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Neil Liversidge: The one area that needs more regulation

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Few things make me angry enough to demand an increase in regulation but property-pushing is one of them.

I refer of course to the estate agents, ‘property shops’ and the like which sucker householders, most of them unsophisticated by the regulatory definition, into borrowing against their family homes to buy additional properties as ‘investments’ and holiday homes.

Around five years ago some clients of ours, an elderly couples in their sixties, fell for a property company’s pitch to buy an off-plan apartment in Leeds. Sadly, as is often the case, they did not consult us first but rushed in and put down £15,000 from their savings as a deposit. Or rather the husband did and he was suffering from early-stage Alzheimer’s, his judgement obviously impaired.

His wife was staggered at his actions but only found out after money had changed hands. The property company was run by a since-jailed ‘property tycoon’. Come the time to complete, all the flats turned out to have been vastly over-valued and nobody would lend the balance due. Litigation ensued which goes on to this day. Their retirement has been blighted and their savings are gone. The promised ‘high rental income’ was a fantasy.

Another couple in West Yorkshire came to me referred by a mutual friend, desperate to help them find a way back from the brink of financial ruin. They’d  had a lovely £300,000 home with no mortgage in a picturesque part of Summer Wine country.

One day they took a stroll into the nearby town centre and looked in a ‘property shop’ selling overseas holiday homes. By the time they came home they’d put down deposits on three apartments in Bulgaria. Their house was subsequently mortgaged with the help of the pusher’s in-house ‘adviser’. The apartments, they were assured, would rent out to sun-seekers in summer and skiers in winter. The same agent would be only too glad to organise the bookings for them.

From then on everything went wrong. Costs escalated, the furniture packs they’d paid for as part of the deal turned out to be junk and the location just wasn’t attractive as a summer or winter location. The promised rentals never materialised. The property shop closed. They were left bankrupt, lost their home and ended up living in a grace and favour apartment provided by a church. The husband had a nervous breakdown and has not worked since.

The home income plan scandals of the 1980s established the principle that it’s generally bad advice to advise somebody to mortgage their home to invest the money borrowed and then rely on the investment to pay the mortgage.  So what’s the difference using it to buy holiday property?

As these people found to their cost, property prices can fall as well as rise just like share prices. As a former IFA colleague of mine also found out, property ‘investments’ abroad can also vanish completely if you’re daft enough not to use a UK based solicitor and you rely on the pusher’s own legals – but that’s another story.

Geared investment is risky – whatever the investment. If you or I encouraged unsophisticated clients to risk health hearth and home we would no doubt be cleaned out and closed down, and rightly so.

So where is the regulation for property pushers?

Memo to Martin Wheatley: there is a whole new area where FCA regulators could be employed and where for once they might actually do some good. How about it?

Neil Liversidge is managing director at West Riding Personal Financial Solutions

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Comments

There are 5 comments at the moment, we would love to hear your opinion too.

  1. Neil you are absolutely on target. But it won’t happen, because the economy of UK plc. relies on the property market and people spending money they don’t have. That’s why mortgage regulation is a pale image of what we have to put up with. (As I have mentioned after attending MMR Seminars at Canary Towers).

    That people gear to buy property is also in many respects a daft exercise. OK if you can do it in Mayfair, but for most places this so called investment is predicated on rising property prices. It might look half way tempting at current low interest rates, but from what I have seen there are pretty thin profits after paying the mortgage and the outgoings. Some numpties actually have purchased on interest only – which only compounds a poor decision.

    Then we come to appropriateness. Something which doesn’t count in this market. Someone can buy an asset for (say) £250,000. They put down a deposit of £62,500. They then have a debt of at least £187,500 for a term usually of around 20 – 25 years. With fees, solicitors charges and stamp duty they are up to around £66,000 – all their savings. For one asset. If they need some cash they can’t just cash in the living room. If they make a gain there is CGT on the lot because they have to sell it all in one go. They have to pay tax (less expenses) on the income and HMRC is now looking at this in detail. So for many (let alone your examples) this is a pretty flaky deal.

    Just imagine if we advised on a £11,520 ISA. Firstly there’s half a day discussing risk, fact finds, suitability, research, due diligence and all the rest. Then this has to be put in writing with 50 pages of KIDS, Key Features, reasons why and a copy of the Beano. Of course to do this in the first place we have to be educated to a minimum of level 4. Then imagine if we advised the client just to put down £3,000 and borrow the balance of £8,520 from Wonga – even if the £3k only represented a small portion of their savings. Of course the punter can sell all or part at any time with no tax implications. But this is deemed to be far more complicated and risky than buying a £250,000 property.

    This is the level playing field and regulatory logic of financial services today.

    On the other hand I have had clients who have purchased but to let – outright. No gearing or loans and the outlay did not represent all their disposable assets by any means. In these cases there might be some sense as it diversifies the portfolio. But for the great majority it’s about as sensible as ‘my house is my pension’ argument.

  2. Agree with you that this is a shamful practice. But regulating it would require massive initial and ongoing investment, (cost to the industry) and would suffer significant issues with cross boader legislation as many of these properties are on foreign soil.

  3. Neil,

    I would totally agree with you and I would go even further not only to I want to see more regulation in respects to what I call property gurus I’d also like to see greater regulation of TV programmes and newspaper articles in connection with property.

    How many programs on TV do you see where property investment is made out to look easy without any risk warnings all references to taxes, legal responsibilities and indeed expenses. Under the hammer is a good example of this and although we may believe it to be light entertainment it does give people unrealistic viewpoint of property investing.

    And as regards to those overseas property companies that target pension funds e.g. Harlequin well I only have one question what the hell was the regulator doing sitting on its hands for so long before taking an interest after so many complaints from different IFA’s.

    You only have to see what is going on in the property market at present to see that we need greater regulation in connection with the press as they are now talking the market up. Any professional knows that any lending has to be based on affordability and the new government backed scheme doesn’t necessarily mean it’s going to spur a new housing bubble as any mortgage still needs to be affordable. This was one of the major changes to the market post 2008, do we hear any major newspaper or even BBC coverage mentioning the new mortgage reality the answer to that question is no.

    Professional financial advisers know that we need a stable housing market and there are far too many get rich property gurus operating particularly in the buy to let market where there is little regulation lining the run pockets and taking advantage of consumers. All mortgages need to be regulated including commercial buy to lets.

    Good article Neil just hope that somebody at the FCA takes note!

  4. I agree with Peter Herd as above.

  5. Good article Neil !

    Just another motorway pile up (not waiting to happen but happening), while the FSA/FCA are busy policing the country lanes, proactive regulation ? my arse

    Will they ever learn ?

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