Vulture clubs: Buy-to-let property investment

Given the current crisis in the housing and mortgage markets, you would think that the days of the buy-to-let property seminar were over. Sadly, the reverse is true.

Despite the collapse of property club Inside Track earlier this year, plenty more outfits have arrived to fill its place – all that has changed is the marketing spin.

‘Profit from the property crash!’

‘Exploit the falling price of property!’

‘Make money buying repossessed properties!’

‘Earn a fortune because of the credit crunch!’

These slogans, and dozens like them, are used in advertisements to lure would-be investors to free property seminars. It does not matter if you have never owned property before, or rent your current home. It does not matter if you are unemployed, a student or retired. It does not matter if you are in the UK on a visa. You do not even need any money.

As one advert succinctly puts it: ‘All you need is the desire to make more money than you could ever dream of.’

Posing as a naive punter, I enrolled on a large selection of free seminars – all of which were free ‘taster sessions’ for a longer course, costing from £1,500 to £5,000, where I would unlock the secrets of successful property investment.

My first aim was to uncover the methods that seminar companies use to lure prospective investors into signing up. Second, I wanted to test the robustness of the advice delegates end up paying for in their desire to get rich quick.

The results, detailed here, are shocking – both in their wilful exploitation of the financially vulnerable and the dangerously high-risk strategies they suggest.

Most of the outfits concerned classify themselves as educational companies, teaching the techniques of property investment, as this bypasses Financial Services Authority (FSA) regulation. Many come with their own brokers, solicitors and agents attached, although they are always ‘independent’ and not directly employed. You can choose to use someone else, but they will not be able to grant you access to the same exclusive deals. One company even suggests you should use its preferred broker to say ‘thank you’ for making you rich.

Free seminars are typically held on weekday mornings. Chatting to delegates, many are unemployed, have been made redundant or are new to the UK. But all say they need money – and fast. Although they cannot afford to buy a house for themselves, they can still become a buy-to-let landlord. I lose count of the number of times I am told: ‘The income multiple needed to buy an investment property is zero, as it is all based on rental projections.’

Another phrase common to every seminar I attend is ‘financially free’. One defines this as ‘paying for your lifestyle every month without having to work’. Another favourite is ‘passive income’, which describes the ease of collecting rent. Somehow, being the landlord of umpteen properties involves no work. ‘Get up on Monday, and you can go back to bed if you want to,’ I am told by one seminar host. The subject of property maintenance is never mentioned.

Nor is there any serious discussion of risk. Dressing up highly dangerous methods, such as buying with credit cards, bridging loans or foreign currency mortgages, as the ‘secrets’ to unlocking a fortune is clearly irresponsible.

Worse still, buyers are actually encouraged to maximise their risks. One seminar company advises attendees to go home unless they commit to buying a minimum of four properties. ‘If one tenant moves out, the income from the other three will sustain you,’ the presenter explains.

Earn a fortune because of the credit crunch!

Another outfit simplistically explains leverage as ‘using other people’s money to make you rich’. The prospect of negative equity is never entertained and falling house prices are blamed on overblown media speculation.

Then there is the ubiquitous PowerPoint slide showing the upward sloping curve of average property prices since 1945. The implication is, if you hang on to a property for long enough, it will double in value.

The delegates I meet absorb this information blindly and many sign up for the expensive courses on offer. But if the speakers possess the secrets of making a fortune through property, why are they wasting their time working for a two-bit seminar company?

It goes without saying that there are some legitimate companies out there giving buy-to-let landlords investment advice. However, considering the lack of regulation in the field, the onus is on consumers to weigh up the risks.

Preying on the weak-minded may be unethical, but it is not illegal. Sadly, despite the obvious flaws in the following methods, you cannot legislate for greed or stupidity.

MYTH 1: Bargain property deals in the US

A growing number of seminar companies would like you to believe that plummeting US house prices offer bargains across the pond.

This is not hard to believe – there are bus tours of foreclosed properties in Florida, and the sad tale of a Detroit house placed on the market for just $1 (pictured) seems to have captured the British public’s imagination.

