Now clearly, there are some circumstances in which you'd need to sell - the classic being that you need a lot of cash for something else quickly, but what if you don't need the cash?

Obviously, if you believe that the market will continue to rise, then it makes sense to hold.

The question is, really what do you do if you believe the market will decline?

One response is the one I'd always intended when I started out as a landlord - hold through the slump, don't worry too much. It'll all sort itself out.

Sure enough, even the slump of 1989-94 did so. Even those who bought at the peak in 1989 are still looking at properties worth far more than they were at that peak.

The advantages of holding

There are some big advantages of holding. The big two are costs and tax.

Buying or selling a property is expensive. If you're selling, then you're normally looking at about 1% of the price as estate agents fees (if you're paying more, improve your negotiation technique, by the way!)… plus legal fees, and often the cost of carrying an empty property for a month or two (voids!)

As an aside - one handy tip - see whether your tenant would be interested in buying the property - if he or she is, then you can save the costs of voids, and estate agents fees, and your tenant will probably take it "as it is" thus saving you the costs of any refurb work you'd do to put it in top condition.

Selling a property also triggers tax - at least, it does if the property is worth more than you originally paid for it. (And unless you got caught buying off-plan in the last few years, it probably is.)

Capital gains tax starts at 40 per cent of the gain, but can come downwards. Obviously, you'll need to pay it one day (if you sell), but it's a tax that can be pushed 50 years into the future by a strategy of "hold for life" (touch wood.)

Aside: if you are selling, and want to work out the minimum tax you need to buy, have a look at the Tax Cafe product I used. For more info, click here

The advantages of selling

If you really, really, really believe that the market is going to crash, then have a look at the real costs.

On the one hand, you have the costs of selling. On the other you have the amount that the property might go down.

Now, the old mantra, buy low, sell high, is all very well, but property isn't liquid.

That means that if you sell now, you won't be able to buy that property back in a year's time.

[More on liquidity in an article I wrote in October - the article is called "Below Market Value - Part I" and can be found here]

So, if you have a property that is particularly good for the area in terms of rentability, but wouldn't particularly sell for a premium, then you may be setting up problems by selling.

What are these properties? Typically ones which you've refurbished to a high standard in "invisible" things aimed at reducing your long-term maintenance. No tenant cares that you've put in longer- lasting cabinet handles or will pay more, but the fact you don't have to replace them every 5 years can help keep your long term costs down, since the cost of replacement is pretty much all in the labour, not the small difference in handle price.

But the advantage is clear if you believe that the market is going to go down 20% or more. In those circumstances, it would make sense to sell ...

... and buy back at the bottom ...

... of course, your belief that the market's going to go down doesn't make it true

A key point about a crash

One thing that many people miss about crashes (not just in property, but in all types of assets) is how crashes work.

The reason that estate agents hate crashes so much isn't that they get smaller commissions - it's that nothing moves.

Take my local estate agency - small office, two people there, typically selling 3-4 properties a week. When the 1989 crashed happened, then that figure went down to about 1 a month.

The reason that property crashed according to the figures wasn't that everyone decided to sell for 20% less…. it was that one person sold for 20% less, and everyone else stayed put.

It's only at the end of a crash that people start getting panicky, and sell out - at the end of a crash, when large numbers of properties start selling, that's often a sign that the end is in sight, and it's time to start buying again (if you can!)

The 1989 crash took almost 5 years - this isn't like a stock market crash where markets can go down 40% in a day.

But during the so-called 1989 crash, it was actually quite hard to pick up bargains… because most vendors wouldn't accept lower prices - they'd just stay still.

Of course, the techniques for finding motivated vendors have improved, but just because it's easier to find the ones that are there, there's no magic way of making more spring into life

So - Should you sell at the moment ?

Hard to say, really. Some people are selling - one person I know is selling his OWN HOUSE and moving into rented accomodation because he believes the market in his area will crash hard towards the end of 2008.

And that's the key point - ignore averages - it's the market in his area that's important.

I'd look at one simple factor - how much has the market gone UP in 2007. The old saying, the bigger they are, the harder they fall is true - if the market round me had gone up 15% of more last year, I'd be nervous. Fortunately, around me, last year was pretty flat.

Tell me what you think

This month, I'm going to be posting this article onto my blog straightaway.

www.markharrison.wordpress.com

If you think I've got it wrong, or missed something important - let me know! Part of the reason I write this newsletter is for the feedback - which helps ME learn. I think it's time that the feedback went public to benefit everyone, not just say in my inbox on Google Mail ]]>http://www.yourpropertyexpert.com/articles.php?ArticleName=To+sell+or+not+to+sell%3F Tue, 22 Jan 2008 00:00:00 GMT What is Mortgage Securitisation, and why does it matter? content:encoded xmlns:content="http://purl.org/rss/1.0/modules/content/">One of the industry buzzwords being thrown around at the moment is mortgage securitisation. This is, it would appear, being blamed for everything from the collapse of Northern Rock to the decline of the NHS.

So, what is Mortgage Securitisation anyway?

Time for another history lesson.

Once upon a time, there were things called Building Societies. Building societies took in money from those who had it (called depositors) and loaned money to those who 1: needed it and 2: could convince the building society that they'd be able to pay it back (called borrowers.)

They would pay interest (at a low rate) to depositors, and charge interest (at a higher rate) to borrowers. The difference was used for three things:

• To pay the running costs of the building society (rent, heating, wages and salaries)
• To take into account the fact that some people wouldn't pay the money back
• To pay out even more to the depositors, because it was they who owned the building society

There were other places from which it was possible to borrow money, including family, banks, and mob bosses.

The Building Societies, however, had some huge advantages over these:

• - They had a lot more money than most families. While you might borrow a few quid from your mum to nip down the shops, most mothers didn't have enough cash to lend each of their children enough to buy a house. The building societies did have enough money to do this, and hence far more people were, through borrowing, able to buy their own homes rather than rent.
• They had rather less aggressive collection policies than mob bosses. At the worst, they'd take your furniture and your house back, and 99 times out of 100, they'd bother to ask permission from the courts to do so.
• They charged lower interest rates for mortgages than banks did.

Then, about 10 years ago, this all changed. Most of largest building societies, and many of the smaller ones, decided that they'd be better off as banks. As banks, they'd have shareholders, and a bunch of owners who were different from the depositors. They managed to raise a lot of money by selling shares (and gave away some shares to the depositors as a sweetener.)

Once they were banks, there were more things they could choose to do (the laws are tighter in some respects for building societies), and they started getting creative.

The first thing they could do was borrow money (from people who weren't depositors) in order to issue more loans. So, a bank wants to lend you £150,000 for your new Buy To Let, they don't need to worry about getting 100 new customers, each with £1,500 on deposit, in order to cover that.

What some of them started doing was lending out at a Buy To Let rate, say, 6.5%, and assume that they'd be able to borrow the money on the open markets at a lower rate, say, 5.5% - and that the 1% difference would be enough to cover their costs and make a profit. There's a rate called LIBOR, which is broadly the rate at which banks will lend money to each other.

This approach worked fine with customers who wanted floating rate mortgages- indeed, lenders tried to get customers to accept mortgages tied to LIBOR, so if the rate THEY had to pay went up, customers would pay them more. It wasn't perfect, because LIBOR changes all the time, but mortgage customers ended up having their interest calculated monthly, so if the rate went up at the start of the month, the bank might have to carry the extra cost until the end of the month. (Of course, if the rate went down, the bank got the benefit straight away, but customers didn't see the reduction.)

