Soundbite: Property Horror Stories Part 4 – Developers

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There are on occasion deals to be done by buying new build or direct from the developer. For example, at certain points in the property cycle, we can potentially lock in some capital growth by buying off-plan. Alternatively, buying at or after development completion can sometimes offer an opportunity to bag a discount from a developer anxious to get off the site and on to the next project or to meet sales targets. I have capitalised on such opportunities from time-to-time, which worked well. However, this is all about those times when things have not quite gone as well as you will see, with stories of my own and others here.

Equally, we will share a few words from the four inaugural TPV Apprentices just 13 days into their 100-day programme...

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Resources mentioned

Linked podcast episode: 10 Reasons Why I Don’t Like Off-Plan Property Investment

Property Deal Tips & How to Reach me By Telephone

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Transcription of the show

Hello, and welcome to another episode of The Property Voice podcast. My name is Richard Brown and as always, it’s a pleasure to have you join me on the show again today.

We continue with the mini-series on property horror stories, this time focusing on developers.

There are on occasion deals to be done by buying new build or direct from the developer. For example, at certain points in the property cycle, we can potentially lock in some capital growth by buying off-plan. Alternatively, buying at or after development completion can sometimes offer an opportunity to bag a discount from a developer anxious to get off the site and on to the next project or to meet sales targets. I have capitalised on such opportunities from time-to-time, which worked well. However, this is all about those times when things have not quite gone as well as you will see, with stories of my own and others here.

Equally, we will share a few words from the TPV Apprentices a little later, but before that here some developer horror stories up next then...

Property Chatter

Off-plan, overseas, slick and glitzy…all the ingredients for a bitter aftertaste?

After having bought my first three properties in quick succession an IFA mentioned to me that I could use my old pensions to invest in property. He described a scheme where I could combine buying an off-plan, overseas hotel room directly from the developer using funds from my pension as a deposit and ‘guaranteed developer finance’ for the remainder of the purchase price. Effectively, this was a ‘no cash required purchase’. To sweeten things up further, there was a rental guarantee from the developer. What could possibly go wrong with this then? Well, almost everything as it turned out!

This developer has since gone into administration leaving literally thousands of investors high and dry. Allegations of wrongdoing alerted the Serious Fraud Office to investigate, IFAs were sued or went out of business to avoid liability, some SIPP providers also went under. It was alleged that substantial fees were paid to IFAs and introducers leading to many pensions being transferred when they should not have been. Client funds appeared to be used to acquire new plots and pay introducer commissions, rather than complete the specific units that investors had reserved and paid money against, along with a range of other claims, scandals and dodgy practices that were outlined in the press over several years.

I was one of the lucky ones I suppose, as I managed to recover my pension funds when the pension adviser recommended transferring the pension into the SIPP was eventually ordered to put me back into the same position as before the investment by the Financial Ombudsman.

However, many others were not as fortunate, as IFAs disappeared into insolvency to escape action, some claims were ‘out of bounds’ of the UK regulators and cash buyers simply saw their money disappear with no real prospect of recovery given the developer’s net assets nowhere near covered the total client funds received.

When I researched the developer initially, all seemed fine; the company had a big office, which I visited and met with many of the staff, website and glossy brochures promised much, celebrity endorsements abounded, some parts of the development were working and even had very good reviews. Add to this, the recommendation of an IFA and so-called reputable SIPP provider and all appeared in order. So, I guess the main learning with hindsight was that it did probably just all seem too good to be true and that for me is the greatest lesson of all…if it seems too good to be true, then it probably is!

Other instances of developer horror stories

I guess the above story captures many of the things that could go wrong with developers in itself, although by no means do they ALWAYS go wrong it has to be said. Here are some other experiences that I am aware of with developers that have caught investors out.

The fall-out from the Global Financial Crisis did provide some opportunities for investors a few years ago. This sometimes produced a ‘100% financed development purchase’ sales tactic that you might have seen in the UK, but also in other places, such as Spain and Portugal. Whilst some of these deals are genuine and offered great value with minimal entry costs, others were not quite as they seemed. For example, I was offered a ‘new build development’ that was in fact completed 10 years prior and had been mothballed since. Others had a very high fee built into the sales price and/or paid to a separate third-party agent, which offset some of the apparently low-deposit financing.

Some agents operate in agent-to-agent chains, opening the possibility for fraud and fee loading. Some developments do not have all the necessary paperwork, building regulations, legal or planning consents in place. There has been a lot of disquiet about inflated ground rent review provisions and some leaseholders have witnessed sudden rises in service charges, or conversely a lack of site maintenance at times.

