House to develop

dickyseville

Hi all,

I was lucky enough to have paid my mortgage off a few years ago. My wife and I are now looking for a project where we buy a house, 'do it up' and sell it on for a profit (hopefully). I've not done this before so I'm looking for a few tips.

My son has just left college and is working in an estate agents as an apprentice. He therefore sees houses before they come onto the open market so we may have a chance to snap up a bargain. He's been talking to a property developer who's been giving him some ideas on how to reduce costs etc.

One thing he's said is, to take the mortgage out in my sons name and for us to act as guarantors. Then in a few months go to the banks and say he can lo longer afford the mortgage and switch it into our name before we sell the house. Apparently this would mean we wouldn't have to pay stamp duty.

Is this something anyone has heard of before? Is it legal? What are the ramifications? If it's not legal are there other ways to reduce stamp duty and capital gains costs?

Any help or tips would be much appreciated.

Thanks.

Pixie5740

If you're buying property with the intent of developing it to sell on at a profit then it's commercial lending you need not a residential mortgage and definitely not a guarantor mortgage. Mortgages aren't just switched from one name to another, one mortgage account would need to be closed and a new one in the name(s) of the new borrower(s) opened.

In attempting to avoid SDLT you could be setting yourself up for a larger income tax bill since property developers are supposed to pay income tax on their profits rather than capital gains tax.

Other than watching Homes Under the Hammer a few times, what property developing knowledge and experience have you got? Do you even have the outline of a vague business plan at this stage?

Surrey_EA

dickyseville wrote: »

Hi all,

I was lucky enough to have paid my mortgage off a few years ago. My wife and I are now looking for a project where we buy a house, 'do it up' and sell it on for a profit (hopefully). I've not done this before so I'm looking for a few tips.

It is not as easy as the programmes on C4 make it look!

The people who manage to make a profit are generally the ones who do a lot of the work themselves, and to a decent standard.

dickyseville wrote: »

My son has just left college and is working in an estate agents as an apprentice. He therefore sees houses before they come onto the open market so we may have a chance to snap up a bargain. He's been talking to a property developer who's been giving him some ideas on how to reduce costs etc.

That might be the case, but it's relatively unlikely. How many property owners are going to sell to an employee of the estate agents, before testing the market first to see if they can get a better price? Not many in my experience.

dickyseville wrote: »

One thing he's said is, to take the mortgage out in my sons name and for us to act as guarantors. Then in a few months go to the banks and say he can lo longer afford the mortgage and switch it into our name before we sell the house. Apparently this would mean we wouldn't have to pay stamp duty.

Not heard of this before, I'm sure Kingstreet will be able to advise. However, your son would still have to pay the applicable rate of stamp duty when the property was purchased, so I'm not seeing the advantage to this scenario, even if it were possible.

dickyseville wrote: »

Is this something anyone has heard of before? Is it legal? What are the ramifications? If it's not legal are there other ways to reduce stamp duty and capital gains costs?

Any help or tips would be much appreciated.

Thanks.

It's not as easy to make money out of this as many think. The last 20 years have seen almost uninterrupted house price inflation, and a lot of the money people have made through property has been increases in the market price, rather than as a result of improvement work alone. it would seem we are now in a market where prices are at best static, which means profits will be harder to come by.

davidmcn

dickyseville wrote: »

take the mortgage out in my sons name and for us to act as guarantors. Then in a few months go to the banks and say he can lo longer afford the mortgage and switch it into our name before we sell the house. Apparently this would mean we wouldn't have to pay stamp duty.

What would be the point of switching it into your name?

kingstreet

dickyseville wrote: »

take the mortgage out in my sons name and for us to act as guarantors

Okay. Joint borrower, sole proprietor would mean he would pay normal rate stamp duty and your income could increase his borrowing power.

Then in a few months go to the banks and say he can no longer afford the mortgage and switch it into our name

The banks? He will have a mortgage with a bank, so is the plan to plead hardship to that one? I don't see what this intends to achieve. He will have to prove hardship for the lender to apply its forebearance measures, but that will involve allowing him to pay interest-only for a while before it starts repossession proceedings.

The lender isn't going to be manipulated into giving you the property on the cheap. Not without a formal repossession process.

If a property requires renovation it may not be mortgageable. Is this a slap a bit of magnolia around and hope for a 20% profit job?

As has been pointed out, property developers don't get the luxury of their income being classed as a capital gain. You'll pay income tax, so set up the business properly, get a line of commercial finance and do a proper business plan.

Get decent finance and tax advice as well.

dickyseville

Hi,
Thanks for the advice. Maybe I've misunderstood the purpose of getting the mortgage in my sons name. If it was in his name would this mean we'd have to pay less income tax because he's only on an apprentices wage (i.e. £500 per month). I'm personally dubious if he'd ever be accepted for a mortgage on that wage whether we acted as guarantors or not!

LEJC

Are there any restrictions on someone working at an estate agents purchasing property that they are marketing....I seem to think you need to disclose the fact .....as an apprentice I'm also guessing your son is not earning a large wage....
....and the mortgage advisor,who's interests is he acting in...your sons who is going to struggle to finance a mortgage ...or his own interest in commission on another sale.

it almost seems to me as if there may be a conflict of interest here....
The estate agency should be working for the seller of the property...but in selling something to an employee I wonder if they are achieving the best price for the vendor...or just a quick sale to a connection.

Pixie5740

I don't know who this property developer is that your son's been talking to but he sounds like a chancer. Using your son to reduce tax liability either means that the profits really do belong to your son or that you're evading tax.

Your son will miss out on incentives like the LISA bonus when he eventually comes to buy his own home if he get embroiled in your property developing now.

LEJC

TBH Pixie....I think they all sound like a bunch of chancers filling a young guys head with dreams and speculative stories...

If it was all as easy as the original post made out then we'd all be estate agents with a property developer to advise us.

Hoploz

Oh dear......

eddddy

dickyseville wrote: »

My son has just left college and is working in an estate agents as an apprentice. He therefore sees houses before they come onto the open market so we may have a chance to snap up a bargain.

That sounds like you and your son would be stepping dangerously close to committing a criminal offence.

Here's a details of a husband and wife who got prosecuted for something similar:

Between April 2009 and May 2011, Connells West Bromwich branch partner Thomas Kelly arranged for his wife to buy three repossessed homes being marketed by Connells.

Kelly failed to disclose his personal interest to the sellers, which estate agents are required to do by law.

...

Thomas Kelly was sentenced to six months' imprisonment suspended for 12 months as well as a Community Supervision order for six months, to include 180 hours of unpaid work. Samantha Kelly was sentenced to a six-month supervision order and Butts was sentenced to a conditional discharge for 12 months.

...

At a further hearing at Wolverhampton Crown Court this week, Confiscation Orders totalling £72069.80 were made against Mr and Mrs Kelly under the Proceeds of Crime Act 2002.

Link: https://www.estateagenttoday.co.uk/912-connells-pair-banned-from-being-estate-agents