The industry has many problems

Something which is of concern to prospective homebuyers and investors in this industry as well as economic experts is the sharp rise in property prices within the UK. This has resulted in a very high average cost for properties with in the UK which are making the prospect of ownership almost impossible for a very large number of people. It is not only residential homes which is affected by this trend because the cost of parking space with in London has absolutely gone through the roof because of the rising demand for such properties. Economists who are analyzing the current property situation with in London are all coming to the conclusion that property is in this city will eventually only be accessible to the most affluent citizens. This is certain to place a lot of pressure on the middle to lower class citizens and according to statistics less than 10% of available properties are falling with in the financial means of single people. Even families where both spouses are employed will find that the options are limited when it comes to obtaining property in certain parts of London.

Property in London are becoming extremely exclusive

Some of these exclusive areas include Camden, Westminster, Kensington and Chelsea. The property prices in these areas are making it virtually impossible for lower income people to be able to afford these properties. According to accumulated statistics the property prices is in London has recently arisen 50,000 pounds in a single month. The problem is that most perspective property buyers are seeing salary increases that are only a fraction of the increases which are seen in the property market. The average salary earner simply cannot compete and therefore an increasing number of these people will be unlikely to be able to afford the kind of homes which they are dreaming about. The problem is not only affecting property purchases but this problem is also affecting those people who are renting. In order to be able to honor exorbitant mortgage payments property owners are left of no other choice but to increase the rent of those properties. This is resulting in a vicious circle which may not be broken for some time if ever.

What would be the effects on coming generations?

When looking at current trends it may be reasonable to assume that unless a major change takes place the current trend is likely to continue for many years until some kind of ceiling is reached. The problem is that it is a little difficult currently to predict when exactly that ceiling will be reached and meanwhile the situation for prospective buyers will continue to deteriorate and likewise the pressure on those who are renting properties will likewise become increasingly burdensome. Millions of young children may never be able to grow up in the typical family home which has been the good fortune of previous generations. To effectively address the current situation may not be an easy endeavor especially since the most affluent and those with the most influence in society are actually benefiting from the situation. Just like the potato famine in Ireland, people were slow in implementing changes because although people were dying the benefits to landowners was considerable. Sound a lot like the Biblical god of money, Mammon.

Investment Property in Spain

Property remains a lucrative investment

Although there may be many people who will question this statement after the events of 2008 and 2009 which has led to a situation where over 4 million homes has been foreclosed upon in only three years in the US property market the truth is that statistics over the last hundred years will prove comprehensively that as an investment choice property are still the preferred method of investing. In fact the preference for property investment goes back thousands of years and in those times it was predominantly the affluent and the wealthy that were property owners and it was only in modern times that it was possible to obtain financial assistance in buying a property which has eventually allowed the lower classes to become property owners.

There are some important rules when purchasing

In order to ensure that your Spanish property investment will be worthwhile and profitable it is very important to never pay too much for a specific property. Those people who are paying too much for a property will encounter many problems down the line for instance wherein they are trying to sell the property or when they are trying to refinance or when they are using the home as security against an additional loan. These people will find it impossible to recover their original investment since they will mostly be left of no other choice but to sell for less than the original investment. In the same way using the home as security for finance may be significantly more difficult because of the size of the mortgage and the pressure which it is exerting upon their financial management. This may not leave a lot of leeway as far as additional finance is concerned. Most property experts are advising property buyers to negotiate the prize at least 20% below the value of the property, however this in not always easy and property in Spain is already at a low.

Current economic pressure

Most economies are still recovering from the last recession and therefore many financial institutions and banks are still maintaining strict mortgage policies in order to protect the property industry against further decline. This is making it more difficult for perspective property buyers to obtain adequate mortgages in older to invest in the market. Although there are many financial institutions that are doing what they can to stimulate the property market with things such as residual discounts, extremely low mortgage fees and in some cases free arrangement fees, but there will still be many buyers that may not be able to qualify for a mortgage loan. However for those people with a stable income they should remember that it is important to never accept the first mortgage which is offered to them but rather they should shop around until they are absolutely positive that they have found the very best mortgage option available.

