FOOL'S EYE VIEW
Beware The Property Game

By Jane Mack (TMFJane)
December 9, 2003

Some friends of mine are contemplating entering into the Property Game. You know the sort of thing – they want to use the equity in their home as a deposit to buy a run-down house which they'll do up in order to sell for a profit. Everyone's doing it, apparently, so why can't they?

But, you have to remember the proverb that 'too many cooks spoil the broth'. If everyone seems to be piling in, then maybe it's not the time to join them.

Like many people - me included – my friends are addicted to the numerous property shows on the telly at the moment. They've watched so many of them that they think they'd be far better at doing up houses than most of the plonkers we've seen gracing our television screens in recent times. Again, you know the sort – the ones who clearly pass through the Stupidity Department before they arrive on Planet Earth and come a cropper because they haven't thought things through properly.

Frankly, I'm not sure whether 'car-crash' or 'comedy' is the correct term to use for some of these programmes but, mostly, I'll opt for the latter considering the apparent naivety of some of the people who appear in them. Of course, it wouldn't make good television if everything went smoothly so we may only be seeing the worst of the bunch.

At any rate, my friends think they can still cash in on the 'upward' property trend. They live in the North in a university town and house prices haven't shown any signs of slowing down there yet. He's also experienced enough at DIY to re-wire and re-plumb a house himself, as well as sloshing a coat of paint throughout - and she's earning enough for them to manage the household bills while he does it. Yes, he's even contemplating giving up his job so he can do it full-time...

He reckons that by doing up three or four (first-time-buyer-type) houses a year (in sequence), he'll get a better income than he currently does from looking after children with learning difficulties. Much as he loves his job it just doesn't pay enough to fund his (and his wife's) old age – hence his current plan to go into property development.

The trouble is he and his wife were asking me some very basic questions at my kitchen table on Saturday night - the sort of questions that they should know the answers to before embarking on such a project. For example, he asked:

"If I pretend to leave my wife and sign over the family home to her, can I go out and buy another property in my own name and call that my 'Principal Private Residence' (for tax purposes) while I do it up so that I don't have to pay Capital Gains Tax on any profits we make?"

Erm, I said...

It took me two hours to tell him what little I know about that sort of tax stuff, two minutes to persuade him to do considerable more research before giving up his job, and two seconds to point out that the Inland Revenue isn't that gullible!

As it happens a professional property developer is working on a house just down the road from me and, in return from the tips he gave me earlier today, I'll mention the book he's written on the subject (Renovation Secrets).

First of all, he says, you have to remember that you're taking a gamble, particularly if you're not going to be doing much of the renovation work yourself. If you have to employ a builder, the profits could easily be eaten up during the work. It's why most professional property developers tend to be builders – the money stays in their own pockets.

He points out that the bank is also taking a gamble. At some point during the renovation the property is going to be in a worse condition than it was when you bought it (for example, when you've demolished the kitchen units and the bathroom suite and haven't replaced them yet). If the bank has lent you, say, 90% of the value of the house (Loan to Value), they're at risk of not being able to get their money back if, at that stage, you can't afford to finish the job. He says it's happened often enough for banks to be wary of lending to amateurs these days unless they have a sizeable deposit.

He also mentioned the importance of considering what he called the 'Profit Pool'. The original vendor wants to make a profit, as does the builder and his workmen, the estate agent, the conveyancer and the Inland Revenue. After taking into account all of this, and your own renovation and selling costs, will there be enough profit left over for you after everyone else has taken their share. The gap between the buying price and the selling price needs to be wide enough to ensure the project is truly worthwhile.

And he said, it's hard work. You might want to be the Michael Schumacher of the racing world but you're far more likely to be an also-ran.

As my friends at the top of the story illustrate, you need to research your plans and your budget thoroughly. I'm not saying it can't be done but there's a lot more to just finding the right property, doing it up and selling it on. It's also about the real costs it would entail to acquire it, the hard, physical work that it would involve to renovate, the time you'd have to give up, the tax you'd have to pay on the profits after offsetting the costs, the expense of selling it on...

Blind faith that an idea will work isn't enough. Especially when so many others have already been there, done that – and sometimes failed. Many of the people we see in the current rash of property programmes have scraped a profit because house prices have been going up anyway.            

And it's anyone's guess as to whether that's going to continue.

For starters, check out our Tax Centre