Important changes and the Red Book rules
Hey guys,
Sounds like some kind of children’s book, but in fact it is the guiding rule book that the Council of Mortgage Lenders (CML) and the Royal Institute of Chartered Surveyors (RICS) have agreed upon. It is the guiding document that all surveyors must follow if they want to conduct a survey for registered mortgage purposes.
So why tell you about it now?
Well - things have started to change. But don’t worry; if anything it is for the better. Let me explain.
The New Build Premium
Imagine a brand new shiny car with that new leather smell. You’re sitting in the driver’s seat as you turn the indicator to leave the car yard. You just paid £36,950.
My question to you is - How much is the car worth now? I think most of you would agree that its worth about 20% less than 30 seconds and 10 metres ago. Buying “New Build” is not quite as extreme, but I always allow a 5% new build premium.
This means if you buy a £100,000 property the moment you take ownership it would resell for around £95,000.
But that’s only half the story. You see, the valuer who gave the property its initial value has two things working against them.
The data and information they have access to is sometimes up to 3-6 months old which means the market may have moved in this time and certainly in a galloping market it may well have. The second thing is that they are human and humans don’t run on a mathematical program. They make decisions based on a mix of emotion and logic.
Both these things mean that potentially the valuer could over or under value the property. I always work on realistic worse case so I consider they have overvalued by 5%. All this means that our £100,000 property (which was worth £95,000) is now worth £90,000 the moment we drive it off the parking lot. :-)
OK - before you go off New Build totally let’s consider your property 2 years on.
2 years on…
Now you might say ‘Why would I ever buy a New build?’
In my experience if you wait 2 years the property generally has picked up the 10% and a little bit more. It’s why I am so focused on my 2 year Cashflow Rule.
In fact the real question is ‘Does the property’s value actually drop at all?’ Possibly if you have to sell in the first two years, but if you hold the property any decreases will be paper and not actually real loses.
What’s more, in virtually every review I have ever done with my clients they have been able to pull enough money out of the property after 2 years to cash flow for a further 2 years.
OK - so we looked at the new build premium now let’s consider the changes.
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Developers reporting record profits
Over the previous 5-7 years - and probably longer - developers have had a field day making lots and lots of money. This has partly been because of the upsurge of demand for buy to let property. The market initially wasn’t used to having so many buyers wanting property and it created a situation where developers could within reason set their own pricing and the market would supply willing buyers.
In the midst of this, a new market was created – the property club market.
Regardless of what you think of many of the companies involved with this industry they have been responsible for a great number of property sales. The challenge has been that as the numbers of clubs increased, the demand for discounted property dramatically outstripped supply. (I am talking about supply of good quality discounted property)
Some developers (and clubs) began putting prices up and offering bigger discounts, this had the effect of separating the new build prices from the secondhand prices (more than the usual premium).
Also, at this stage the red book rules were a little hazy as you might expect for a developing industry and basically allowed the valuer to look at other new builds in the area as comparables without necessarily considering the second hand market.
The market fights back
About a year ago the red book rules changed in line with the market when valuers became required to consider the new build in the area but also consider the comparables of second hand properties in the area. Not much really happened until about 3 weeks ago when a number of head valuers began telling us they were now following the red book rules to the letter.
The result of this has been that valuers are now unprepared to offer values which they feel are not “within reason” of the second hand market.
Better for everyone.
You may not notice a major change in the market and for most people it won’t affect them directly, but it will however mean that price lists that developers publish will need to be much closer to the second hand market. This may mean they will need to go to shareholders and tell them they are unlikely to make as much money as previous years (which is of course unlikely). Most likely it will mean a lot of the outrageous inflated discounts will come down to a more reasonable level making the industry better for everyone.
The losers in this round of changes will be those who have exchanged on a plot with no mortgage in place especially on a site that has been overpriced compared to the surrounding second hand market.
If you have exchanged without a mortgage in place on a new build property, it might be time to make that mortgage application and find out were you stand. If you have any problems give us a call and we’ll be help in any way we can and point you in the right direction.
Live with passion,
Brett Wood