocks of apartments where a developer has defaulted they may well offer a 100% loan. It costs them nothing – you are simply taking over a portion of the outstanding debt due on the property and even if you should default in the future, every payment you make is a bonus. So surely this is a can’t lose deal? Well, maybe not.

In the past Spanish banks used to take foreclosures into their own portfolio at cost. They held the properties until market conditions recovered sufficiently to sell them on and recover what was due, avoiding the need to write down their book value or show losses in their accounts. This also had the added benefit of not flooding the market with cheap, distressed sales and further pushing it down. It was essentially dishonest because the value shown in the bank’s accounts was greater than the real market value of the asset but as long as they weren’t forced to sell, that could be covered up

Now compare this with what happened elsewhere, notably the UK in the recession of the late 80’s. Repossessed properties were sold at no reserve auctions, the banks took major losses and the whole market was undermined. On the face of it what the Spanish banks did was sensible. Today however this won’t work. The amount of repossessed and defaulted property is simply overwhelming. If it was to be shown in their accounts at a true cash value the banks would be bankrupt.

So, going back to the apartments with 100% mortgages, what are they really worth? What would they fetch on the regular open market? What would they go for at a no reserve auction? When you answer that it is immediately apparent that in a lot of cases the mortgage is an inducement to buy a seriously over priced property. It suits the banks because it justifies values in their accounts and provides a cash flow but what does it do for you? You may not have put any capital in but you are still spending money making the payments every month on a mortgage that is much greater than the value of the property.

Not all of these deals are bad; if the property is good, well located and suits your needs and you take a long view then it may be a good idea but for a great many people it is money thrown away.

There are great deals in the market today but your best bet is forget a highly touted come on and just look for a distressed seller. We have plenty and the properties you buy from them will be genuine bargains.

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Email: bill.tickle@tickle-international-property.com
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