Excellent opportunities could be found

For those with the financial means do not act rashly but rather be patient and wait for opportunities to present themselves. There are many people who are left of no other option but to sell because of financial difficulties and it may be possible to negotiate a very favorable deal. Because of the recession many financial institutions had to foreclose on Spanish property owners and now they are sitting with properties on their books which are difficult to get rid of and this is another opportunity which should be considered.

It’s property investment 101. If you are renting out a property, particularly a residential rental property, then you have to increase rent. This may be annually, but most likely every 18 months to two years. Why? Well, there are a number of reasons this is considered to be a standard operating procedure in property investment. Firstly, small rent increases regularly are more likely to be absorbed by your tenants than a large increase when it is possibly too late. Secondly, you need to be keeping up with inflation and with the rental market. Your personal property investment rules probably involve getting the most out of your investment to support your overall investment plan. Why subsidise your tenants’ rent at the expense of your investment goals?

But is it always so black and white? Sometimes we get so caught up with the investment rules and numbers we forget the big picture. For example, what if a 5% rent increase takes a property’s rent over a key price threshold that causes the tenant to look elsewhere. If you can’t afford to lose a tenant then this could be a key consideration. An extra $500 a year probably won’t affect your bottom line, but an untenanted property probably will. Rent increases aren’t something to be afraid of, but just be sure to think of the big picture before blindly sending out your rent increase letter. Is the property worth the rent you are increasing it to? Is it really market rent? If your tenant leaves, will you be able to find a new tenant for the same rent?

Most likely regular rent increases will be one of the key tools for successful property investment in residential rental property. However, be sure to take a moment to think your actions through first.

Selling a home has traditionally involved the use of a real estate agent who has been tasked with the responsibility of marketing and selling the home. For their time and effort they are paid a commission on the sale proceeds. Whilst many view this as a necessary part of the sale process, the question needs to be asked, can I sell this house without an agent?
The good news is that it is actually possible to take control and sell your house privately and for the sake of some time and energy, thousands of dollars can be put back into your pocket.

Before I go through the pros and cons, I feel it is a good idea to explain how the commission process for real estate agents works. In this sense, real estate agents don’t always have your best interests at heart.

Real Estate Agent Commission Structures

You will employ an agent who works for a particular firm; that firm will have a set commission structure. As an example a NZ firm will charge the following, 4% on the first $250,000 ($10,000) and then 2% thereafter. Some agents even charge the 4% through to $350,000. They will also generally charge you an administration fee of $500. This fee covers a basic marketing package but you will generally be expected to pay for media advertising outside your set package.

So say you sell your home for $400,000. You would expect to pay out $13,500 in commission. Of this half goes to the firm and half to the agent. If another agent introduces customers to the property then the 50% that is set aside for the agent is split between the selling agent and the listing agent. For this scenario we will assume that the listing agent is also the selling agent. They will receive $6,750 for the sale as their share of the commission.

If your home was sold for $420,000 the commission to the agent would increase to $6,950 or an extra $200, whilst you would get an additional $19,600. As we can see the additional income is hardly enough to motivate the agent. The incentive for the agent to get the best possible price for your home is not really reflected in their commission, a speedy sale and fast turnover of listings is more important.

The agent does have access to buyers and a thorough knowledge of the property market (hopefully), but most of the agents in the market today have elementary training due to widely accessible entry requirements within the industry.

Sell your House Online

With the internet being used as a major marketing tool for real estate sales, it is easy for people looking to sell to do their own market research. The internet is also a great tool to use when attempting to market your property on your own or even sell your house online. Sites such as eBay and TradeMe are cheap to use and easy to set up. It’s possible for you to have your property advertised in a matter of minutes. The number of real estate agents that use these sites to market properties or for online house selling is testament to its marketing power.

Can You Sell a House Without an Agent?

Short answer: Of course you can! Real estate agents do not hold any special powers that enable them to deal with property that the average person does not have. If you feel you are capable of selling your property then chances are, with a little help from some associates, you probably can sell your own house.

