Insolvency Indemnity when buying an investment property.
Something new has been happening lately with the purchase of a Below Market Value (BMV) investment property.
As an investor, your goal is to purchase an asset such as a Buy To Let (BTL) property at a discount also known as BMV. That way you are building in a profit at the time of purchase. Most importantly, this gives you security in the future should you want to sell quickly, you can sell the house for less than it’s worth and get all the money back that you invested in it. This is just one of the stress testing methods I use and teach others working with me who are looking at and evaluating deals.
So you have found a property and you’ve got it BMV and, in this case, for less than the person actually paid for it when they bought it. Brilliant you have got a deal, well done!
This is exactly what I have done only there was a slight hiccup When my conveyancing solicitor started the process of the purchase. Here are the numbers to help explain.
THE NUMBERS
On this deal, I have agreed to purchase the property at £75,000.
The property will be valued at £120,000 – £125,000.
The rent will be £750 per month.
So this is a great deal, as I will get most of the money I invest into the purchase back on refinance and it’s a great Return On Investment (ROI).
I won’t do the calculations here as I have done them in other posts or YouTube videos on my channel.
If you can’t find them, then please email me at [email protected] and ask me for the spreadsheet calculator I use for ROI.
However, with this purchase, I am looking at a 32% ROI minimum.
That means I will achieve a return of 32% on the money I have left in the deal.
This is well worth buying, happy days right? !!!
Anyway, back to the hiccup.
There is now something in the financial law that says something like, should the person you are buying the property from at some point in the future up to 6 years from the purchase date go into liquidation, bankruptcy, or go bust the creditors could force the reversal of the purchase. Sometimes called unwinding of the transaction.
Effectively that means I would have to return the property to the people the seller owes money to so they can sell it to help the person I bought it from debts owed to them.
Now to protect me, should this happen, then the seller is asked to take out, at the seller’s expense, an indemnity insurance policy.
Great I am now protected against this for the next 6 years.
You know they say the devil is in the detail?
Well, you definitely need to understand just what that policy covers you for.
The policy itself is not a large expense given the price paid for the property.
In this case, it’s around the £150 mark.
Because it’s not an expensive policy, this made me look further into what is actually covered and I asked that question of my solicitor who arranged the cover for the seller.
It turns out that should the worst happen, and I am forced to give or sell the property to the creditors from an insolvency action and I will only be compensated for the purchase price.
I will only receive £75,000.
That means all the money I have spent doing the property up, costs such as Solicitors fees, loan fees, broker fees, land registry duty, and more are not taken into account or reimbursed through the policy.
This could put people off as it is a risk.
It’s a risk that you take by getting the property for BMV.
There are a few things you can do to reduce the risk, such as asking for credit file information on the seller, is the person selling in real financial difficulties, or whether are they selling because of some other reason. Again, this is another whole subject and digging deeper into the reason will help you.
However, if you have carried out some risk assessments yourself then the ultimate decision will lie with you.
What’s important to note is that this is something that lenders have started to introduce to protect themselves. They are lending you the money to buy the property BMV and therefore want to make sure they will get paid back the loan regardless of what happens to you or the seller in the future.
For the property I am buying, I have decided to go ahead with the purchase.
I have carried out my due diligence and I am happy that the risk is very minimal to me.
If the worst should happen then I will have had a period of good income or ROI and nearly all my money back from the property.
This is something I am happy with.
Everyone is different and you need to decide what is best for you.
If you want to book in 10-minute chat then send me an email to [email protected] and we can book it.
I hope this helps
Neil Stewart
Property Mentor and Investor.