The Difficulties of Selling in a Challenging Market

Worried about the potential repercussions of selling in a challenging market?

We’re constantly hearing that the UK housing market is on a downward slide. We’re also told that landlords are selling up in their droves, but at the same time rents have never been better – so, what do you believe?

The prospect of selling in a challenging market is never a comfortable one for investors, and property investors are no different. We encounter a number of clients who tell us that they simply cannot sell for £X because they owe more.

The truth is sometimes, when you make an investment, it doesn’t pay off as you hoped, so if you decide to dispose of that investment, you need to give serious consideration as to the when and how.

With years of experience as a buy-to-let property professionals, we’re going to take a look at this difficult decision and how you might best approach it to maximise the outcome.

Regulation or strangulation?

One of the key drivers behind landlords selling in a challenging market is the accretion of new and revised legislation and regulation that they currently face.

Specialist press and websites are full of doom-laden stories and dire warnings so it’s no surprise if many current landlords are thinking that, regardless of the economics of letting property, it’s simply no longer worth the grief.

Are you facing a loss?

There are a number of reasons that you may find your let property isn’t producing profit, or indeed costing you money. You also need to determine whether you’re facing losses against your capital investment or operating costs.

Operating losses

The rising cost of living, increased mortgage rates, stagnant rental income – all of these will put pressure on landlords’ operating costs. Insurance costs more, repairs cost more; frankly, everything costs more.

All of this before you start to factor in the potential costs of EPC compliance and the changes outlined in the Renters (Reform) Bill, both of which will undoubtedly increase the financial burden on landlords still further.

Despite all the column inches detailing rocketing rents, the reality for many landlords is that they cannot increase what they charge on a whim. Many may not want to, appreciating the benefits of good tenants above the uncertainty of the unknown.

In Scotland, privately-owned annual rent increases are still limited to 3% per annum, except where the landlord can demonstrate exceptional circumstance, in which case the maximum is capped at 6%.

Capital losses

If you have bought property recently, there is a danger that slumping property prices may be reversing your hopes of capital growth, certainly in the short term. In the longer term, the outcome may be more positive.

Even where you still stand to make a profit, the amount of that profit may no longer be what you expected, as higher interest rates have their intended effect of depressing the housing market.

And then there is Section 24… If the landlord owns the property as a sole trader, not as a limited company, this means that tax is calculated on their gross income without any right to deduct mortgage costs.

The upshot is that regardless of actual income, a landlord can find themselves in a higher tax bracket despite their net income not justifying this. It takes no mathematical genius to work out that this is less than ideal.

For any landlord wishing or needing to exit the market, these are less than ideal circumstances to be contemplating divesting themselves of their investments. So what, if anything, can you do?

Choices, choices

The options open to you will depend very much on your particular circumstances and the reasons that you’re considering selling your investments. We recently wrote about the pros and cons of selling tenanted vs vacant property.

You can read that piece, ‘Tenanted vs Vacant: Which is The Best Way to Sell Your Property?’ so we won’t revisit that discussion here.

Meet Bob

Bob is contemplating selling in a challenging market. He bought a buy-to-let opportunity four years ago for £50,000. Not having free cash at the time, Bob took out a mortgage to finance the purchase.

He has a long-term tenant with whom he has an excellent relationship, however Bob is finding that with all the changes which have affected the UK economy, he is now facing an operating deficit of £150 per month.

In addition, Bob is not at all impressed with the proposed regulatory changes which are hanging over the private rented sector (PRS). Therefore, Bob thinks it’s time to sell and maybe seek alternative investment opportunities.

Unfortunately, with the slump in property prices, Bob has been told that his property is worth £45,000 on the open market as a vacant possession, but that amount won’t fully discharge his mortgage, leaving him to find the balance.

What to do?

What options does Bob have? Let’s explore all of Bob’s potential solutions below.

Do nothing

With a current deficit of £150 per month, over a further year Bob stands to lose £1800. That is less than he stands to lose if he sells, not to mention the legal fees which would be involved in a sale.

He may, during that period, be in the position to renegotiate the current rent, improving his situation. The property market may also reverse, giving hope of increasing capital growth.

However, this is a gamble – things may not improve and in the meantime Bob is either eating into his savings or having to spend some of his salary (if he has one) to hold onto the property.

Go nuclear

While he still can, Bob could serve an eviction notice, sell the property for what he can and cut and run. That option is based on a number of assumptions…

The assumption that his hitherto excellent tenants leave the property as asked. There is an increasing amount of advice available for tenants online, much of it along the lines of ‘tough it out as long as possible’

This comes from the knowledge that if they refuse to vacate, Bob will have to go through an overloaded legal system in order to reclaim his property, a process which can take many months.

Even if his tenants agree to quit, Bob is still at the mercy of the market, may still not meet his mortgage commitment and will have to pay legal fees for the sale. The only glimmer of light is that he can offset his loss against his capital gains tax, if paid.

The win – win

Bob might instead approach his tenants and offer them first refusal on the property. Doing this as an off-market sale removes his estate agency costs, and his tenants may be more willing to meet his asking price to stay where they are.

In an ideal world, Bob might break even on this transaction, leaving him free to look elsewhere for another investment option.

Advice from the property pros

There’s a real danger at present of advice taking the form of ‘if I was going there, I wouldn’t start from here’! Since that requires a degree of teleportation, and possibly time travel, let’s see if we can be a little more practical.

This is not the best time to be looking to sell property, but there is little that any of us can do to change the economy so we have to play the hand we’re dealt. Our mythical Bob does at least have options.

The right choice for Bob (or you) depends upon personal circumstance. If Bob can weather a small, on-going loss, hanging onto his property makes more sense. In a year his situation may have changed and things might look quite different.

The fact that Bob is heavily mortgaged might suggest that he doesn’t have much free cash to invest, and paying off the mortgage won’t change that. Therefore, setting his shoulders and hanging tough might be for the best.

If he feels he has to sell, approaching his tenants could be a veritable win-win-win. They may welcome the chance to buy, and even if they don’t, it allows Bob to have a conversation about their future with regards to the property.

Hopefully if he decides to end the tenancy and sell, he can get, and keep, his tenants on board with his plans, as it will be less of a bolt from the blue for them.

In summary…

The buy-to-let market is in a state of nearly-unrivalled flux at present and that is putting pressure on investors and landlords. Allied to this is a slump in property prices occasioned by far higher mortgage rates than we’ve seen in years.

Toss in the cost of living crisis and for landlords it’s almost a perfect storm, but like all storms this one will also blow over, and while there will undoubtedly be damage and victims, the PRS will survive.

While landlords may justifiably feel that they are vilified in the media, they are no more targets of legislation than the millions of motorists wondering for how long they’ll be able to drive into nearby cities without paying for the right.

Our best advice when selling in a challenging market would be; don’t rush to do anything. Take your time and seek specialist advice, from property managers, your accountant and buy-to-let experts like ourselves.

All of us can help you sort the wheat from the chaff, and in our case, where selling in a challenging market is actually your best option, we can assist you in finding the best way to do so.

Written by Chris Wood, MD & Founder of Portolio

Get in touch on 07812 164 842 or email [email protected]