With the widely accepted use online house selling now, it is possible to market your own property yourself for a fraction of the costs it would cost you to employ an agent. You know your home better than anybody and can use this information to your advantage. You can set up open homes at times that suit you and can deal directly with the people who are looking at your property. You are sheltered from the real estate banter that so many people hate.

On the flip side, there are people out there that do not want the hassle of dealing with people, spending time answering questions and have to sit around and watch strangers walk through your home commenting on your favourite holiday snaps that hang on the wall. For these people, employing a real estate agent is probably the better idea.

How to Sell your House Privately

A good property solicitor is worth their weight in gold. They can draw up sale and purchase agreements, offer advice on what clauses to put in the contract and also help answer any questions that you may be unsure of. If selling a home for the first time, employing the services of a trusted solicitor is recommended. Generally speaking, most people will employ a solicitor to help out with the sales process even if it is just to control the discharge of mortgage security.

The financial implications of selling a house privately as well as sell tips and advice and more information on how to sell your house privately will be addressed in future articles.

When you are making an important decision, such as buying an investment property, there is nothing worse than feeling overwhelmed or out of your depth. One thing that can cause things to start whizzing over your head is the use of jargon and industry-specific language. Unfortunately, the banking industry loves these terms, and the world of property purchasing and investment is full of them! A good property investment tip is to brush up on some of these banking terms and definitions before entering in any discussion where you need to be fully understanding what you are getting into.

Here’s a few banking terms and definitions to get you started:

Lending Priority:

The priority relates to the right a mortgager has over what is retrieved through the sale of the property. To avoid hassle later, a lender will often set out a higher priority than they have lent in case the customer wants to borrow extra in the future.

Consent to Second Charge Mortgage versus Deed of Priority of Land

Consent to Second Charge Mortgage

A consent to second charge mortgage occurs when a customer wants to take a second mortgage out on their property with a different lender. The original lender needs to agree to this first, and is registered on the land title as a memoriam of priority. It results in a formal agreement between the two companies. It sets out how much priority each lender has over the land.

Deed of Priority of Land.

This occurs when the customer already has two mortgagers but the priority on that mortgage needs to change. If one of the lenders lends more money to the client then that priority needs to be renegotiated between the two lenders. This is an informal document, but binding document and it supersedes the original ‘Consent to Second Charge Mortgage’.

Lending Covenants

Lending covenants are terms that Banks and financial institutes may include in loan documents should they think them necessary

Some popular lending covenants are:

LVR (Loan to Value Ratio) Covenant

This means that lending must remain below a set percentage of the property’s value.

Interest Cover Covenant

This means that interest cover on debt must be higher than a set figure, for example, 1.5x.

Revaluation Covenant

This is where the bank can stipulate that a new valuation is required at the customer s cost, at any point in time.

Also, Investment Property Tips has a Property Investment Glossary for you to look when you need to brush up on other property investment and banking terms and definitions.

As the economic environment brings about change, so property valuation must change to meet these new conditions. For property investors the value of a property affects everything from the purchase, property income, and importantly the investor’s ability to leverage for further investment. Before looking at any property valuation, an extremely important property investment tip is to understand what approach or property valuation method was used to determine it. From there you can cast a more critical eye over this vital element of property investment.

Property Investment Tips will look at the three most common methods of valuation and compare them as to how they relate to property valuation in 2010. There are three basic valuation approaches used to value property, with each using different means of finding the property’s place in the market. The methods include ‘the market date approach’, ‘the cost approach’ and ‘the income or investment approach’. The market data approach looks at the value of property sales in the area and finds how this property compares to the ones that have been sold. The cost approach uses the actual value of land and how much the property cost to build. The income or investment approach uses a formula based on the cost and income of a property to determine its value.

This series of property investment tips on property valuation articles will discuss the three different property valuation methods. The first article will discuss the market data approach, the second the cost approach and the third will explain the income or investment approach.

Click here to continue reading the property investment tips series on property valuation.

Next: The Market Data Approach.

