Singing Pig

Hi Father Fred,

You used to be on housemouse, didn't you?

Yes, I am in Sussex and invest locally.  Re: I am fairly confident that decent detached houses are 5-15% off peak, with 10-15% being my best estimate.  Is this right?  I would say that's about right here too.  (I'll come back to that point). Are your properties doing better than that?  No. Are you worried?  No.  I'm a long-term investor.  Well, when I say no... the last time I estimated my portfolio value was probably three months ago and I'm not doing it again now:-)  I'm not in the mood!  I'll do it again when prices exceed what they were last time I did it, whenever that may be!  I think I've done the right thing in extracting a lot of cash out of my portfolio over the last two years, while prices were high, which I use to make more money than I could by keeping it locked up in there.  My gearing is high, certainly over 75%.

I don't like buy to sell on the whole... surely that's a high risk activity in this market?!

I guess my main, if not only, justification for continuing to buy at present is that I'm seriously worried whether buy to let mortgages as we know them - as we've almost come to take for granted since 1996, won't continue to be available at anywhere near the levels they have been.  So my argument for buying now is simply that it's still possible!  I may be wrong of course, and I hope I am.  If I can get 85% leverage to buy an asset - a long-term asset which I was going to keep long-term anyway, if I still have faith in long-term and I'm confident of managing the property well to give positive cashflow, then why wouldn't I?  Also, as I'm sure you're aware coming from this area, it has been incredibly difficult to get sellers to accept big discounts when the market has been so hot, but now it's much easier. 

Also, I will admit that I'm learning all the time: I think I'm a much better investor than I was years ago and so able to do better deals.  These hard times concentrate the mind, which is good.  This thread is good... it has affected me, made me think.  I believe in immersion, focus and constant & never-ending improvement as Anthony Robbins would say:-)  I don't buy too many properties to be honest - I don't overtrade - that's bad.  Probably 95% of what I do is what I don't do, if you see what I mean... I just wish my friends & family understood..!! I just think a lot of the time - that's a good thing to do!  We should all think long and hard about what we're doing - or not doing!  And have positive cashflow:-)

Anyway, I'm sure you'll be fine.  50% gearing.  Bought as much as possible in the fast rising years.  Sit back and observe now. 

Angela

Sorry, I just remembered that I forgot to come back to that point:

Re: I am fairly confident that decent detached houses are 5-15% off peak, with 10-15% being my best estimate.  Is this right?  I would say that's about right here too.  (I'll come back to that point). 

Just quickly as it's getting late now: I actually saw prices rising in our area at a ridiculous pace last year and into this, and discounted in my own mind those peaks anyway - I took that as froth that had to inevitably come off the top of the market, and never went there!  That's what's important about knowing your area - well, and having commonsense about the market generally.

When I estimated my portfolio value last, I didn't bother with that froth - I mean, things were going on the market and selling at 190 - 195k, but I didn't estimate my like properties at more than 175k.

I do believe that 'real' falls will come and even are doing so now, but will relatively quickly recover back to 'normal' levels that are on long-term trend. 

The problem for investors will be 'catching' the bottom of the market as it turns... and when it turns, it could turn very quickly - back to days of sellers NOT being willing to accept big discounts!

Angela

I did used to be on housemouse and believe we were in contact before, briefly.  I am still interested in the area and indeed hope to move to Guildford in the next 12-24 months (dependent on the market!!!!)  After that, and when prices are at more sustainable levels, I hope to become a serious investor… part competitor to you and hopefully more than that someone who can help you and vice versa. 

the last time I estimated my portfolio value was probably three months ago and I'm not doing it again now:-)  I'm not in the mood!  I'll do it again when prices exceed what they were last time I did it, whenever that may be! 

Sounds like a bit of a head in the sand attitude!  Knowledge is power, you know that.

I think I've done the right thing in extracting a lot of cash out of my portfolio over the last two years, while prices were high, which I use to make more money than I could by keeping it locked up in there.  My gearing is high, certainly over 75%.

If you have made money then you have done the right thing.  By gearing do you include any cash?  ie is 75% of your gross wealth borrowing or 75% of your gross property values?  Either way I do not think you need to panic, I hope it is the latter.  I have done a similar thing and when I talk about my gearing I include cash as equity so I actually owe nearer 65% but I don’t include what I can pay off any time I want!

I don't like buy to sell on the whole... surely that's a high risk activity in this market?!