Before one dreams of owning whole streets of suburban America, this price was subject to the buyer taking on thousands of dollars of utility charges, and spending thousands more on renovating the property, which had been looted of all fixtures and fittings – including the boards on its windows and doors.

This has not stopped one outfit from encouraging its members to build up portfolios of US houses, claiming they will be ‘worth a fortune’ in a few years. I attended a free seminar at a top central London hotel to find out what the deal was.

Following nibbles and drinks in the plush seminar room, faces fall when presented with images of the properties on offer – they are not pretty. The presenter claims to have sold 200 of these dilapidated-looking flat-board houses in New York State. They can be purchased outright for as little as $30,000 (£18,500) cash, and come preleased to tenants on welfare.

‘You don’t see voids,’ the presenter reassures, playing down the risks. ‘The tenancies are month to month, but these people stay put for 10, 15 years. These properties offer extraordinary rental yields, of four times or more what you’d get in the UK.’

He is offering a $30,000 property, split and leased to two families, with a combined rental income of $850 a month. ‘That’s a rental yield of 31%!’ he tells the captivated audience.

Some would question the logic of a shabby buy-to-let on the other side of the Atlantic. Conveniently, the presenter says his company will handle property management – for 10% of the rent. Future refurbishment costs are skipped over. Property taxes are briefly mentioned – after some probing, a figure of £1,000 a year is estimated. And then there is his ‘sourcing fee’ of nearly £3,000 to add on.

As the brochures are passed around, questions start to be asked. ‘Why aren’t US investors taking advantage of these great rental yields?’ asks an elderly Asian gentleman.

‘A lot of Americans are lazy and don’t want to be landlords,’ says the presenter.

These properties offer extraordinary rental yields, of four times or more what you’d get in the UK

‘But if it’s such a great investment, why is your company selling them?’

‘Our job is to find great deals for people,’ is his schmaltzy reply.

There are more questions about problem neighbourhoods and tenants. One woman – whom I suspect is a plant – stands up and says that she owns 20 such properties, has had no problems and is raking it in. She sits down to a round of applause.

Time for me to ask a question. ‘Why do we have to buy in cash?’.

‘It’s the quickest way to do the deal’, apparently, and crucially, buying without a mortgage means I need no buildings insurance – the brochure’s small print says this is up to buyers to arrange. It transpires that homes such as these, where the replacement cost is greater than market value, are effectively uninsurable.

Back at the office, I make a few calls to estate agents in the same area of New York State. Is a $30,000 property with $850 monthly income really such a great deal? Linda Kazu, property broker at Realty USA, thinks not.

‘That is quite high,’ she says. ‘We just sold a property in the same area for $16,000 to an investor, which was bringing in close to $1,000 a month in rent. I sold another house split into two apartments for $19,500 with combined rental of $1,125. They are not in the greatest neighbourhoods, but the rent is paid by state housing assistance, which attracts investors.’

Kazu says she is aware of investors targeting low-priced properties such as these and stipulating in the purchase contract that they have the right to sell on to another buyer for a higher price within 30 days of closing.

‘It definitely is happening more,’ she says, bemused that British buyers are falling for it.

MYTH 2: Buy property for below market value

‘The divorced, the dead and the desperate’ is the slick turn of phrase employed by one seminar company describing who its delegates should be targeting.

‘Buy below market value, and you’re in profit from day one,’ says our host. Known in property circles as ‘BMV’, this is the linchpin of nearly all the ‘get rich quick’ schemes touted by dubious seminar companies.

Those offering access to BMV deals can be split into two camps. The first group charge extortionate course fees to reveal methods as basic as leafleting (‘Need to sell your home fast? Call me!’) or taking out adverts in the local paper. One company is slightly more sophisticated and suggests paying someone else to deliver the leaflets.

The second group act as property sourcing agencies and – for a hefty fee – will offer deals they claim are heavily discounted for a quick sale. But in a market devoid of residential transactions, how is ‘market value’ defined?