There was a problem with this, though- many customers wanted fixed-rate mortgages - so the banks got more creative. Some took the risk, and hoped that they could forecast the changes in interest rates well enough over a medium-term period (2-3 years) that they could peg their fixed rates at a level that would make them money.

Others decided to hedge that risk, basically by buying what was effectively an insurance policy. This insurance policy (called a swaption) was a deal in which they would pay a small amount, and if interest rates moved heavily in a certain period, they'd get a bigger amount back.

However, even this still left one big risk- what if customers didn't pay their mortgages. Now, up to a certain point, the cost of this is already build in- you and I pay slightly higher rates, effectively to cover the bank against the possibility that our neighbours won't pay up. (And, of course, the bank has the aforementioned right to ask the courts to take our houses off us if we don't pay up.)

What the banks then worked out was that the skills of selling people mortgages, processing mortgages and taking the risk that some people won't pay were fundamentally quite different.

Some decided to outsource the sales process, and offered commissions to independent financial advisers would would sell their products. Others kept sales in-house. Many did both.

Some decided to outsource their processing departments, either to India, or to packaging companies who'd do all the paperwork handling (many of whom also ended up in India.)

Some decided to outsource the 'taking the risk', and this is what securitisation does:

Say a lender has 1,000 mortgages owed to it. Each of these mortgages is for (on average) £150,000. Some are less, some are more- but the bottom line is that overall, the customers owe the mortgage company £150 million quid.

What the mortgage company would then typically do was register a NEW company. This new company would be sold to external investors - and would BUY the mortgages from the original lender. Typically, that meant that the lender would carry on doing the administration (and, of course, charging the new company a fee for doing so), but the income each month from the different customers would belong to the NEW company, not the original lender.

How much did the new company pay for these mortgages? Typically a bit more than what was owed.

The original lender got several benefits from doing this:

• They made a small (relatively) profit up-front
• They got an ongoing contract to do the processing
• They got someone else to take on the risk of borrowers not paying
• Oh, and as a more technical matter, because the mortgages weren't on THEIR books, they needed to keep less cash around to comply with the capital adequacy rules for lenders.

The new investors got some benefits too- they got to be mortgage lenders without all the administrative overhead of setting up processing departments, and sales departments, and so on. Historically, most people ended up paying their mortgages, so it was fairly easy to predict how much money they'd make. (And some people, say pension funds who know how much they're going to have to pay out each year, like PREDICTABILITY in their income very much indeed.)

The new investors also had a liquid asset- they could sell their shares in this new company rather more quickly than they could ask for repayment of a mortgage if they needed to get their cash back out.

Why is this called securitisation- because securities are (in the US) another name for shares - and the investors were buying shares in the new companies.

OK, that's what securitisation is- so, what does it mean for us property investors?

By 2000, about 6% of UK mortgages were securitised in this way - and the numbers kept on going up.

However, all is not well - the week before last, Bradford and Bingley sold off a bunch of mortgages in this way- approximately £4 billion pounds worth- but rather than making a small profit, they made a loss of somewhere between £15m and £40m in the process (depending on who you ask, and how you count.) So far this year, B&B have securitised about £9 billion.

Northern Rock, on the other hand, have securitised almost £70 billion of mortgages so far this year.

At the next level down, we have Abbey and HBOS, who have done about £50 billion each - but in the context of MUCH bigger financial groups.

In fourth place, though, there's a massive drop to GMAC at about £15 billion.

What's changed is that the mortgage lenders (lke B&B) are finding it much harder to do this- so there's bound to be a credit squeeze.

On the bright side, though, Northern Rock was the big one- there isn't another such mortgage lender about to have the same problems (or rather, about to have problems on anything like the same scale.) Even if Abbey or HBOS had problems, they'd be a smaller drop in their overall accounts - and let's be honest, if, for example, Clydesdale (who have done about £2bn this year) had problems, that wouldn't have the same impact as NR.

Note:

I describe Swaptions as being like insurance policies - this is that they are financial instruments with an upfront payment in one direction, and a larger payment in the opposite direction ONLY if certain events take place. I am not intending to imply that Swaptions are covered by the same consumer regulation as insurance policies.

You need to provide a HIP if:

• You are MARKETING a property AND
• That property is in England or Wales AND
• That property has three or more bedrooms

UPDATE: 23 November 2007 - The Housing Minister, Yvette Cooper, has announced that HIPs will apply to ALL properties put onto the market after 14th December.

The intention is that, once enough inspectors are recruited, they will be rolled out to all properties, presumably with two-bed places next. The government are saying that they will need about 3,000 inspectors total, but as well as the absolute number, will need to make sure that they are spread evenly across England and Wales.

The key word is MARKETING. A HIP is required if a property is advertised. This is, for most sellers, through an estate agent, but does not have to be. Under the terms of the Act, even a FOR SALE sign in the window is enough to require a HIP.

What this means, of course, is that, from a sellers perspective, if they are responding to a WE WANT YOUR PROPERTY flyer or ad, then it could be argued that they are not marketing their property. So a HIP is not required. For someone on the verge of bankrupcty, this could be another good reason driving them away from Estate Agents, into the hands of direct buyers. So those of us who use direct sourcing techniques are finding that the playing field is being tilted in our favour by this legislation!

So in fact, for the investor, they are more of an issue when (if) we sell than when we buy.

The Packs are somewhat watered down compared to the original proposals. They MUST contain:

• An Energy Performance Certificate
• A sale statement
• Standard searches
• Evidence of Title
• For leasehold properties, lease-related information
• An Index showing what's included and what's being looked for!

To take those one by one:

1: Energy Performance Certificate:

If you have bought a new appliance recently, you will have seen something similar. A little graph with A in Green at the top, down to G in red at the bottom, with the As using less energy.

The HIP versions are a little more sophisticated - they have two scales, one for energy efficiency (which tells you how much the house / flat will cost to run), and one for enivornmental impact.

In addition, each scale has two entries - one for the property as it is now, and one for what the property could be if it were
improved.

Whether people will actually be put off buying properties because of their energy efficiency has yet to be seen. The Government are, obviously, hoping that make the information so in-your-face will encourage people to make improvements now.

Of course, it is not clear whether it will actually be possible to make these improvements, since one of the suggested improvements on the Government website is covering 25 per cent of the roof with solar panels… which may require approval… which may not be forthcoming in some areas, but heh!

2: A sale statement

This is a fairly basic document, showing the address, whether it free- lease- or common-hold, whether it is registered or
unregistered (anything sold in the last few years will have been registered, but this only became mandatory in the last ten years), whether the property will be sold with vacant possession, and who is selling it.

3: Standard Searches

These must include the charges certificate from the Local Authority, as well as any other records like planning decisions or road-building schemes that the Local Authority provides.

This part of the HIP must also include information (in a particular format) about who provides drainage and water to the property. The local water company (or both, if, like me, you have a different company responsible for your water and your drains) can provide this.

4: Evidence of Title

Where a property is registered with the Land Registry, this must be the most recent copies of the Property Register, the Propietorship Regsiter, the Charges Register (if there is one), and an official copy of the title plan. The Land Registry can supply all this.

Where the property is not registered, then other documents will need to be provided, including a Certificate of Official Search from the Land Registry.

5: The Index

... which is, fairly obviously, an Index of what is included.

If any of the required documents are missing, the Index has to give a reason why, and show what steps are being taken to find them.