The first article in the Property Investment Tips series on Property Valuation Methods looks at The Market Data Approach.

The market data approach to valuation looks at recent sales of comparable properties in order to ascertain a market value of the property. This approach relies on the marketplace dictating the acceptable price of property in an open market situation. One valuation principle that this approach relies on is the principle of substitution. The substitution principal dictates that a practical purchaser is believed to pay no more for a property or rental than it would cost to buy or rent an equally desirable alternative property that is on the market. Essentially what this is saying is that, people will not pay more for one particular property when there is an equally desirable property available for a lesser price.

Worldwide economic conditions have seen jobs lost and businesses close. With limited jobs available, the number of consumers who have defaulted on mortgage payments has increased. The flow on effect from this is that there has been a steady increase in the number of forced sales of residential properties through mortgagee and foreclosure situations. At the same time, financial markets around the world have had to tighten lending conditions due to a shortage of money flowing around the world. Interest rates, lending guidelines and requirements for greater equity behind investments have all contributed to a decrease in the number of active investors in the marketplace. Governments around the world are also getting involved, finding ways to regulate their respective property markets.

So in effect we have three different scenarios affecting the market, in very different ways. On one hand we have forced sales due to inability to pay for the associated lending against the property, and on the other we have tighter lending conditions for people looking to enter the market and we also have uncertainty surrounding the tax and structure of investment properties from the government. All these issues have the same outcome, which is to generate caution within the real estate market and reduce prices of those that are on the market.

In this current situation, it would seem that the market data approach to valuations may be the most appropriate. Given that so many variables are interfering with the value of homes, the best way to determine what a fair price is, would be to look at the most recent sales for comparable properties. The drawback to this approach would be that some of the comparable sales may have been under a forced sale condition and hence may not necessarily be in an open market environment. A counter argument to this could be that due to the number of people exiting the market at this point in time, especially through forced sale conditions, then this is in fact a reflection of the current market, and hence prices are fairly reflected. As prices are considered to be low (compared to 12-24 months ago) then it could be argued that those who are trying to sell their property at the moment, are only doing so because they need to do so for some reason, for example upgrading property or leaving the country etc. If you did not have to sell at the moment, when prices are down, then why would you? The substitution principal supports this methodology in the fact that people will only want to pay the cheapest price for an equivalent property, all things being equal.

Another drawback to the market approach is the heterogeneous nature of property, meaning that no two items of land are the same. For the market approach to work (a comparison of similar properties needs to be collected). This means, properties with similar sized sections in the same area, with similar sized and aged dwellings and improvements on the site. Nowadays many new developments are built to similar specifications (same house design on multiple sections) and hence new areas of cities can all look very similar. This works in the market approach’s favour as determining comparable sales is easier.

Next up on the Property Investment Tips series on Property Valuation Methods is The Cost Approach.

Click here to read the Cost Approach to Property Valuation.

The second article in the Property Investment Tips series on Property Valuation Methods looks at The Cost Approach.

The cost approach takes a different look at the value of a property. Essentially the value of the property is derived by first establishing the value of the land or section (the market approach may be used for this) then adding to this is the current value of the structure (adjusted for depreciation) and other improvements to give an overall value for the property. This approach has some limitations in terms of residential valuations, the key one being able to accurately calculate the depreciated value amount of the building and improvements. One situation where it would be used in the residential market would be to calculate the value of a property that is yet to be constructed.

An ‘on completion’ valuation would take into account the land value and the construction costs to determine the final value of the finished product. This is a highly subjective technique and can vary from valuer to valuer. There are times where external influences may interfere with this method, one of those being a market where supply is short and demand is high, in cases like this the value of an older property under the cost approach may not be in line with the value of the property using the market approach. The heterogeneous nature of property plays into the cost approaches technique when it comes to unique homes and properties. Where there may not be suitable comparable sales under the market approach, the value can be assessed by determining the land and building cost.