Holding a falling asset is risky (well it’s not a risk, it’s a certainty!)  But if you are buying sufficiently BMV then by definition you can sell straight away at a profit, therefore it is relatively low risk.  (If you can ensure the yield is good as well you have a Plan B to fall back on.)

I guess my main, if not only, justification for continuing to buy at present is that I'm seriously worried whether buy to let mortgages as we know them - as we've almost come to take for granted since 1996, won't continue to be available at anywhere near the levels they have been.  So my argument for buying now is simply that it's still possible! 

That is exactly where I think your thinking is flawed.  There will always be finance available.  And to a very large extent prices will be set by the availability of that finance.  Now there is a possibility that BTL finance will dry up and owner occupier finance won’t.  But I doubt it.  There is nothing magical about owner occupiers or BTLers.  Both are reliable borrowers if the income stream is high enough and secure enough.  I can see finance getting harder all round (well it is already).  And prices will fall all around as a result.  At some point the finance will open up again and you will be able to buy again.  But the key point is that in theory buyers and the banks interests are aligned.  If the borrower can afford the property and the price is going to stay steady or go up, then it makes sense to buy.  And it makes sense to lend. Currently – aside from not having money themselves – banks are worried that buyers can’t afford the payments and the value of the security is falling.  It does not make sense to lend (or not at high LTVs). 

Put simply, the fact that banks don’t want to lend is in itself a reasonable indication that it is not a good time to buy. 

Also, as I'm sure you're aware coming from this area, it has been incredibly difficult to get sellers to accept big discounts when the market has been so hot, but now it's much easier

I did not know that but I would have suspected strongly that that was the case. 

Also, I will admit that I'm learning all the time: I think I'm a much better investor than I was years ago and so able to do better deals.  These hard times concentrate the mind, which is good.  This thread is good... it has affected me, made me think.  I believe in immersion, focus and constant & never-ending improvement as Anthony Robbins would say:-)  I don't buy too many properties to be honest - I don't overtrade - that's bad.  Probably 95% of what I do is what I don't do, if you see what I mean... I just wish my friends & family understood..!! I just think a lot of the time - that's a good thing to do!  We should all think long and hard about what we're doing - or not doing!  And have positive cashflow:-)

All good!  I have done something similar.  I can’t remember exactly when I last posted but I have gone back to university, studied for a masters in estate management, and am 90% of the way through the training to become a chartered surveyor specialising in valuation – retail, industrial, offices, development land, the odd going concern, residential (including residential lease extensions, collective enfranchisement).  I know a bit about commercial landlord and tenant law, valuing residential with regulated tenants, planning law and process.  And I am learning how to negotiate.  Very very useful stuff.  Hopefully the next boom and I am ready with better knowledge and finance than I was last time!!!

Anyway, I'm sure you'll be fine.  50% gearing.  Bought as much as possible in the fast rising years.  Sit back and observe now. 

I am certainly poorer than I would be had I been less cautious.  But then again I only really thought about property investment in a big way in 2003/04 and by the time I had thought much about it much I was convinced prices were above long term trend and that buying would be risky. 

I actually saw prices rising in our area at a ridiculous pace last year and into this, and discounted in my own mind those peaks anyway - I took that as froth that had to inevitably come off the top of the market, and never went there!  That's what's important about knowing your area - well, and having commonsense about the market generally.

When I estimated my portfolio value last, I didn't bother with that froth - I mean, things were going on the market and selling at 190 - 195k, but I didn't estimate my like properties at more than 175k.

Sensible.  I think investors should ignore the last 6 months froth in a booming market as – you are right – it can disappear in a flash.  Prices are back at late 2006 level, with the growth in 2007 having been reversed in a few months this spring.  I would argue that this is the start of a trend downwards however, and not just the removal of froth.

The problem for investors will be 'catching' the bottom of the market as it turns... and when it turns, it could turn very quickly - back to days of sellers NOT being willing to accept big discounts!

Again, I take your point, but I would argue that getting them at 25% or 35% below peak (in real terms) at 7 or 8% yield rather than 5 or 6% is a significant enough discount that missing the bottom by 10% won’t worry people anywhere near as much as some people will regret buying at 2007 prices.

I think the idea of 15% 20% or any per cent BMV is becoming a little irrelevant, as transaction numbers fall and values become less identifiable, being able to discern what is or isn't market value becomes almost impossible.  I am not one to pay overmuch for anything and like everyone I love a bargain, but how do you ascribe a set value to a property? I read in another thread about a purchase at 68.5% BMV, how anyone can be that specific I don't know. 

