We continue with the mini-series on property horror stories, this time focusing on property deal sourcers. These cases are genuine, real-life situations based on my own experiences and of people close to me. They could well shock you and put you off, although keep in mind that these are the deals that have gone particularly badly, so they are hopefully some of the the extreme cases. We conclude the episode by looking at some practical ways to protect ourselves when dealing with property deal sourcers, so some good can come out of other people’s bad experiences.
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Transcription of the show
Hello, and welcome to another episode of The Property Voice podcast. My name is Richard Brown and as always, it’s a pleasure to have you join me on the show again today.
We continue with the mini-series on property horror stories, this time focusing on property deal sourcers. These cases are genuine, real-life situations based on my own experiences and of people close to me. They could well shock you and put you off, although keep in mind that these are the deals that have gone particularly badly, so they are hopefully the extreme cases. We conclude the episode by looking at some practical ways to protect ourselves when dealing with property deal sourcers, so some good can come out of other people’s bad experiences.
Let’s dive into these horror stories right now then.
Property Chatter
I regularly see or am presented with potential projects from property sourcers falling under at least the following categories:
- Apparently ‘below market value’ or ‘BMV’ opportunities
- Potentially highly profitable flips
- So-called high yield BTLs
- No or low cash left in BRR projects
- Development & conversion projects with BIG profit potential
- Rent-to-rent deals with next to no cash required
- Serviced accommodation opportunities with over a £1,000 a month cashflow per property
- Portfolios and apartment blocks for sale…off market
- Holiday homes, fractional ownership and other timeshare style opportunities
- Overseas property deals in most of the above categories
Basically, all shapes and sizes and more besides!
Perhaps to put things into a little context, I am probably connected to around 150 or more active property sourcers. Some are solo operators, whilst others are businesses set up for the specific purpose of finding property deals for property investors in larger volume. They can offer a useful service, especially to more hands-off or time-poor property investors and developers. Whilst I do not deal with all those I am connected to, I have probably seen potential projects from many of them and indeed have successfully collaborated with a small number of them on several dozen projects over the years.
When it comes to dealing with property sourcers, I would say that there are probably two major types of issue to look out for;
1) Values, ethics & character; and
2) Commercial matters.
Notice that I placed the non-commercial aspects first…just watch out for those ‘fakers’ that I have spoken about in recent weeks though won’t you! Keep this in mind as we progress and always make sure that the commercial or legal protection backs up the stated values, ethics and character…just to be safe.
Some Property Sourcer Horror Story Case Studies
- Overseas Property Sourcing Triangle
I have property investment and development interests in four different countries and one of the ways to help locate overseas opportunities is by utilising the services of locally-connected property deal sourcers. One such operator that I started a dialogue with was finding bank, developer and vendor financed projects in Spain. High LTV bank and developer finance opportunities were still available in Spain after the clear-out from the Global Financial Crisis.
The Spanish-based sourcer that introduced a 100% bank funded property deal to me failed to disclose that they were one of 3 agents in the chain before the developer / bank owning the property, which also turned out to be 10 years old, again not disclosed. Instead I was told it was a new build development that had been repossessed...see how that was spun there? The Spanish sourcer did know of one connected sourcing agent in the UK and explained that sometimes one sourcer has the client contact whilst the other has the developer contact, so they often team up, which made sense.
However, the Spanish sourcer later claimed that he was not aware of a third sourcer in the chain, who ultimately became problematic to deal with. This third UK-based sourcer had promised the 100% financing, which never seemed to arrive, then they simply left me abandoned on day two of an overseas viewing trip and tried to argue out of returning my reservation fee when I decided to withdraw.
The Spanish-based director of the third sourcer that left me stranded on that second viewing trip day also offered to pay my taxi to the airport without any real explanation for leaving me at the time. However, the managing director of the company simply reneged on the promise to honour this simple commitment to pay for a taxi fare.