At one seminar, following an hour’s brainwashing, I was offered details of four ‘BMV opportunities’ to tempt me into parting with £2,000 in membership fees. Back in the office, I looked up the postcodes of all four properties on the Rightmove website. Despite the agent claiming a 20% discount to market value, it came as no surprise that I was able to find comparable properties for similar prices online. Deduct the membership fees and commission, and these would actually work out cheaper.

What is more, the rental estimates provided by the company were at the top end of similar properties Rightmove advertised for lease.

Buy a £100,000 property for £80,000, giving you £20,000 to invest in number two

‘Establishing market value is very hard in a falling market,’ comments independent property investment adviser David Lawrenson. ‘To find someone who is desperate enough to sell their home for 20% below true market value is very hard indeed. Even if leafleting and advertising produces a “lead”, you will have to work very hard to convert someone into a willing seller.’

MYTH 3: Get paid for buying a property, with no money down

Buying BMV (below market value) is the key to the next scheme. Dressed up by various seminar companies as getting ‘paid’ to buy a property, or getting ‘instant cash back’ from a property deal, they all boil down to the same high-risk method – using a bridging loan to buy a property, then remortgaging it for a higher value.

One self-styled property millionaire tells his free seminar audience: ‘You can buy a £100,000 property for £80,000, giving you £20,000 free to invest in property number two.’ PowerPoint slides flash before us. A shabby-looking property in Lancashire is pictured. Bought for £35,000, it was remortgaged ‘on day one’ for £53,000, thereby avoiding the need for a deposit. After £6,000 of refurbishment costs and £750 legal charges, ‘you get cash back of £3,300. That means you just got paid £3,300 to buy this property,’ our millionaire concludes. All that remains is the small matter of finding a tenant to cover the mortgage repayments.

There is an added twist to this scheme – same-day remortgaging is no longer possible. The last company to offer this service was Mortgage Express – Bradford & Bingley’s buy-to-let arm. Yet our millionaire expects us to pay £2,000 for a course that is now fundamentally flawed. After being quizzed, he accepts it is more difficult to find same-day deals, but stresses that with the right broker, remortgaging is possible. ‘When you find a good deal, the money finds you,’ he reassures. Naturally, brokers who can assist will be present at the forthcoming course.

‘Buying a property in this way is incredibly risky,’ says Darren Cook from mortgage comparison website Moneyfacts.co.uk, who believes a gap of ‘at least three months’ would be required before remortgaging were possible.

‘Property prices are dropping. The danger is that a buyer will arrange bridging finance, but then find themselves unable to raise a mortgage. There is no guarantee in the current economic climate.’

Moneyfacts also tracks the interest rates of bridging loans, which Cook says range from 1% to 3.5% a month – or 42% when measured on an annual basis. ‘A buyer would still need a deposit to purchase a property using bridging finance,’ he says, adding that the average loan-to-value of products currently on offer is 75%. So much for buying with no money down.

However, our presenter has another worrying solution. ‘You have one credit card to go to Sainsbury’s, and 20 credit cards to use for your properties,’ he says, adding that his course contains a special section on how to improve your credit rating.

And guess what? You can also use your credit card to pay the £2,000 fee.

According to a free property seminar I attended in the home counties, repossessions are the ‘holy grail’ of property deals. The Council of Mortgage Lenders forecasts there will be 45,000 by the end of this year – but don’t wait for them to turn up at an auction.

‘People who buy properties at auction are the people who pay the most,’ says our enigmatic speaker. It is far better to execute what is known as a ‘sale and rent back’ deal.

For a fee of nearly £2,000 I can become a ‘retained client’ of his firm, and thus receive introductions to purchase properties from ‘motivated sellers’ on the verge of repossession. The firm will also take 2.5% of the purchase price – which is guaranteed to be more than 20% below ‘market value’ (see myth 2).

‘With repossessions, the profit is in the purchase and not in the resale,’ our presenter continues, adding that investors should aim to rent such properties out for three to five years to ‘maximise profits’ before selling on. But who to rent them out to is a more pertinent question.

‘Buy these properties with the tenant in. But don’t keep them for more than six months – remember, they nearly went under due to financial problems,’ is his frank assessment. ‘Far better to let it to someone else.’