Optional Documents

In addition to the compulsory documents above, there are some optional ones, including the much-discussed Home Condition Report.

The HCR is the piece that was going to be mandatory, and basically amounted to a structural survey. As you might imagine, this was not going to be cheap, and only made sense if you could then assume that mortgage companies would accept it, and not require a separate survey of their own. A huge number of mortgage companies made it clear that they were not prepared to do this, and would still require a survey from a valuer on THEIR panel… and hence, summer last year, there was quite a change to the HIP regulations.

Considering that the HCRs were the biggest part of the HIPs, this led to all kinds of HIP Replacement puns, which you can work through for yourselves.

Other optional documents included things like lists of which contents would be included, details of rights of way, flood risk documents, mining risk documents, and so on.

In fact, all the documents that mortgage lenders insist on anyway.

Overall, the HIPs felt like a good idea - the original point was to protect potential buyers in three ways:

1. By making sure that they did not get any nasty surprises AFTER they had agreed, and once the BUYERS had started spending money.
2. By stopping people joke-marketing their properties, with no real intention of selling, and wasting everyones time.
3. By meaning that the key documents only had to be paid for once, by the seller, rather than potentially several times by competing buyers.

Looking back on them now, they feel like a relatively pragmatic set of documents. I remain to be convinced that the Government mandating the format of some documents is inherently better than getting the industry professionals to, but that is a relatively minor point.

Overall, though, the key point is still about MARKETING properties.

If a vendor is responding directly to you, and that vendor cannot afford a HIP themselves, then this is another benefit you can offer them.

However, I cannot help but feel that some investors will use this as a tool to exploit the most disadvantaged sellers into accepting even less. Such appears to be the way of well-meaning legislation.

We have all, by now, seen the pictures of savers queuing up outside of Northern Rock branches, trying to get their savings out. We have also seen the spectacle of senior politicians making headline grabbing promises that, on closer analysis, seem to mean very little.

This article is in two parts - firstly a quick review of what happened. Secondly, some opinions about what it might mean for property investors.

Right, time for a quick bit of background.

A long time ago (in a galaxy far, far, away), there were these things called Building Societies. People paid into deposit accounts, and earnt some interest. Then, the Building Societies made loans to other people, and charged them a higher rate of interest. The difference paid for the running costs of the Building Societies, and any left over went back to the people with deposit accounts in the form of extra payments.

Then the Building Societies figured that, if they were banks, they could give the any left over to shareholders instead of savers. Oh, and by the way, have some extra options in the kinds of transactions they were allowed to do. A set of deals were stuck whereby savers got some so-called free shares, and a lot more got sold to the general public and other financial institutions. (The shares were not really free, in the sense that the savers had owned the building societies anyway, just in a slightly different way.)

Nowadays, some of these make loads of loans, but rather than financing them out of savers money, they in turn borrow the money from other banks.

For about ten years, this worked.

In the wake of the US market crash, however, the banks with loads of cash have gotten cold feet about lending to each other, and jacked up the rates at which they will do so… or just plain stopped.

This is when the Central Banks, in our case the BoE have to step is as what is called the Lender of Last Resort. The BoE does this lending all the time on an overnight basis, and again, nothing too unusual is seen.

Where the Northern Rock deal is odd is that the BoE have agreed to lend a LOT of money, on a rather longer basis… the day after they said they would not. I now understand that the Treasury and the FSA had been leaning on them heavily, and reminding them that while they are bankers, they are also public servants. (Crikey, I feel like a journalist now - I have sources!)

Northern Rock got into this problem because, compared to many other lenders, they borrow rather MORE on the money markets, and fund their loans far less just from savers money.

Under the circumstances, the savers have been queuing up to get their money out in cash, and the shareholders have seen their Northern Rock shares worth about a third less than they were yesterday.

So, investing in the Northern Rock turned out not to be that great a thing to do.

Investing in is, of course, different from saving with the bank.

The Government announced a bailout that, on closer inspection did not promise TOO much.

In a bank (like Northern Rock), then there are savers, who put money into individual accounts. These people were already partially covered by the Financial Services Compensation Scheme. This would cover up to £31,700 - being all of the first £2000, plus 90% of the next £33,000 - lost by any individual.

What the Government have done is said that savers are fully protected. Though it feels a bit of an empty promise, since everyone is in agreement that the Northern Rock has plenty enough assets to cover the payouts if needed - it is just immediate cash that it is short of.

So, what does this mean for property investors?

My take is that this is not a CAUSE of anything... it is an EFFECT of something big - the complete implosion of the US Sub-Prime market (that is to say, a huge number of mortgage foreclosures happening in the US.)

As a result of this, lenders are getting very, very, cold feet.

Expect to see the end of the days of easy finance for buy to let.

A smaller version of this happened in the specialised world of gifted-deposit mortgages about three years ago. Suddenly, lenders got cold feet about that kind of loan, and the market dried up within the space of a few weeks...

... but then it came back, within about 6 months, everything was moving again.

However, in the meantime, be very, very, careful about your creative finance deals (find a solicitor and a broker who really understand them, and the market carefully.)

In the long term, I see this as a good thing (for me, anyway.) I could do with a bit of a shakeout of the B2L market, and seeing amateurs get cold feet and leave. Of course, it would impact both cashflow (if rates go up) and equity (if the market slides down) for a short while... but there is an opportunity for the buyer in this kind of market. Getting hold of motivated vendors is likely to get EASIER.

[Advert - My mentoring scheme launches in October - a large part of the material for the scheme is about updated methods of BMV deal-finding - contact Nightingale Conant, my exclusive reseller for more info.]

However, and this is important... these are INTERESTING TIMES, as the saying goes. My hedge fund friends tell me that the kinds of things they are seeing in the global markets have not happened since the 1920s/1930s. Runs on Banks were meant to be things that last happened in depression America, not last week in the North East of England.

I think the curves are going to get very jagged over the next few years... do NOT base your investment strategy on what has happened to work over the last ten.

I sent the newsletter out to about 1,900 of you - and 140 of you responded. My Direct Marketing friends tell me, by the way, that this is an incredibly high response rather, and I should have expected more like 40 replies, not 140.

Thank you to those who did reply. I have put all your responses into a spreadsheet, so have some group opinions to share.

Thanks also to those who did NOT reply, assuming that your reason for replying was that you do not have particular views. Hopefully you will find the responses interesting.

I have a set of Headlines for what property investors currently (September 2007) believe about house prices, interest rates, and investment opportunities.

Headline 1: We believe that prices will go up in the next year.

A total of 76.4% of those responding said that prices will be higher this time next year than now.

Some were very certain (giving precise figures clearly based on high-level economic research). Others had views on whether prices would go up in London more than the rest of the UK. Some (and these impressed me more) said that the figures given were FOR THEIR AREA, and they had no idea about the rest of the UK (focus!)

Headline 2: We are very divided on what interest rates will do.

• 38.6% said that rates would go up over the next year
• 20.7% said they would be the same
• 40.7% said rates would come down

Of those saying rates would be the same, about half thought that this would be a rate rise (or two) followed by matching cuts.

Headline 3: Most of us are going to carry on buying.

• 83.6% said that they would own more property in a year from now
• 14.3% said they would own the same amount
• 2.1% said they would own less property in a year from now

Headline 4: One third of us are ultra-positive...

34.3% said that prices would be higher, and rates lower, in one year. However, of these 48 voters, only 42 said they were still buying.