BMV Irrelevant? I daresay much of the SP hierarchy are spitting out their werthers at the the mere suggestion of it! I say irrelevant because in a time of rapid property devaluation and flux in the finance market the only parameter worth sticking to is yield. It is far duller to talk about over a sunday lunch and leaves many investors with that glazed over look I get when I meet a finance salesman, sorry adviser, but it is the only barometer worth a toss currently. You can get houses for 50% off and still not have a viable proposition if the rent doesn't stack. I know several investors with great investments on paper, and right up to the point they run out of income when remortgaging fails to materialise, they will be arguing how well they have done - look at how rich I am. Look at the equity! The problem with this approach has always been the exposure to low cashflow. You can't survive with no income, you can with no equity.

I agree with your general point but...

there is always a market value.  At the moment that market value is much harder to ascertain than in a slowly rising market where you just have to look at the last couple of sales and add a bit.  As a valuer you have to show caution in a declining market and express valuation uncertainty (ie the value is x, but it is subject to a greater margin of error than normal due to the small number of transactions.) 

a starting point that is more reliable than trying to find good comparables is often last summers price less 15%!

equally as a buyer if I wanted to buy BMV I'd be tempted to start with Peak price less 15%, reduce further if there is evidence to suggest falls have been greater, less 5% to make sure, and then start looking for the deal to be below that if it is to be regarded as BMV. 

Hi Father Fred,

(Sorry I missed the above two posts while on this!)

Thanks for your interesting reply.  To reply to your points:

I'm not convinced about this. It's very hard to sell anything at present. I do think the idea of "holding a falling asset" is relative to the longevity of one's outlook. I see my outlook as being in alignment with Warren Buffet's approach to shares - which works for him! One of the reasons I stopped investing in shares is because it was too easy and almost felt natural to lose money by panic selling, which I learnt was totally the wrong approach but one most take and so lose money.

Market value is a difficult concept and even valuers will disagree to some extent even though it is defined quite precisely by the RICS.

“The estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.”

What is proper marketing? I would argue that in a town like Cranleigh it is probably 2 months. Now if the market is falling arguably you are as likely to lose £5k by waiting another month as you are getting a higher offer by ensuring it has been properly marketed. (Equally if it is rising and you don’t accept the best offer after 2 months and sell it for £5k more 2 months later you have sold it for market value but not for the market value you would have expected given the time you put it on the market – you have held on and got the new higher market value.)

Anyway, I am prepared to accept that in tough times you may wish to give your property a bit longer on the market. But basically if it has not sold then either you have not marketed it properly or you have over-estimated market value.

Arguably MV is the highest price for which you can be certain of achieving. If you are not certain of achieving it then you are hoping not analysing the market and being realistic. If the only people looking to buy are investors looking at getting 20% BMV then market value is their concept of MV less 20%. If the only people looking to buy are investors who want 10% yield, then the market value is £100k (assuming £10k pa rent).

Sorry, but it is very simple, market value is what you can sell it for and if you can’t sell it you are looking for too much IN THE CURRENT MARKET. You might be unlucky and find that people 2 months earlier got £10k more, and 2 months later got 2 months more, but if you used a decent agent and they marketed it right then what you sold it for is – give or take – market value.

great banter chaps,,,,some interesting thoughts. 

my own view is that i buy to hold forever ....... literally, until i snuff it!  therefore, not really fussed about prices too much, except to the extent that it determines how expensive my finance is (LTV).  i am building a portfolio to generate a 6-figure net income (i.e. after all costs).  that involves buying houses with good yield, good tenant demand, low likely maintenance.  i buy with a cash deposit & then batter the mortgages with my business profits ........ and then i plan to sell off 1/3 of my portfolio to repay the final chunk of mortgage .... in about 10 years time.  be left with a solid high-yield portfolio in a compact area, that generates a decent income.  i will then semi-retire from my accounting business. my wife has already "retired" to manage the portfolio full-time which is great as our first child is on the way in 6 weeks ......... she's out of the corporate rat-race, yet still creams a decent income of the portfolio. 

every time i buy/have bought, i do the best that i can at the time i buy/bought price-wise.  i don;t buy junk that i know i will later have to off-load becasue of poor rents/excessive competition/maintenance issues ........ even if its cheap.  i ask myself, "will i have trouble renting this out in years to come?  will it continue to be popular with tenants?  will it cost me a fortune to maintain?" etc ..............

red shoes (I think) was spot on .... better to walk away from "bargains" that are poor investments, regardless of the % BMV.  (exception to that is your PPR ......... then its purely about % BMV).  keep it simple.  invest for cashflow.