Our slow-burning investigation into the increasing number of legal claims filed by developers against buy-to-let investors received a well-deserved mention in the Mail on Sunday at the weekend.
So thank you Mail on Sunday both for your generous DVD giveaways of Classic War Movies and for the publicity.
For more details of the investigation continue reading.
Photo by Alison Jackson-Bass via Flickr.
Developers get tough over buy to let
Paul Norman and Christian Metcalfe 21/12/2009 13:00
A landmark ruling at Bristol's high court last week, which forced a buy-to-let investor to pay damages of more then £130,000 after pulling out of an off-plan deal, will have come as a boost to many developers chasing down payments.
Housebuilder Prestige Homes South West was awarded the damages after the unnamed investor - who had agreed to buy two flats in the 122-home Zero 4 development in Plymouth in Devon - tried to renege on the deal.
An investigation by Estates Gazette this week reveals that this is just one of hundreds of legal actions currently being pursued by developers and investment intermediaries as the UK 's love affair with buy-to-let turns increasingly sour.
Prestige Homes is itself in talks with a further 20 investors who backed out of deals after buying off-plan. They are among around 30 people who initially paid deposits on 54 flats in the now-completed Zero 4 development, but tried to walk away when property prices started to fall in 2008.
Eight cases are due to be heard in February.
The pattern is repeated across the country. EG has found that in London alone, between August 2008 and 7 December 2009, eight parties lodged close to 300 claims against buy-to-let investors who had not completed on off-plan purchase contracts.
Irish developer Ballymore has filed more than 130 claims against individuals over the past 15 months, with the majority understood to relate to failure to complete, while Dublin-based fund adviser Strategic Property, which bought as an intermediary from Telford Homes, has lodged around 50 claims. Imagine Homes - the former buy-to-let intermediary run by Grant Bovey - has filed some 40 claims. Housebuilder Berkeley and its subsidiaries have filed more than 20.
A spokesman for Berkeley said: "Berkeley Homes is disappointed that a small number of off-plan purchasers, some of whom have committed to buying more than one property, have yet to make adequate disclosure or, in a few cases, have declined invitations to engage in constructive discussions. In such circumstances, Berkeley Homes regrets that it has no option but to initiate legal proceedings."
The group said that it was "sympathetic to the difficulties faced by off-plan customers who have been impacted by falling house prices and the tighter mortgage market".
It added that it was working one-to-one with customers who provided full disclosure to find out how their contractual obligations could be fulfilled.
Jeremy Raj, head of residential property at lawyer Wedlake Bell, said: "Investors are legally obliged to complete on transactions unless they can prove that they were induced to invest under false pretences or were given negligent advice."
Many buy-to-let investors may now start looking at this, although claims will be vigorously defended by developers.
Indeed, one private buyer, Steven Dowd, has formed the Berkeley Homes Collective to represent people who have been unable to complete on purchases of homes at Berkeley 's Caspian Wharf , Royal Arsenal and Chelsea Bridge developments in London .
Last month, investors Roy and Patricia Assersohn filed a claim against Morgan Sindall subsidiary Muse Developments, accusing it of fraudulent misrepresentation over the sale of six flats at the £250m Chatham Place scheme in Reading , Berkshire . Muse is vigorously defending that claim.
They allege that Muse made "glib and false assurances" about the scheme.
How the buy-to-let dream turned into a nightmare
The buy-to-let boom - there are an estimated 800,000 buy-to-let mortgages in the UK - was propelled by a model that saw buyers agree a price for flats prior to completion, on the assumption that the value would rise in the interim.
However, the economic downturn has decimated the property and mortgage-lending markets, leaving many buy-to-let buyers facing massive hikes in the amount of equity - the deposit and other costs - they needed to complete.
In the past two years, the number of lenders has fallen from around 30 to five while, according to broker Mortgages for Business, the average loan-to-value ration offered has dropped from 85% to 70%. The lending market is now dominated by two groups - Lloyds Banking Group's BM Solutions and Nationwide's The Mortgage Works.
David Whittaker, managing director of Mortgages for Business, said it was not the collapse of the lending markets but the decline in values - as much as 40% on town centre flats - that had caused the most problems.
When buyers cannot complete purchases, developers are now reclaiming properties and selling them for what is often 40% of the agreed price, while pursuing the investor for the remainder, plus legal costs and interest.
Clearly there's a wave of people who haven't the subtley to differentiate between motivations of off-plan buyers, and as Mira Bar Hillel points out on her blog, have fantastic retrospective insight into the then-pending global disaster about to unfold.
Not everybody buying off-plan is doing so to make a fast buck. It was also an opportunity to secure a property at a price you can afford, avoid gazumping etc. Naturally, the process was used (and some might say abused) by sophisticated property investors and creating false supply and demand through such speculation could be legitimately held up as a contributing factor to the housing bubble and the fall out 'post-burst' but it essential to openly differentiate between the career buy-to-let portfolio investors who overleveraged themselves and the unsophisticated buy-to-live homebuyers who were let down by the system (developers, conveyancers, valuers, lenders) and have literally NO consumer protection whatosever. The industries fall guys akin to insurance policies for the developers.
The mechanics of why people are forced to default is similar in both camps (valuations plummet, LTV's drastically reduce, mortgage availability dries up etc) but, try this:
Put yourself in the seat of an investor. Should you be investing a significant portion of your capital, or even all your capital in some cases, into properties with a view to flip them or relying on high LTV ratios? I'd argue no. If it's a business you should slowly and steadily grow your capital base through low to medium risk ventures. As one professional latterly told me, fully invested in one sector place provides a risk vs reward profile that is just too great.
Now put yourself in the seat of a homebuyer. Would you invest your life savings in your future home? Would you do so relying on 90% mortgage that are ubiquitously available at the time you reserve your future home? I'd argue it's what almost everybody in this country does both regulalry and will continue to do for time and memorial.
When considered this way it's important to make a differentiation between the two groups. People who buy homes are not wanton moneygrabbers and their actions are justifiable. I argue it's the motivations of the professionals in this debacle, the developers/lawyers/lenders et al, not homebuyers, that should be scrutinised and changed to protect Average Joe in this country from questionnable fatcat business ethics.