One needs to be careful when using this method that the amount spent on the property may in some cases not accurately reflect its value. A unique architecturally designed home that has had no expense spared in terms of its construction, may have been overcapitalised and the final value would be less than the actual construction costs. A couple building their dream home in which they plan to retire in may undertake such a development. In a situation like this, the valuer would need to apply common sense and perhaps undertake an additional valuation approach in order to conclude a fair value. The substitution principal is one of the paramount considerations to apply in the cost approach to valuation, taking into account that someone will not pay more for a property that they could acquire a similar site and construct a similar building for a cheaper price.

Next up on the Property Investment Tips series on Property Valuation Methods is The Investment or Income Approach.

Click here to read the Investment or Income Approach to Property Valuation.

The investment or income approach to property valuation looks at the income producing potential of a property and determines a value based on this. It is ideally suited to situations where the property in question is to be used as an income producing investment. By assessing the “present value of future benefits of future ownership” the income approach can determine the suitability of an investment. This method is not very common in application for residential investments due to the market approach being a more consistent and proven method. The income approach is used on a number of commercial property valuations but is often overlooked in residential. For this method to work, a suitable capitalisation or cap rate must be determined, which is then used to determine the total value of the property based on the proposed income stream. To determine the income stream, a fair rental amount must be calculated. This is then summed to come to a total amount for the year and depending on what the cap rate is, a final value is reached.

For example a 3 bedroom home may attract $350 pw in rent. Over a year this calculates to $18,200. Assuming the valuer used a cap rate of 5%, the total value of the property would be $364,000 ($18,200/5%). This may seem to be a reasonable assessment of the buildings value and not far off the mark for a house in that particular area. The issue lies in determining an appropriate cap rate. How was that 5% determined? Depending on the location (town, suburb, street) a different cap rate would need to apply. Using the market approach in that same area, we can work backwards to determine the cap rate. We take two properties, one in a new suburb that is classed as highly desirable, the other in a older suburb that is classed as less desirable. Their respective values are $350,000 and $240,000 (this example from my actual portfolio). The $350,000 home has a fair market rental figure of $360 per week or $18,720 per year. This equates to a cap rate of 5.35% ($18,720/$350,000). The less desirable house has rental income of $285 per week or $14,820 per year. This equates to a cap rate of 6.18% ($14,820/$240,000).

In the commercial property market, it is easier to determine the cap rate of a property, as the market values of similar properties are found using the market approach, the rent or lease returns are easier to calculate and from there a cap rate is found. By assessing the cap rate of a number of similar properties an appropriate rate can be found and based on the existing lease and expense details a fair value can be determined.

Click here to read the conclusion of the Property Investment Tips series on Property Valuation Methods.

Property Valuation Methods: Conclusion.

Finally, the conclusion of the Property Investment Tips series on Property Valuation Methods

As we can see, the three valuation techniques discussed in this series all use different methods to determine the value of a property, and all three have different situations and property types where their use may be more appropriate.

The market data approach determines the value of a property based on sales of similar properties in the area. This is the most commonly used method of residential valuation but has limitations in the fact that all property is heterogeneous and sometimes locating sales of a similar property may be difficult. The cost approach assesses the value of the land and then determines the depreciated cost to construct the building and improvements that exist on the land. This approach is suited to properties that may be difficult to value under the market approach. Properties that have one-off designs, unique construction or special purpose properties are all difficult to compare and so a cost approach may be a better method to use. The limitations of this method become apparent when a building has been built at great expense and is actually worth less than it costs to build; overcapitalisation of a property can be difficult to account for under the cost method. Finally the income, or investment, approach to valuation looks at the income earning potential of a property and bases the value of the property on the projected revenue that the building can earn. This method is extensively used when valuing income producing properties such as commercial buildings, but is not often used in the residential market due to the difficulties in assessing a fair income return on the property. In the case of an owner occupied home, the income potential from the home may be argued as being zero.

The best property investment tip is to use combination of the three valuation methods is recommended. By applying one technique and then confirming this through a second or third method, an accurate idea of the property’s value can be determined. Of course, the more experience that a valuer has in a particular market, the greater ability they will have in determining an accurate value and only one method may need to be applied.