Property Sourcing Companies - Should You Use One?
Anthony Ayton, Director of Repolist, shares his views on using property sourcing companies. Do they hold the key to giving investors BMV opportunities in the best areas or are they a waste of money? You decide.
In the past eight years there have been numerous scandals with property sourcing companies. At the mild end of the scale are the companies that offer property with a ‘discount’ that can be considered deluded at best. At the worst end, we have seen companies that commit outright fraud by either taking upfront reservation or admin fees with no real intention of completing deals for clients, or selling properties and taking fees where there is no mandate for sale.
I have met and spoken to hundreds if not thousands of property investors over the last 12 years. Of those that have an investment property they regret buying, they almost always bought this property from a sourcer or intermediary (I say this as a former sourcer). Don't get me wrong, there are a few reputable operators out there. But generally they offer the sort of service that either promises high rental yields in poorer areas, or help investors add value to a property with well thought out refurbishment projects. No credible company would, in my opinion, make a public claim of being able to offer 20-30% BMV in the current climate.
If in 2005 you had gone into an estate agent with a bag of money and only the word ‘yes’ in your vocabulary, you’d be sitting pretty on a pile of equity right now. If you had spent that money with a property sourcer at the time, chances are your new build two-bedroom flat in Sheffield’s regeneration area is still way offside in terms of equity.
In 2008 there were 750,000 properties for sale on the UK market, prices were falling in many areas and it was difficult to secure mortgage finance. However, it was easy to find a property perhaps at auction selling for 70% of the price of a similar property sold by an estate agent six months earlier. I would argue that this was the market value at the time the deal was struck, as there were not many keen buyers or willing lenders at the time.
It is entirely different to today’s market. There are less than 500,000 UK properties for sale and the market is fairly hot. Where Repolist is based in Brighton, estate agents turn their noses up at non-cash buyers and receive multiple offers on almost all properties new to the market. The idea that a significant number of vendors have attractive properties for sale at a 30% discount... it’s magic beans, nonsense.
Nowadays, some sourcing companies are offering properties with 15-17% discounts. According to the Royal Institute of Chartered Surveyors, surveyors have a 20% margin for error when valuing properties. So how does an unqualified sourcer offer a discount of 15% in the context of a 20% error margin on a property he may not have visited? On properties worth less than £100k, it’s even more difficult: things like central heating and new windows can account for 2-4% of the property value. Sourcing fees often swallow up any perceived savings.
If you make 200 cash offers on properties at 20% below the asking price in seven days you may personally get a BMV deal, but trust me, you'll have earned it. If you think someone is going to give you £30-70k of genuinely provable equity for £5-10k? Magic beans. Why would a sourcer give you that property for such a discounted price? It’s the question every property investor should ask themselves before even thinking about using a property sourcer.