Some of the low-rate / high loan-to-value financing promised did not always materialise. In some cases, lawyers, fiscal representatives, finance brokers, letting agents, inspectors and valuers have too cosy a relationship with some of the developers and other connected parties, leading to fee-loading and in some cases, questionable ethical practices, inflated valuations or even risky legal purchases being offered.

Then, there are the rental guarantees and developer buybacks, which in many cases are not worth the paper they are written on due to their poor drafting or the weak financial strength of the guarantor. Another neat trick is the pre-tenanted property at an inflated rent, which is then terminated after six months, leaving you wondering how your yield suddenly disappeared.

I have seen cases where developments were offered ‘at a significant discount to cash buyers’, only for investors to later discover that gaining finance on the property was nigh on impossible due to issues with the developer or the development. Finally, I have seen challenges in reselling certain types of development, including student pods, care homes, hotel rooms and ‘fractional ownership’ schemes.

In other words, there is plenty of scope for things to go wrong!

I guess my experience with this off-plan developer, along with some horror stories shared by other investors close to me lead me to shy away, certainly from off-plan purchases at least. In fact, you can hear more on my views on off-plan development in a previous podcast episode recorded in June 2016, bluntly entitled 10 Reasons Why I Don’t Like Off-Plan Property Investment. So, you might want to have a listen to that after this episode to hear some of the reasons why I now avoid this strategy and as a result, have reduced my risk exposure too! PS – there is one positive reason or strategy that I do also share in that episode, so might be worth a listen 😉

Lessons learned and steps to take to help protect ourselves

1. Due diligence – This is a running theme throughout this series I know, but I cannot stress it enough. We need to make checks on all the people and companies that we are working with. Independently check for track record, reputation, connected companies, industry memberships, certification, consents, etc. Equally, run your own numbers and check all values and rents yourself. When a full ‘turnkey solution’ is presented that includes all that is required to purchase, finance, furnish and tenant a property – just double check to make sure all is above board with all the parties, or find your own instead. Remember that when you hand over control to someone else you are more open to it going in a direction of someone else’s choosing rather than your own.
2. Too good to be true test – high returns, low deposit, all-inclusive, hands-free, guaranteed, exotic location and great capital growth all on a plate…really? I believe in win-win outcomes, so if I am presented with something that looks like only I get to win and to win big at that, then my suspicions are immediately raised…after all, why would someone want to give away so much for so little? As an old colleague of mine used to say ‘always look for the personal motive’ in the other person’s actions…ask them what’s in it for them and how they stand to gain, it may not be as obvious and transparent as it first looks.
3. New is not always better – there are some advantages to buying new, such as an expectation of lower maintenance, more up to date building methods and so on. However, there is also the potential to pay what is known as the ‘developer’s premium’. As a developer myself, I try to realise this premium when I undertake any form of development, so I am not against people making a profit. It’s just that with older stock it is easier to benchmark valuations and then add a developer premium ourselves, compared with a new build. Add in some of the potential risks that I have described here and perhaps the scales are tipped more in favour of older stock than new build at times?

Not all developers are bad, risky or dodgy...I do wish to stress that. But, when things go wrong, they can go very badly wrong indeed, so take extra care!

OK, that’s another horror story shared again this week; how are you feeling during this more challenging mini-series I wonder? Don’t worry, I am a solution-minded, pragmatic and generally optimistic person...it’s just that there can be occasions when things or people cause things to go off the rails a little and I think it’s right that you are aware of this, that’s all.

Shout Out

Before we finish this week, I thought I would share a quick soundbite directly from the four apprentices that I selected to work within the inaugural TPV Apprenticeship Programme with you. You can hear from them a quick summary in their words at just 13 days into the 100-day programme right now.

Wasn’t that great to hear? 4 apprentices with different ages, goals, strategies and plans to aim at. It has already been very rewarding, with many insights or breakthroughs made. I will try to give you a short update now and again as we progress over the remainder of the 100-day programme too.

If you would be interested in taking part in a future TPV Apprenticeship programme, then just drop me a message or give me a quick call. I am 100% focused on helping the current apprentices right now, so the next programme is likely to start in the spring now, so get your name on the wait list if this sounds appealing.

OK, then. As ever, the show notes can be found over at www.thepropertyvoice.net. Or, if you want to talk about anything from today’s show, or just talk property investing more generally, email me at podcast@thepropertyvoice.net, I would be happy to hear from you!

Once again, all I want to say is thank you very much for listening once again this week and until next time on The Property Voice Podcast…it’s ciao-ciao.