What's the worst that could happen?!

sliding_doors

I've spent the last two evenings reading the highly vocal opinions on this forum (and elsewhere) to advice my mother whose thinking of putting a large amount of her recent inheritance into property.

She recently got a large lump sum from some distant Uncle as apparently its a Scottish tradition to leave money to nieces. She's never had much money before but she did buy a house in 1986 which is now worth a lot more and so in her experience she feels that 'house prices only go up'.

The basic plan is to take out an interest-only mortgage and then rent it to my brother who will be able to cover most of the interest. He has been working for few years in the poorly paid theatre industry and would very much like some cheaper, decent accomodation (at least it keeps him off my sofa bed!). After a weekend looking, they have found a studio in a desirable area of London for £220,000 and have put in an offer of £200,000 which may well be accepted. (My mum can put down a £100,000 deposit)

After doing a little bit of research, I have been advising that as there is no massive urgency to invest now (other studios will come along), we should wait until to the end of the year / beginning of January to get a clearer idea of what is happening (see what's in the budget and whether interests rates drop etc).

However, the response of my family has been: if we are planning to keep the property for 10 years or so and take out a fixed rate mortgage then the 'risk' is limited. In fact the worst that could happen is that we 'could' be able to buy similar properties for a lower price in a few months time. They seem happy to risk paying the higher price to have it now as in the long run they will not make a loss. However, my question is whether there are any other 'risks' which I am missing? (sorry for such a basic post)

chewmylegoff

yeah. the risk that in 10 years time the flat is worth less than if the money had just been left in the bank and earned compound interest.

also is your brother going to want to live in a studio flat for the next 10 years? doesn't sound likely to me.

can't believe that in the current climate someone would buy a place after one weekend of looking. not being rude but that's bordering on ridiculous for something that costs £200k, especially since there is absolutely no rush in a falling market.

lynzpower

Im sorry, I know you are new but heavens, did you/ family not read the papers- 200k for a studio flat is crazy in this climate , unloess you are really talking zone 1. - you can get 2 beds upwards for that...;) . this is ultimately the risk, that no one will want to buy it as there is something bigger & better round the corner for the same or -ever-so-sligfhtly- more. The thing is, as we have seen in this downturn , studio flats are the last thing that will sell, if you can get something bigger for the same money.

I know of one person ( mate of a mate) who has a studio, refused to accept it was worth less than the EA valued it at 8 months ago when a slightly under AP offer came in. Now she cant sell it cos there are 2 beds for cheaper. this IS the risk. She is deperate to sel to move into something bigger, but cannot. Mutual freind says she feels v trapped.

The worst that can happen is that you ar lumberered with a property that you can neither sell nor let. What if this chap wants erm a GF/ bf. Most Studio flats are really only ok for pied a terres im my view, or for those who dont have much stuff.

lynzpower

Also, do you think there is any chance that the stage might take him overseas?!?! I know of quite a few in the industry ( not closely, they are clients of a co I work for) and they seem to go off for 6 motnhs touring here there and everywhere, Europe/ USA, moving the produiction to Bham- up to scotland for a few months etc.Its a very fluid industry?

sliding_doors

Thanks for the comments. I agree with chewmylegoff that a weekend looking is more than a hasty decision (I think it might have been two weekends though but certainly only 4/5 properties!).

In response to my brother moving (probably in about 5 years): Ive only just moved down here and don't know London very well but their argument is that Wimbledon Village (the location of the property) is a 'highly desirable area' and they will always be able to rent to some young professional as its in such a good location. So even if my brother does leave etc. renting will not be a problem and hopefully at a price that will more than cover the interest.

Added to that apparently Wimbledon Village is so desirable that it will be shielded from property decreases and it will always sell.

I know how all this sounds and although I don't know much about the area on a general level I think investing in property before the end of the year is just too risky. However, pursuading my mum to wait is much more difficult and I need the facts to back up my arguments.

Any ideas how to pursuade her? (She has already made an offer and is waiting!) :mad:

jscalow

I can see your dilemma and glad that you are seeking advice. Why not ring the same estate agent that is making the sale and tell them you have a studio flat in Wimbledon village that you want to sell for £200k do they think they could get a quick sale or will the market dictate a discount. By doing this the EA may give you an truer evaluation of the present local market.
Good luck and I hope everything works out well!

MrMonkey

If your mum has £100k cash, get her to put it into a savings account and look to buy in 12-18 months time. She will have more money, and every indication is that the market will have fallen more by then. She'll possibly be able to buy a 2-bedroom flat or house for the same price that she is budgeting for now. Your brother can surely rent for the time being, as I doubt a house-share is going to cost any more than the interest on a £100k mortgage.

I would very strongly suggest thinking about whether an interest-only mortgage is the right product at this point in time. As the loan amount is not paid off with an IO mortgage, a falling asset value will seriously impact on her asset value. A 20% drop from this point (which is quite a moderate forecast) based on a £200k purchase price would see a loss of £40k of her £100k investment. This does not even go into the difficulties of selling a studio flat in a falling market or the possibility of renovation and repair work being needed.

To reiterate, every economic indicator points to now being a very bad time to buy, but a very good time to save for a deposit. Even if you do decide to buy, bear in mind that a quick scout of the maket is not going to be sufficient to find the best property. Take a few months to look around, learn about the area, read a bit about the economics underpinning the housing market, and weigh up other options. Using phrases such as "...Wimbledon Village is so desirable that it will be shielded from property decreases and it will always sell..." displays a lack of research (it sounds like estate agent spiel) and understanding of the dangers in the housing market at present.

beecher

Has your mum managed to get a mortgage set up? I thought all lenders wanted evidence of a repayment vehicle - how is the £100,000 going to be paid?

Sounds like a bad idea all round to me, particularly if your brother isn't going to be able to afford all of the interest. Your mum would be better off putting the money in the bank, and helping him out with the rent for a studio as this doesn't sound like an investment to me at all.

chewmylegoff

sliding_doors wrote: »

Added to that apparently Wimbledon Village is so desirable that it will be shielded from property decreases and it will always sell.

oh dear. i suggest choroforming them and locking them in a basement for six months.

penguine

It's very generous of your mum to want to buy a property for your brother to live in, but as she hasn't done her research regarding the property market I would suggest she's wasting the inheritance her uncle probably saved for years to be able to leave to her. She's only getting a 10% discount off the asking price and prices have fallen 11.5% over the past year. And I think the asking price was inflated anyway, that seems outrageous for a studio. If it was very central perhaps, but not in Wimbledon.

Perhaps you could get an idea of how much similar properties were selling for in that area in 2000/2001 and tell her prices are likely to fall back to that point (or further). This is just the beginning of a house price crash, and in previous crashes once they got going prices fell for several years before stabilising. She's got nothing to lose by waiting for a few years when she'll be able to buy a property that would be a much better long term investment for her.

PS Given today's stamp duty announcement if she does want to go ahead anyway she should drop her offer to £175k!

Jonbvn

sliding_doors wrote: »

Added to that apparently Wimbledon Village is so desirable that it will be shielded from property decreases and it will always sell.

Sorry but this statement is simply untrue. I am guessing that someone is just repeating BS from the estate agent. Please tell you mother not to invest on such flimsy information.

Finally, I would recommend you wait until the full effects of the recent change in stamp duty are incorporated into the market.