Meet the investor making money from repossessions (February 01, 2008)

Meet the investor making money from repossessions

The current downturn can bring big profits for smart bargain-hunters

Susan Emmett

More than a million borrowers will struggle to pay their mortgages this year as the credit crunch deepens and the banks tighten their lending criteria. That is the ominous warning from the Financial Services Authority this week.

The financial regulator says that a third of the 5.7 million people who took out mortgages between April 2005 and September 2007 are in danger of defaulting, with particular pressure falling on the approximately 1.4 million borrowers whose mortgage repayment will soar by an average of £210 a month when their low fixed-rate loans end this year. Adding to the gloom, the Land Registry announced on Tuesday that house prices continued to fall in December, so that the Council of Mortgage Lenders is beginning to look optimistic with its forecast that repossessions will rise by 50 per cent this year to 45,000 homes.

But not everybody is glum. Negotiators are taking advantage of the rise in repossessions and the fall in property prices to knock up to 20 per cent from the market value of homes seized by lenders from borrowers struggling to pay their mortgage. Some of these hunters are first-time buyers grabbing their first chance to get a foot on the property ladder. Many more are investors hoping to resell at a profit.

Among those looking for repossession deals is 27-year-old Heenal Lakhani, the managing director of Fenwold Properties Ltd, a property investment company. “You can get them at 15 per cent below market value, if not 18 per cent,” he says. “Not many people like to buy them, because they're often sealed up, cold and damp. The plumbing might not work. The electricity might be down. It puts buyers off.”

His recent deals include an ex-council one-bedroom flat on the top floor of a mansion block near Tower Bridge, which he bought for £250,000 before Christmas and has just sold for £285,000 without changing anything. Towards the end of last year he bought a two-bedroom ground-floor flat in Shoreditch for £270,000, though it was valued at £330,000. He is keeping that to let.

Last March he bought four flats in a Central London block for an average of £450,000. All had been repossessed from an investor who ran into trouble, and Lakhani managed to sell them for “far more than I paid”.

He says: “I had to compete with another buyer prepared to pay £50,000 more for one of the flats, but the banks like to sell to one person who they know will act quickly.” So the bank got its quick sale, the agents got two lots of fees from the same property and Lakhani got the deal. In theory, banks, surveyors and estate agents have a legal duty to sell a repossession at the best possible price: they risk being sued if they do not fulfil their obligations.

Ed Mead, of Douglas & Gordon in West London, sold a repossessed one-bedroom flat in Chelsea for £250,000, £75,000 more than the asking price, though there were only eight years left on the lease.

According to Julien Holmes, the managing director of Crown Mortgage Management, which chases debt for sub-prime mortgage lenders, most repossessions are impossible to sell at the full market price. He says: “If it's an unpleasant repossession, the occupiers quite often trash the place. They take all the kitchen units, pull out the bathroom fittings, smash the windows, take off the doors - and worse. Much, much worse.” The properties in the worst state tend to go straight to auction; here they sell at an even greater discount, if at all.

Holmes says that the sales price of one of their repossessed homes is currently 5 to 10 per cent lower than it would be if the borrowers had sold it themselves. There is a further drop in price of 6 to 10 per cent if the property goes to auction. “There are exceptions. We are sometimes able to sell at full price if the property is in good condition. And the losses might be greater if the property has been vandalised before the occupiers leave,” he says.

As house prices drop, a greater number of repossessed homes are likely to end up at auctions, at even lower prices. Tony Webber, auctioneer at Eddisons in Leeds, says: “This time last year most repossessions were selling well through estate agents. But as the credit crunch deepens and the lending situation changes, more repossessions are coming to auctions. We have to set the guide price at 20 per cent of the market value to get people in the room.” Even after the discount, many are failing to sell, which suggests that investors are waiting for prices to drop even more. “We are selling 60 to 65 per cent of our properties, compared with 85 per cent at the peak of the boom,” says Webber.

Click here to return to the News page