Headline 5: Optimism about interest rates has more of an influence on buying patterns than optimism about price rises.

(Rounding errors mean some do not quite add up to 100%).

The BUY / HOLD / SELL percentages are:

So the difference - 88% vs. 80% - in buying patterns based on what people believe about interest rates is far more significant than the difference based on price movements - 84% vs. 79%

You can, by now, probably guess my comment.

It really does not matter too much what prices are going to do - if you can get a good positive cash-flow lined up, AND lock in a below-market-value deal, then property is likely to do well for you.

Interest rates are, of course, much easier to manage - simply taking out a fixed-rate mortgage can remove the uncertainty for a few years (though, obviously, your mortgage broker can provide you guidance on what rates are available, and whether a variable rate might be better in your circumstances!)

I turn down the vast majority of such approaches, as I know that most other property investors do, but I thought it would be worth reviewing how to find a joint venture partner and how to pitch a deal.

This article is mainly about property, obviously, but there are some more general comments - over the last year I have been involved in fund-raising for several small businesses, and there are many similarities in the two worlds.

Basically, investors are looking for several things, and you need to have all four of them covered to have a chance of finding an investor:

• A partner they can work with and respect
• A track record
• A clear set of expectations about what they will gain
• An exit strategy

1: A partner I can work with

It is unusual for investors to back property deals with strangers.

This has been the real power of the networking events for many people - meeting face-to-face with potential business partners, and getting to know them over a drink.

However, a pint at a bar is not enough - the way that most people end up joint-venturing on a property deal is through having done a small business deal first. For example, some people who have been on my negotiation training course have spent a few hundred pounds with me, and then have a far better feeling for whether I deliver. Some have gone on to ask me to work with them on property deals. They have the assurance that I know what I am talking about, I have the assurance that they are reliable. Of course, most people do not run courses, so the small deal stuff tends to be along the lines of being a property finder for a few hundred pound, then later doing a JV.

2: A track record

It is a cruel truth that it is hard to get started, because you have no track record. This is, in my experience, true in many different business areas, not just property.

Where possible, investors tend to look for people with a track record, where there are clear reference projects, and reference JVs, and clear previous business partners they can talk to.

One thing that some property projects people have done is put together groups of investors, each putting in a few thousand, rather than trying to find one investor with 50,000 to start with.

Not only does this build up the partner aspect from above, but establishes a track record with many different investors.

Of course, this can backfire - some big names have got caught out trying to grow too fast, and started making a few people a bit of money, before losing a lot of people a lot of money.

(This, by the way, is one of the reasons why I invest in others deals, but do not look for investors in mine.)

3: A clear set of expectations

Some investors prefer to receive a fixed payment - 1 to 2 per cent per month is common.

Other investors prefer to receive a share of the risk, and a share of the reward - generally, though, the partner putting in the bulk of the money will expect the partner doing most of the work to put SOME of their own cash at risk, not just their time.

What the investor has is called an appetite for risk. But wherever along the line the investor sits, you will need to meet them at that point on the line.

It is absolutely vital to be clear whether you are looking for people who will receive a fixed return (guaranteed by you personally), or whether they will receive a share in the profit.

Of course, if they are taking a share in the profit, and it goes well, then you have to pay them more. (But on the flip side, if it goes badly, then you are not saddled with monthly interest payments to them.)

The absolute reward is one part of the equation - the other is the timing. Investors who are looking to receive 1 per cent per month may well want that paid to them monthly!

If not, they may want the sums compounded, so if you borrow 10,000, then after a month you add 1 per cent interest - so you now owe them 10,100. The following month, you add 1 per cent interest of THAT sum, so you now owe them 10,201, and so on. (At the 2 per cent per month level, it is more common to have a flat return, not a compounded one, deferred until the end.)

Which leads me on to:

4: An exit strategy

One key difference between investing in property projects compared to investing in small companies (which I also do) is that with construction / refurb projects you have a clear timescale...

... at the end of the project, you will either sell the property, or re-finance it into your own name, and repay them the working capital plus their profit.

This exit strategy, particularly in a fast-selling housing market is one of the things that REALLY makes property deals appeal to investors. Never forget to play up this aspect in your pitch, and be clear about the timescales. (But be conservative, particularly if you have not done many projects - things always take longer than you expect, and an investor who had expected their cash in June will be angry by August and furious by October if you are still trying to finish the job and sell the house.)

A final word of warning - at the moment, property investments are unregulated. That is to say, you do not need a licence or any special paperwork to sign a deal. However, the moment you start slicing things up in a company name, or are obviously out looking for investors, then be careful, and always take professional advice from a lawyer who understands these deals BEFORE you agree to anything.

Over the last year, I have had a few discussions with the FSA about what I may, and may not, say in the course of this newsletter, my blog, and the various training and information products I have.

The general view was that, provided I talked about investment property and didn’t stray into residential, there was no obligation for me to register with them, since investment property is non-regulated.

However, there were various restrictions imposed by what is called Perimeter Guidance on what I could and could not say as a public speaker on the subject of financing properties. There was an implied danger that people might interpret what I was saying as about their PPRs (which is a regulated market.)

A year ago, I was happy with not needing to register, since I was generally opposed to governments over-regulating people because:

• I believe that most people are responsible adults
• I do not believe we should set laws that inconvenience the many just because of the actions of a tiny few

That having been said, I found the FSA very helpful and easy to deal with, and they have been great about making sure that this newsletter remains compliant.

Last month (April 2007), I became FSA registered!

Do not worry - I have not turned into a mortgage advisor :-)

Part way through last year, I was phoned up by a friend of mine who had an idea for a new business. I spent a couple of afternoons with him, talking through how he might market that business.

Then he met me for lunch, as asked whether I would be prepared to enter into some formal consultancy contract to help them.

I said no. I told him, outright, that I would be prepared to become part of the Board, and become Marketing Director, but that I thought the idea was so good I did not want to be on the sidelines as a consulant. I joined the board in mid-October.

About six weeks later, the Chief Technology Officer decided to concentrate on another business of his, and I stepped in to take over the site development. I can honestly say that it has been a FANTASTIC way to break my retirement, and I am having a ball.

There is an important message about property investment here - because I made enough money in property over the last ten years that I was able to give up the day job, I have been able to get involved in this kind of venture, without an income, because I can say that I will work for a percentage of the business. If I had been relying on my salaried job to support me, I would never have been able to get involved.

There is more to retirement than playing golf (unless that is what you want to do!)

The business is FSA-regulated, and this means that I, as a Director, have to be personally registered myself.

As I’ve been through the registration process, and the training, I have decided that I wish that investment property WERE regulated. I see so many poor-quality courses offered, trying to teach people how to get rich, run by self-styled gurus, that I really wish we were in an industry where there were actually qualifications and licences.

Ouch - whatever happened to the free-market-maven Mark?

The new business is called FabInsurance.com, and it does offer services to Landlords and Property Investors, as well as general members of the public.

The business offers Insurance through a process of reverse auctions. You go onto the site and input your details, both your personal details, and those of your property or your car.

So far, so good, plenty of other sites allow this.

Where we differ is that we do NOT provide instant quotations. Instead, FabInsurance creates an auction - normally for seven days - during which insurance providers can BID for your business. The difference between a bid and a quote is, of course, that in the reverse auction, the providers can see the price they have to beat to win your business.