A course offered by a separate company advocates leafleting and advertising in local papers to find ‘sellers in distress’.

These are financial products that no one else in the country has access to!

‘The best time to reach them is before they are repossessed,’ says the presenter, adding that this is the perfect opportunity to hammer down the price, and then rent the property back to the unfortunate former owner. ‘They make great tenants – it’s their home!’

What is more, he says, you could sell them an ‘option’ to buy back their property for a fixed price in three years’ time, adding £100 a month to their rent. If they fail to pay, they lose the right. Other companies advocate same-day remortgaging for instant profits (see myth 1).

‘These seminars are basically groups of unprincipled people working together to discuss how they can profit from other people’s misery and distress,’ says Adam Sampson, chief executive of homelessness charity Shelter. ‘People who are on the verge of losing their homes are extremely vulnerable and are being preyed upon by these people. Encouraging people to entrust their homes to a company that may then throw them out, while legal, is as good as theft, unethical, and utterly immoral.’

The government is urging the Office of Fair Trading and FSA to regulate sale and rent back to clamp down on unscrupulous activity.

‘The trouble is that the owner-turned-tenant will usually have no security of tenure beyond the fixed term of the tenancy agreement of six to 12 months,’ says independent property investment adviser David Lawrenson. ‘There are some landlords who claim to do this ethically, and I am sure it can be to the good of the investor and the seller in some cases. However, I caution would-be investors about how they’d feel about evicting a family that defaulted.’

He also raises another worrying reality. ‘As it typically takes five months to evict a tenant through the courts, I wonder if Green investors who bought using this technique have got into financial trouble themselves as a result of tenants defaulting.’

MYTH 5: Save money with a foreign currency mortgage

For a whopping fee of £5,000 another ‘property education company’ will introduce delegates to mortgage brokers who can access below base-rate mortgage deals.

‘There are financial products we have access to that probably no one else in the country has access to,’ says the presenter, alluding to a team of ‘financial engineers’. Although not directly employed by the seminar company, ‘they can access products you can’t get on the high street that are only available to our delegates’.

He tells delegates that commercial funding is available for interest rates of 3.5%. I question how this is possible.

‘Who says you have to borrow money in the UK?’ is his smug reply. ‘We access finance from 57 different countries. The answer is come on our course, and we’ll show you how.’

Let me save you the £5,000 cost, and potential risk of financial ruin, by explaining the pitfalls of foreign currency mortgages, which are described as ‘extremely risky’ by Ray Boulger, a mortgage expert at John Charcol. The chief problem is the mismatch between the asset – a UK buy to let – and the capital – from a foreign bank – which creates huge currency risk.

‘Interest rates in the US and Japan may be much lower than the UK but, in the last few weeks, sterling has fallen nearly 25% against the dollar,’ Boulger explains. ‘This movement would hugely increase the value of your debt, and even blow the loan-to-value covenant of your mortgage.’

The maximum loan-to-value covenant on commercial loans is typically 70%. ‘If it gets up to 80%, you’ve either got to repay part of the loan – which people on a course like this presumably couldn’t afford to do – or the lender will convert the loan back into sterling,’ he says. ‘This crystallises losses – plus you end up paying sterling interest rates.’

Most foreign currency loans are pegged at a fixed margin above three-month LIBOR – usually above 2% for a commercial loan – and carry a 1% arrangement fee, which adds to the cost. ‘Now UK rates are on their way down, these deals won’t be hugely lower than UK bank rates,’ Boulger says. A professional investor may be understand this level of risk. But, amazingly, to push these products on people with little or no financial experience is not illegal.

‘I would be very surprised if the risks were properly explained on the course, or even by the mortgage broker, unless the investor steers clear of whichever broker they will be pressurised to use by the seminar organiser.

‘Because the FSA doesn’t regulate buy to let or commercial mortgages, if the risks of borrowing in a foreign currency are not explained and it all goes horribly wrong, the investor will not have recourse to the Financial Ombudsman Service.’

The debate about FSA regulation continues. Meanwhile, a young woman at the seminar asks: ‘Can we pay the course fee after we do our first property deal? You see, we came here because we need the money now.’