In a move which could alarm the UK government it has been revealed that so-called “buy to flip” investors in the London property market have received an unexpected boost. Historically those looking to “buy to flip” have been forced to sell to cash buyers because of the perceived high-risk nature of selling development property which is not yet finished.
Those who follow the markets will be well aware that this type of transaction played a major role in the fall of the UK property market after the US mortgage crisis. The so-called “buy to flip” investors were playing with relatively thin margins having put down only a deposit on development property. However, in the good times many of these investors were able to flip properties on a regular basis banking significant returns.
Is this a return to the bad old days?
At least one lender in the UK is now offering loans to those looking to acquire “assigned contracts” which are effectively off plan property. In simple terms an investor places a deposit on a property development and looks to flip the investment at a higher price thereby banking the difference between the original asking price and the “market rate”. This opens a whole new avenue for those looking to “flip” properties and will inject some competition for traditional cash buyers who could negotiate better deals.
In an era where financial regulations are now playing a major role in property lending it will be no surprise to learn that the new “assigned contracts” loan instruments will not be as generous as those in years gone by. First of all they are focused at the more sophisticated property investor who is well aware of the risks and the potential rewards.
There will be a number of constraints on these arrangements such as blocking multiple sales of “assigned contracts” before the developments are even completed. It is also interesting to see that a maximum loan to value ratio of 75% would be considered but this will be based upon the original contract price. This will reduce the amount that a would be “assigned contract” purchaser was able to raise with a property loan company.
It was interesting to see that previously only London and the south-east really attracted “flip to buy” investors in great numbers. This was because of the economic wealth of these areas and the fact they were the hub of the UK economy. The interest rate on these specialist property loans will also be higher than the standard mortgage rate and there may well be additional fees.
While some may be alarmed to see this type of very specific property loan re-emerging across London it is unlikely to have the same impact of years gone by. In the heyday of the London property market we saw properties flipped numerous times before the development was even completed. Even though the estimated increase in new builds across the UK is likely to see more “buy to flip” opportunities emerging it is unlikely numbers will return to those seen just prior to the 2008 crash.