We have over 90 insurance providers signed up to bid through the system, and the initial feedback from customers (we have only been live about a fortnight) is that they are seeing prices tumble over the seven days, and certainly be very competetive compared to what they have been quoted elsewhere.

You can currently get bids for insurance on:

• cars
• motorhomes
• property, including contents insurance for tenants, and indeed structural and contents insurance for landlords
• vans
• tradesman insurance

Having read it, I thought it would make a good little article for this newsletter as well:

NC: Mark, why did you start in property?

MH: When you look at housing statistics across Europe, the UK stands out for two reasons.

While in most other countries, a huge proportion of the population rent, about 70 per cent of the UK housing stock is owned by "owner-occupiers", that is to say, we own our own houses.

The other huge difference is in the remaining 30 per cent. In many parts of Europe, the rented sector is still dominated by the state. In the UK however, huge numbers of council houses were sold off in the 80s and 90s, and councils typically have waiting lists measured in years. Into this void steps the private landlord.

The track record for landlords has been great - houses that sold for around a few thousand in the early 1970s were worth several hundred thousand now. For the last tens years, the rise of Buy-To-Let mortgages has made the business of landlording possible for hundreds of thousand of new investors.

Despite the success of many, however, there are literally millions of people financially able UK residents have not yet taken the plunge into property investment. Why not? Because of uncertainty about the market, outdated beliefs about the problems, and a simple lack of knowledge about what it does, and does not take.

My parents believed really strongly in education. They sacrificed a lot of things they could have had to send all three of us to good schools, and then on to University (which is noat cheap.)

I went to Oxford, where I studied Mathematics and Computation, and when I graduated, started work in IT. I quickly noticed that there were many very bright people working in IT, who despite intelligence, education and years of experience, were not doing well financially.

After I had been with the company about a year, I received my first annual statement from their pension fund, and was shocked to discover how little I could expect to receive when I retired, even if I stayed with the same company for my entire working life. Being in IT, I realised that I would probably move around employers a lot, and while I would do well in salary terms, this would cause my pension prospects to look poor. So I came to the conclusion that I should find some other thing in which to invest. I found a mentor who knew a lot about rental property, and learnt from him about what I might do, but it took me a while to get started.

I lived with my parents for about 2 years after graduating, which was hard for all of us since I had become used to being self-sufficient. However, I was able to save up a deposit on a studio flat, and decided that the first thing to do was get my foot on the ladder.

After I had been living in the flat for about 6 months, I started going out with Mary, and we quickly got engaged. The flat, a studio, was never going to be big enough for both of us, so we went house-hunting. We discovered that we could either sell the flat, and buy a starter house, or we could take out a "commercial loan" on the flat, and put in a tenant. We decided to give landlording a go for a year, and see what happened. A friend knew someone who was looking to rent, and she became our first tenant.

At the end of the year, we discovered that the rental property had put a bit of money in our pocket, but gone up in value dramatically. So after a while, we moved again, refinancing our house on a commercial loan basis, moving on, and letting the house out.

After that, once Buy To Let mortgages were introduced, and the financing became easier, we started buying properties specifically to let out.

NC: What is it about property that seems to make it such an attractive investment?

MH: There are three main reasons for me. Firstly, compared to other forms of investment, property is relatively stable. Yes, there will be booms and busts over the next 20 years, but if you look at the period since the Second World War, then property prices have had a relatively straightforward relationship to incomes. Straightforward, that is, compared to shares or bonds, let alone "alternative investments" like wines or sports cars. Certainly, there has never been a property crash where the market went down 40 per cent in an afternoon!

Secondly, unlike shares, it is possible to pick up bargains. If I wanted to buy a share, then my broker would quote me a price, and it would a simple yes/no decision for me. With property, however, I can make offers, and work to identify the vendors who value things other than the highest price.

Thirdly, it is very simple to improve properties. If I were to buy a share in a public company, then there is very little I could do to improve the value of that share - buy their products, maybe. If I buy a property, then there are a huge range of things I can do to make that property more desirable very cost-effectively.

NC: Is property investment only suitable for those with huge amounts of money to spend?

MH: When you have a lot of money to spend, then of course it is possible to do certain types of deal. However, it is also possible to get started in property investment by working harder, and more cleverly, rather than needing lots of seed capital.

When I got started in property, I was not a high earner. Although I worked in IT, I was working in front-line support, doing things like changing the toner on laser printers, and showing people how to make the font bold in WordPerfect. To put things in perspective, at the time I was earning less than newly qualified teachers were.

Nor was a I born with a silver spoon in my mouth. My parents spent decades of their lives sacrificing things like new cars or foreign holidays to pay for our educations. And for this, I am eternally grateful.

It is possible to start investing in property profitably for as little as two to three thousand pounds, if you are prepared to commit every evening and weekend to learning and deal-sourcing.

It is a balance - the more cash you have available, the less time you need to invest. The more time you have to invest, the less cash you will need. Education and knowledge have a huge impact, and reduce the need for both.

NC: What about making money in property? Is selling the only way to turn a profit?

MH: It is a way to make a profit, but it is certainly not the only way. For the first seven years of my investment history, I did not sell a single property. I just put in tenants, and let them pay my mortgage for me. Then, after a few years, the property had gone up in value, so I was able to remortgage, and generate some extra capital I could use as a deposit on the next investment.

The last ten years have been great for capital appreciation, with increases around the 15-20 per cent mark in some areas in some years. I am certainly not expecting the markets to rise like that over the next ten years, though.

One of the key skills you learn as an investor is to differentiate between what you know and what you hope! I know that I am lousy at predicting what house prices will do in the short term, so I pick investment strategies that will work whether house prices go up, stay flat, or decline.

For me, the most successful strategy has been one of positive cashflow. If a mortgage is costing me £500 a month, and the tenant is paying me £850 a month, then it really does not matter to me that much whether the property goes up in the month or down in the month. I am still getting the after-tax positive cashflow in my pocket.

What I have seen happen over decades, though, is that even when there are crashes, prices come back and move on to even higher levels. So even if prices did go down for a few years, then I am confident that in twenty years time they will be much higher again.

NC: So, property is a long term investment strategy?

MH: Absolutely. If I needed to invest, because I knew that I would need a lot of capital in 2 years time, then I would not go with property. I have always had a 15-20 year time horizon in mind.

In fact, over the past decade, things have gone better than I had ever expected. Heh - if I had known what things were going to be like, I would have bought ten times as much in the early 90s - I told you I was lousy at predicting short-term house prices movements.

NC: What would be your final word of advice for someone thinking of investing in property?

MH: Get good advice, and remember that property is a business!

There are an awful lot of people out there who have no interest in your financial well-being beyond keeping you solvent long enough to pay their commission.

You need people to work with - letting agents who can advise you on rental demand for different types of property - financial advisers who can work with you to help determine what is possible and profitable, and what is not - a solicitor or conveyancer who will work with you in the way you need, and a mentor, who will focus on improving your skills as a business owner - a business owner of a property investment business.

One of the most bizarre questions I was ever asked, however, was

• what should I wear when viewing property?

I pick on it today because it is a great example of the kind of issues that new investors / new entrepreneurs face.

You see, there are two completely different ways I could have gone with answering the question:

• Why are you asking me this? It does not matter.
• I am glad you asked - it is terribly important.

... and the problem I have is that both answers are equally valid.

When you are in a job, there are certain social norms - most people dress broadly the same as their peer group.

Architects seem to like pastel-coloured blazers. City traders wear suit trousers and striped shirts. Bankers wear ties. It support people wear polo shirts and chinos... and so on.