But for the fact I had negotiated a return fee clause to be written into the reservation fee agreement, I would literally have been screwed on that as well I expect. Fortunately, due to the way I had negotiated the reservation fee, along with that fact that they know that I have a wide audience reach, they did refund me my c£10,000 reservation fee. However, rather belligerently, they blindly refused to compensate me for the additional travel costs that I had incurred due to them leaving me stranded. Since then, I have literally been subjected to threats, intimidation, false accusation and slapped with a bogus and unsubstantiated invoice for over £18,000 for daring to claim for the refund of the promised €90 taxi fare by the MD of the third sourcer! Would you want to deal with such a bully as this I wonder?
Contrast the way this property sourcer described here operated with a different solo property sourcer that I have dealt with, where there was a similar situation. The HMO properties that I viewed on behalf of a client were in a portfolio. Sadly, they were not as described and to be fair the sourcer did say that he had not seen all of them in the portfolio personally. However, he simply returned the sourcing fee with no quibble whatsoever when the discrepancy in description to the actual condition became apparent. The moral of this story: when it comes to overseas property deals, not all that glistens is gold!
- Leading UK Property Sourcing Company
This was a client case that I assisted with, where unfortunately the deal broke down. Luckily, I had recommended that my client negotiate a return fee clause in their reservation agreement, which fortunately proved to be priceless. However, it still took over 6 months, literally dozens of chasing emails and calls with lots of failed promises before finally agreed return the contractually agreed return fee.
It was only after multiple threats of escalation from the client that I finally contacted their MD personally on behalf of the client...sometimes the weight of an audience of 22,000 property investors has some clout! Finally, the client did receive the return of their fee, which was fully documented and legitimately due. Sadly however, the client never received any apology or explanation from the company for the inexcusable delays, inconvenience and sheer unprofessionalism on their part. Honestly, I doubt that without my intervention that this client would have seen their fee returned in truth.
In fact, I can go further than this as that is precisely what did happen with another separate client of mine with this same property sourcer. He was offered a high yield property in the north-west at a bargain price of £45,000 and a gross yield of 12.4%. Not too shabby hey?
Well, if you want the full breakdown of the numbers on this deal and why all was perhaps not as it seems, then make sure you have a listen to the podcast episode released on 8th August this year under the title ‘Just say no! Some property deals I just would not do…and why not.’
However, putting the numbers aside for now, this is what was contained in the contents of the valuation report instructed by the client:
- Overall opinion – ‘It is advisable that you think carefully before committing to purchase this property’ I guess we could just stop right there couldn’t we?
- Description discrepancy – presented as a 1-bed, when in fact it’s better described as a studio
- Concerns about the overall property condition and the local area affecting its resale potential
- Suspected asbestos and traces of damp reported
- No form of heating was present and indeed was refused by the current tenant!
- Value £40,000 rather than £45,000
The situation here is that this is also a deal introduced by this leading UK property sourcer. The client has probably been misrepresented on a few levels and sought a refund of their deposit. He was placed under some pressure or ‘duress’ to use the correct legal word for it, by one of the property sourcers sales team to accept a slight reduction of £3,000 on the property price and proceed despite the additional problems highlighted by the survey. The pressure tactic used was suggesting that they would lose their sourcing fee and also the developer’s reservation fee if they withdrew. This amounted to several thousands of pounds here. However, he client had a subsequent change of heart and realised it was still a bad deal even with the reduced price…he sought a full return of the fee but the terms and conditions do not allow the fee to be returned and his statement under some pressure that he would still proceed was turned against him also. The result is that the fees refund has been denied by the sourcer and my client has learned a painful and costly lesson as a result.
Contrast this with another national property sourcing company that I have had dealings with, who have had a similar situation but again had no qualms in sticking to their commitments of agreeing certain express conditions when a fee can be returned. In conclusion, not all property sourcing companies are an asset to you!
- UK ‘BMV’ Property Sourcer
This was a case of choosing to remain silent on the part of the sourcer, to ensure they complete on a sale and get paid, despite a potential conflict of interest identified to them separately by both the buyer and the seller.
It turned out that the vendor told the property sourcer that they would only agree to sell for the price agreed on condition that the current tenant stays. However, due to a tight timescale, I had insisted that notice be served on the tenant by the existing vendor and landlord, as my intention was to flip on the property rather than retain it. However, neither message was relayed to the other party by the property sourcer sat in the middle, resulting in a very delicate situation to be handled with the tenant when they explained that they had been promised in writing by the vendor that they could stay on in their ‘forever home’.