When you become an entrepeneur, however, one of the things you LOSE can be that sense of group identity, and this is the real issue for this newsletter.

When you set up in business for yourself, you have to come up with the answers - there are no longer a bunch of people who surround you who think, act, (and yes, dress) in a way similar to you.

Suddenly, you have to find a routine, a place, a way of working that works for you. The good news is that YOU can make these decisions. The bad news is that YOU have to make these decisions.

And, in my experience, it is these types of questions that cause most startups to run into problems, not the headline-grabbing issues of business strategy, or client attraction, but the boring basic stuff of setting up a system that works for you.

This, by the way, is why franchises have much lower failure rates than from-nothing startups. A franchise makes many of these decisions for you, and provides almost a half-way house between a job and a business that you design from the ground upwards.

In Property Investment, however, the franchise opportunities tend to be limited to the service roles - estate agencies, letting agencies, IFAs and the like - not to the core business of actually building property portfolios.

Which brings me back to one of the mantras I have been repeating for several years. Property Investment is A BUSINESS - it is not, in the early years, passive income in any meaningful sense of the word passive. Instead, there is a whole lot of work to do, people to call, streets to pound, meetings (viewings) to hold, offers to make, teams to build, and big decisions about money to commit to.

So, while it would be easy to dismiss the question of what to wear as irrelevant, it does provide a good example of the problem - that if you are going to make it in property, you need to be able to come up with answers to ANY question you might face.

All that I can ever do is provide some insight into what has worked for me. (chinos, smart shirt, no tie for viewings / meetings with estate agents or vendors.... Suit and tie for meetings with the bank... Jeans and rugby shirts for stuff at the (home) office.)

That answer works for me - it may not work for you.

The reason that it may not work is that our minds associate particular clothes with particular ways of acting. If you are used to putting on a suit and tie to work, and only put on jeans to slob around the house, then put on a suit and tie to work on your property business. If you only wear suits to family weddings, then by all means wear jeans to the bank...

... and as for the questions of what time you should get up in the morning, whether you should have a free-phone, lo-call or geographical phone number for your business, whether you should answer that phone in your name or the name of your business, what colour your business cards should be...

... my best advice is to not get hung up about it. To realise that there may be a MARGINAL advantage in, say, red cards over pink ones, but the REAL choice is between getting out there and getting the cards printed, and having no business cards because you still have to come off the fence about colour.

In December, I heard a speech in which the speaker basically said that Einstein had claimed that the greatest invention of all time was compound interest.

A quick search of the term ---Einstein compounding--- on Google turned up almost 100,000 pages that reference this quote.

However, the earliest mention of this quote that anyone seems to have been able to find was a 1983 article in the New York Times. The problem was that Einstein had died in 1955 - some 28 years earlier. So it seems most unlikely that the physicist ever uttered those words.

Likewise, something I heard on another course earlier in the year was the claim that we only use 10 per cent of our brains. For various reasons, I have been reading up on Neuroscience recently, and apparantly this claim is one of the hot buttons that really gets them wound up. It has been repeated in adverts since the 1950s, and apparantly all stems from some work done by Dr. Karl Lashley in 1939 that showed that rats could carry out visual discrimination even if over 90 per cent of their thalamocortical pathway was removed.

In fact, removing as little as 1 per cent of a human brain can lead to significant problems.

And this is where I have to make a confession - I made a similar error - and even worse, I made it on a recording:

In the 2004 version of The UK Property Millionaire, I said that research done at Havard in the 1970s had shown that students with written goals ended up accomplishing far more. In fact, the study was (supposedly) at Yale, and not Havard (as I said on the CDs), and ran from 1953-1973.

However, this is where things get more interesting!

Fast Company (the US magazine) approached Robbins Resarch International to ask for documentation on this study... RRI suggested that Tony had got it from Brian Tracey, who referred them to Zig Ziglar. And Zig Ziglar (or his office) said that the source was probably... Tony Robbins!

So they approached Yale directly:

• We are quite confident that the study did not take place.
• We suspect it is a myth

...said Beverly Water of Yale, who carried out extensive research into whether this study ever happened, after it was reported all over the place.

Brian Tracy, in response to this research piece, apparantly said

• Heard this story originally from Zig Ziglar.
• If it is not true it should be.

I have to admit, that while I am kicking myself for having included as if it were a fact this in my CD set, I am pretty much with Brian Tracy on this one.

Goal-setting has proven incredibly valuable to me, and I attribute the fact that I was able to retire at 32 to the fact I’d started setting goals at age 17.

In part one, I spoke of that fact that because of certain differences between the property market and other types of market it is possible to buy property below market value. I also spoke about the use of the leaflets as a way to attract motivated vendors, and also to work out what form of adverts actually work for you.

In part two, I spoke about newspaper adverts, personal contacts and estate agents. I explained they can bring below market value properties to you. We also discusesd how it is important to use the test approach to your leaflets first, before you start spending money on newspaper ads.

In part three, I ran through the research work you need to do in between receiving a phone call from someone who needs your help, and going to visit them. (Ironically, there was a big type - I said TomeTrack instead of HomeTrack.)

In this, the final section, I am going to be running through what to say when you meet the troubled vendor.

The first thing to do is to get your head straight. You are there to offer help, and to offer a solution, not to browbeat someone into saying yes to your offer. If I believe that a vendor would be better off putting their property on the market with an estate agent, I tell them so.

The next thing to do is to build rapport, and this starts with what you are wearing. You often find that the people who are in difficult situations financially feel that they are victims, and have been ripped off by the establishment. (This term pretty much extends to anyone who wears a suit.) As such, I make a point never to wear a suit - I tend to wear chinos and a sports jacket - so that I look approachable and serious, but not part of the traditional establishment.

Then I make sure that I build rapport with the person - rather than jumping straight in and talking about money, I will start out by talking about the most interesting subject in the world - THE VENDOR. That is to say, that I will look round the living room and find something to admire (photos normally give away hobbies), oh and always accept that cup of tea.

The reason for doing this is to make sure that the vendor is comfortable with you as a person, and realises that you are a human being who is genuinely interested and wants to help (if you are not, by the way, you will quickly discover that it is very hard to fake, and probably find that BMV does not work out for you!)

Then I explain how we work - namely that we are a business, and need to make a profit - normally a ten per cent profit. I then explain that in order to make an offer on the property (an offer that will give me my ten per cent profit), I need to run through a number of things:

1: How much they owe.

You need to get this up front, not just the mortgage owings but any other secured (and ideally unsecured debts.)

If they are mortgaged up to the hilt, then it is better to explain straight away that you are unlikely to be able to make an adequate offer, and that they may be better allowing the courts to repossess them and declaring bankruptcy.

If, however, they have relatively low mortgages, then there are a whole bunch of other options avaialble to you.

One key trick is with overdue credit card debt. You can explain that, if they agree to your offer on the house, you can also help them negotiate with their credit card lenders to write off some of that debt.

2: The market value of the property

• I already know this from the HomeTrack report (which I will normally bring along to show the vendor.)

2a: The value of the property that market rent would sustain

• I show the typical rents (which in my areas I know), and the interest rates an investment buyer would have to pay, and thus calculate the highest price that an investment buyer could pay.
• I only show this, obviously, if it is LOWER than the market value. In the market in 2006, it often is lower.

The vendor may counter that they want to stay in the property. However, I can explain that I would love them to stay in the property, but my partners and I have to be protected in case they fall behind with the rent and we need to find an alternative tenant.

3: The costs that I would incur if I were to buy the property and then re-sell it through an estate agency.

By the time that stamp duty (buying and selling!), legal fees, and estate agency costs have been added, this normally comes to about 6-10%.

4: The costs of bringing the property up to let-quickly readiness.

This involves walking round the property, and explaining that modern tenants expect newly decorated properties, so I have a sheet for each room that has a series of tick-boxes of what work would need to be done. Then, I also have a pre-printed sheet of estimated costings for each piece of work. (There is real psychological power to having this professionally type-set and looking like a formal document - if it looks like I am making up the figures, they may well be challenged - if it looks like the figures are set, then chances are they will be accepted.)

Again, the reasoning for this is that, even if the vendor wants to stay on, if they were to fall behind, this work would need doing.

You should always err on the side of caution when it comes to estimating that work. There are often unforseen problems and costs can over-run dramatically. If costs under-run dramatically, then dropping the vendor an unexpected thank-you cheque as a bonus does wonders for your referral business!

Once you understand the value, and the costs you would need to incur, you need to take off your ten per cent for profit, and explain that that is the offer on the table IF the vendor want to stay on at full market rent.

HOWEVER, and this is where the creativity comes in, you can often offer the vendor a dramatically reduced rent in exchange for a much lower sale price.

If, say, the price you were prepared to offer were 135,000 and market rent were 700 per month, you could give them a choice:

• You buy for 135,000 and they rent back for 700pcm OR
• You buy for 120,000 and they rent back for 600pcm OR
• You buy for 100,000 and they rent back for 450pcm

In many cases, they already have an idea how much they want to spend on rent. So you can explain that you can tailor the package for that. However, there are two things to make sure they understand:

1: That the rent will go up in line with inflation each year 2: That this is only possible if their mortgage and other borrowings are low enough to let them sell out at the 100k figure, so they MUST make sure you have all the info.

Finally, do not expect everyone to say yes. Many people are just looking to get multiple offers on the table, and you will only ever get BMV when the vendor is genuinely in difficult circumstances and you are able to help.

In part one, I spoke of that fact that because of certain differences between the property market and other types of market it is possible to buy property below market value. I also spoke about the use of the leaflets as a way to attract attract motivated vendors, and also to work out what form of adverts actually work for you.

In part two, I spoke about newspaper adverts, personal contacts and estate agents. I explained they can bring below market value properties to you. We also discusesd how it is important to use that test approach to your leaflets first, before you start spending money on newspaper ads.

Today, the subject is the three hours hard work you have to do.

That three hours pretty much starts when the phone rings and someone says they saw your advert.

What you must not do is say that you will go round straight away. There are two reasons that this:

• Firstly, it can make you look too desperate (never a good negotiation tactic)
• Secondly, you need a few hours is to do your research

In those three hours there are three questions you needed answering:

• How much demand will there be to let out this type of property?
• How much rent when I get for this type of property?
• What is a fair market value for this property?

The first two of these (tenant demand and the rent expectation) work hand-in-hand.

Now, because I tend to buy properties in the same area, I generally have a fair idea of what properties will let for, which roads are in demand, and which types of houses and easy to let. This is one of the big advantages of concentrating in a relatively small area.

However, when I look at something slightly out of my area, then I pick up the phone and speak to some letting agents, and ask them two questions:

• If I brought you this kind of property, how long think that takes you to let it?
• Secondly, if you were to let this property, what would you get for it?

Those you have heard my Portfolio Seminars will realise that normally when I talk the letting agents I ask them how much it would let for... and then I phone up the following day pretending to be a tenant interested in that type of property, and ask them how much I wuld have to pay.

When you only have a few hours before you are going to talk to the below market vendor, you can phone up two different letting agents and ask them the question, speaking to one as a prospective landlord, and the other as a prospective tenant.

However, that only two of the questions. The third question is that of fair market value for the property. For this, you need to get some comparables.

Now the good news is that in the last couple of years this has become much much easier. The Office of the Deputy Prime Minister now have the Land Registry publish actual sales prices in a far more timely fashion than they used to.

There are various sites on the Internet you can go to to to find this information. You enter a postcode and a size of house, and the site gives other properties that have sold in the last few months.

Importantly, you get the actual selling price not just the estate agent asking price.

The site I use is HomeTrack which costs about a tenner a report, although if you are getting a lot of these there are various companies the offer monthly subscription schemes where first 15-20 pounds per month you can download all the Home Track reports you want.

If you are serious about BMV then it may well be worth joining one of those schemes.

Although you are finding out market rents and demands, please do not misunderstand me

I am looking at tenant demand to protect myself. It may well be the when I go and talk to the vendor, it will transpire that they would like to stay on.

However, there is every possibility that they will not be an ideal tenant. They may quickly fall behind in their rent.

So I need to make sure that I have run my figures as if I were buying the property at arms length.I need to know that the property would stack up as a rental investments at market rent.

I said that there are three hours work you need to do between the phone ringing and going into talking to the vendor.

In the next newsletter, I intend to go through what to say when you get there!

In part 1, I explained why I believe that BMV does exist, and then went on to look at leaflets, combined with testing (checking which versions work and which do not.)

In this part, I am going to talk about newspaper adverts, and personal contacts.

Newspaper adverts are deeply misunderstood - there is a perception that they are generally wasted, and this is true, up to a point.

The issue, however, is not whether 999 out of 1,000 readers ignore your advert - the issue is whether ENOUGH readers pay attention, and go on to do business with you, that you make enough money to cover the costs of the ongoing advertising.

And the word ONGOING was lurking there in that last sentence, to trip the unwary. I have used paper advertising in many of my businesses, not just property investment, and I have learnt a couple of things.

1: The direct mail approach is a far more cost-effective way to determine which adverts work, and which fail. Only once you know you have an advert that gets responses is it time to start rolling that advert out to a wider audience through newspapers.

So I would only recommend that you consider newspaper advertising after your first succesful leafleting campaign has generated an advert that works.

2: Advertising rates vary wildly, and are open to negotiation.

This second point is well worth noting. You will be quoted a rate, and often deal with someone who makes out that they have no authority to vary that rate.

There are some nice tricks - firstly, find out when the deadline for adverts is, and phone up about an hour before - asking if they have any last-minute-space that they are prepared to give on a deep discount to fill.

Another trick, if you are not worried about WHEN your advert comes out, is to send in a copy of the advert, a cheque for about a third of the normal price, and a covering letter saying that, if they have any space come up in the next three months, then run the advert and cash the cheque - if they do not have any space, then return the cheque please. The worst thing that can happen is that you get the cheque back.

You have to pick your paper or magazine carefully though - it is a sad fact that the kinds of people who both have these problems, and are unable to find alternative methods of resolving them, tend to come from the demographic groups C and D. As such, you need to pick the right paper - the FT is probably a bad idea, the Sun is much better, but for most investors, a local paper is the answer.

(If the terms C and D are unfamiliar, have a look at the article here at Wikipedia which explains them.)

Just as with flyers, however, it is important to remember that people will only call you when they have a problem - and generally expect you to be able to respond quickly.

Personal contacts are the other method of finding people who need help. Of all the methods I have used over the years, this has been the most succesful for me.

Personal contacts, however, take time - there is no substitute for simply letting people know that you buy certain types of property.