I had later managed to speak with the vendor / landlord and tenant in person to verify the info and what was shared with them. When I confronted these facts to the sourcer, I was simply told that I could legitimately serve notice to the tenant myself. Whilst being potentially valid legally is not valid ethically, especially when the clear conflicting intentions of the parties were known and explained in advance. I have since built a very positive relationship with the tenant and am in the process of refinancing this property to retain in my portfolio at a decent ROI. However, the change in strategy from flip to BRR has meant that I have had to leave a lot more cash tied up into this project than I had planned. So, I did not lose money, but I have lost some momentum as a result of me wishing to honour the pledge made to the tenant, who in truth needed a bit of a helping hand after some tough life experiences too.
Again, contrast this with an award-winning property sourcing and training company, who maintain that everything they do must comply with all legal requirements and that full disclosures must be made between the parties involved. Remember that property sourcing people and companies are sales people that get paid when we proceed on one of their deals.
- IFA & Overseas Rogue Property Sourcer
Returning overseas for the final case study today. This was quite a few years ago now and I used to have an independent financial advisor of IFA that liked to offer shall we say some ‘alternative investments’. These included palm tree plantations, car parking spaces and some overseas property deals too.
I was drawn to a no-money-down deal with a Spanish property where a bank had repossessed a property and were prepared to offer 100% finance on it apparently.
To cut a long story short, the local sourcer operating in Spain introduced by the IFA collected around £1,500 in fees from at least 30 different investors, usually introduced by people like my IFA. That was at least £45,000 and you probably know what is coming don’t you…yes, he disappeared with the fees never to be heard of again! The last I heard, the UK police were pursuing him but, in all honesty, with each investor owed around £1,500, I doubt whether anything would have come of it and I was not contacted to provide any form of witness statement, which suggests he got away with it.
I was fortunate that the IFA concerned accepted responsibility for the lost fee and so agreed to introduced me into another project where he would cover the fees instead. It worked out OK in the end and I still own this replacement property today, which has risen in value significantly over time. However, I could just as easily have lost my fees and in the current climate, I am seeing fees for similar types of overseas investment amounting to more like £15,000 not £1,500, so the stakes were a lot lower with my deal than the equivalent today. The moral of the story here is two-fold: if you are not dealing directly with the vendor or the developer, then you are at greater risk of being scammed and; an IFA is a salesman at heart too…keep that in mind.
Lessons learned and steps to take to help protect ourselves
- Again, always do your research and due diligence on people you plan to work with. Google through several pages on the company and their directors. Ideally get independent referrals, recommendations and testimonials from their clients to help back up the sizzle of the glossies.
- Talk about how you like to do business, your values and your ethics and get the property sourcer to do likewise. Ask if they are ‘direct to developer /vendor’ and if not establish who else is involved, what their role is, how they get paid and who you will legally contract with. If you get a wishy-washy response to basic issues like acting with integrity or who is involved, then run for the hills!
- Remember that in the event of any dispute, the only safe way to protect yourself is to either avoid paying fees in advance, pay them into escrow or to have a safe and enforceable fee return clause inserted into the agreement. Don’t work with those that refuse to work this way.
- ‘Caveat Emptor’ – let the buyer beware! Whilst property deal sourcers, agents, brokers and intermediaries can offer a valuable service, there is a clear incentive for them to act in ways that can benefit themselves at your cost if you are not careful. So, inspect the property, do your own checks on the numbers presented and the property, get professional representation, set and get clear expectations and have written agreements with adequate protection to you should things go wrong.
There are some good property sourcers out there and I have had a good relationship with some over the years…but clearly there are some bad, or even some bloody ugly ones as well! I have my little black book should you want to cross-check against it, let’s just leave it at that…
OK, that’s me done for this week. The show notes can be found over at www.thepropertyvoice.net. Or, if you want to talk about anything from today’s show, or just talk property investing more generally, email me at podcast@thepropertyvoice.net, I would be happy to hear from you!
Once again, all I want to say is thank you very much for listening once again this week and until next time on The Property Voice Podcast…it’s ciao-ciao.