Again, 999 of every 1,000 people you talk to may never bring you a property, but the 1,000th may well bring you one that makes you an extra 20,000. That means that, ON AVERAGE, everyone you talk to about what you do earns you twenty pounds.

Viewed in those terms, it becomes a lot easier to pluck up the courage to tell people what you do. So what if they laugh, if you know that every conversation earns you, on average, twenty quid, then you can probably fit what you do into a lot more casual conversations.

At this point, I need to pay tribute to the two people who have helped me clarify my thinking about BMV - Parmdeep Vadesha and Glenn Armstrong, both of whom started in property many years after I did, but built up large, profitable portfolios quickly.

Both Parmdeep and Glenn have training products:

• Parmdeep has a free mini-course, and then a paid for home-study course that goes through the BMV process
• Glenn has an instructor-led one day training course that runs about once a month.

Both come with my recommendation, and you can read more about them (and other products I have found good) here.

The idea is that you can buy a property for less than it is worth.

On the face of it, this makes no sense whatsoever, from at least two different viewpoints:

• Some would ask who would sell a property for less than it was worth?
• Others would say that surely the sale price DEFINES the market value for a property, since that was the most that the vendor could get for it?

The answer to both these questions is that Market Price is a value that is easy to set only in certain circumstances - namely that the market in question is liquid and transparent.

The first of these - liquid - is easy to define. It means that for anything that someone wants to sell, a buyer can be found; and for anything someone wants to buy, a seller can be found. It says nothing about the price that the buyer might have to pay, nor the seller might have to drop to - but does say that a buyer will be out there. In addition, the transaction can be immediate (or as fast as makes no difference), with little in the way of transaction costs.

The second of these - transparent - is slightly more subtle. It means that all the information needed is available to all parties. This means that the potential buyer can see not only every property on the market at the moment (with asking prices), and every property that has been sold recently (with actual selling prices) but also every other potential buyer, together with what they are currently bidding!

The best example of a transparent market is eBay - if you are looking for a widget, you can see every widget currently listed with eBay, plus the recently closed auctions for widgets, and the highest bids from other buyers. Indeed, much of the effort around eBay at the moment is in technologies making it possible for people to put in a last minute bid (a snipe bid) which gets in so soon before the closing that no other bidder has time to respond

So the question I pose is - is the property market liquid and transparent. The answer to both of these is undoubtably NO.

There are liquid and transparent ways to sell a property - auctions spring to mind - but these reflect such a tiny proportion of all property sales, that it has become commonly-received wisdom that auction prices do not reflect accurate market values.

Hopefully that argument goes to answer the second objection - and supports my belief that it IS meaningful to talk about BMV, because inefficiency in the market means that it is possible, from time to time, to buy property for less than the open market value (OMV.)

The first question - why would anyone in their right mind settle for less than the property is worth? - also needs addressing.

However, the answer often boils down to SPEED of transaction.

For most people selling their house, time is no great pressure. They put their house on the market at about the same time they start looking for a house, and assume that it will take about the same time to find their next house as it will to sell the current one.

Indeed, many people put their own house on the market BEFORE they go house-hunting, because they figure that it is easier to get a good price for their next house if their own is already sold. (And to a large extent, that belief is true - many estate agents like what they see as cash buyers.)

However, there are a small number of people who are not in this situation. Who, because of their circumstances, value a fast sale. And I mean value a sale, in the sense of prefer that to real pounds.

Given the choice of two sales, which would you go for?

• Offer of 180,000 from Mrs. Jones, who is about to put her own house onto the market, and will buy yours once that is sold.
• Offer of 160,000 from Mr. Harrison, who has cash ready.

Obviously, it depends on your circumstances. If you have found your dream house but need to move fast, and 160,000 is enough, then perhaps you will go for it. But for most people, the extra 20,000 will be worth waiting for. (For most UK households, 20,000 is higher than the after-tax annual income.)

That was the good news - that BMV exists.

Now for the bad news - finding BMV deals is labour intensive. It is NOT a strategy for the passive investor.

There are three parts to finding the BMV deal - finding the vendors, and then closing the sales. This newsletter, I am going to talk about one way of finding the vendors.

It IS possible to find them through estate agents, but very, very difficult for the new investor. Most estate agents already have contacts with a small number of investors who can move fast to help those vendors. Breaking into that circle takes, in many cases, years. One reason I recommend dealing with estate agents is to set that years-long process in motion.

Far more common, however, are the direct techniques, and these broadly fall into three groups.

1. The flyers
2. The newspaper ads
3. The personal contacts

Flyers are the most time-consuming, but widely reported as being very, very effective in many areas. You design a flyer, get a few thousand printed, get them posted through a few thousand doors in your target area, and wait for the phone to ring.

Designing a flyer is an area that needs some attention - you are NOT looking to advertise the fact that you buy houses Below Market Value... instead you are looking to advertise the fact that you can help in certain situations.

There are two schools of thought about flyers - one is that only the headline matters, so you want a simple flyer that reads:

• Facing repossession? I may be able to help. Call Mark on 555-1234

The other school of though is that you want LONG COPY, and a list of areas where you might be able to help. For example:

• Facing repossession? Going through a divorce? Credit card problems? Creditors hounding you? Expecting the baliffs? If you own your own home, and need to raise cash quickly, then I may be able to help. Call Mark on 555-1234
• (except that it actually goes on for several hundred more words.)

Which works better? Well, there is an easy way to find out!

Instead of printing 10,000 of one flyer, print 5,000 of each, and stick them through alternate doors. However, and here is the cunning bit, instead of writing call Mark on them, you write call John on one, and call Dave on the other.

Then, when someone phones asking to speak to John or Dave, you know which flyer has caught their attention.

The downside of this technique is that you then have to explain that John / Dave are on holiday, but you work with them... the slightly less tortuous alternative is simply to register two different phone numbers and see which calls most, but this ups your expenses. (Though, to be fair, IT solutions make it much cheaper than a few years ago, if you have broadband.)

The combination of direct marketing with testing (seeing which approach works best) has been very, very succesful

More about other ways of marketing in the next newsletter...

As I have said before, I always use a financial advisor to help with my remortgages, and recommend that any investor do the same.

One of the things that surprised me was how high the fees were on many products, compared to a few years ago.

So, he and I got talking about how best to account for fees when comparing mortgages.

One approach, that many investors take, is to rely on the fact that fees can be added to the mortgage, and therefore just work out the uplift on monthly payments once they have been added on.

However, this approach does not appeal to me, particularly when used as a basis for comparing mortgages.

It is not at all uncommon in the property investment world to take out fixed-rate mortgages for periods of 2, 3 or 5 years. The problem comes at the end of these fixed periods, when interest rates can go up. In my case, a couple of the mortgages had gone up from under five percent to over six-and-a-half per cent.

One-and-a-half percent does not sound like a huge change, but proportionally, it is massive. For every thousand pound paid in interest during the fixed period, I stood to pay thirteen hundred pounds now (which over a block of properties, can add up to substantial sums.)

Comparing two potential mortgages is something that needs a little thought. One issue is the length of the fixed period - generally, the longer a rate is fixed for, the higher the level at which the rate will be fixed.

So, to compare apples with apples, I looked at three three-year fixed term options.

• Option 1 at 5.79 per cent, no fees
• Option 2 at 5.19 per cent, fees of 1.5 per cent
• Option 3 at 5.49 per cent, fixed fee of 599

The mortgage on this property was for 191,500, so the interest payable (excluding fees) would be:

• Option 1 - 924 per calendar month