Lockdown Multi-Unit Purchase with Complex Requirements
The Client: Our client worked for a large multi-national company and lived part-time between England and Northern Ireland. He owned a couple of vanilla properties and one commercial buy to let in his personal name.
The Property: A large multi-unit freehold block consisting of 13 flats, occupied by a mixture of students, professionals and tenants who received housing benefits. It was situated in a desirable northern town, ideal for commuting to two large cities.
The Finance: Our client required a 70% LTV buy to let mortgage so he could purchase the multi-unit block into his newly set up SPV limited company, of which he was the sole director and shareholder.
The Challenge: We opened this case a few weeks into lockdown when physical property valuations were still on hold. Due to the multi-unit property type, we knew a remote valuation wouldn’t be possible. Furthermore, to get an accurate valuation of the investment, we needed it completed on the property’s investment value, rather than the bricks and mortar value, which meant it would have to be a physical inspection. With no idea when physical valuations would resume, we knew this case would likely take some time to complete.
The pandemic also meant that many lenders had reduced buy to let mortgage offerings and tightened up criteria, meaning that we would have less choice from the start. Besides the complications caused by the COVID-19 pandemic, this case itself had a range of challenges; from specialist criteria requirements to more complex client circumstances which required unique underwriting.
In terms of criteria, our client required a buy to let lender who would accept:
- Multi-unit freehold blocks with over ten units
- Flats under 30 square meters
- A mixture of tenant types, including students and tenants on housing benefits
- A first-time multi-unit landlord
- An SPV limited company application
There were also three additional complications which would require negotiation and for the lender to consider the application on an individual basis:
- The property had two vacant flats which were not receiving rent
- Our client had a small amount of unsecured debt: two cars on finance and a credit card
- Our client’s deposit was a loan from a family member
While most lenders will accept gift deposits, with a signed declaration stating that the money does not need to be repaid to the ‘gifter’, there are very few who are comfortable with loan deposits. Besides being additional debt, the issue with them is that it means the purchase is essentially 100% financed, making it too high a risk for both the borrower and the lender.
The combination of all these challenges meant that we had very few lenders to choose from, and potentially none at all!
The Solution: We used our knowledge of the (remaining) market and additional research to shortlist a handful buy to let lenders that would accept the case just based on criteria. From this selection, we approached lenders directly to ascertain their appetite for our client’s particular circumstances.
After several conversations with specialist buy to let lenders, one was willing to work with us to find a solution to the three circumstantial issues of the case.
When the lender saw our client’s high monthly income and previous credit record, they were confident that the unsecured debt would quickly be cleared and did not pose as an issue for the mortgage application. Furthermore, they were satisfied that the high yield of the property meant that there was sufficient rent from the other 11 tenanted flats to cover the rental voids of the vacant two.
Working with the lender and our client, we managed to find a solution to the more significant issue of the loaned deposit. We agreed that if the family member lending the deposit funds became a 15% shareholder of the SPV limited company, the lender would accept the application. 15% was a significant figure, as a shareholder holding a 20% share or above would need to be underwritten as an applicant on the mortgage. All the lender required from the family member was a standard Anti-Money Laundering (AML) check so a solicitor could verify their identity.
While the client understood the exceptional circumstances of lockdown, he was keen to make sure the purchase completed as quickly as possible. We agreed with the lender that if our client paid the valuation fee upfront, they would underwrite the deal up to the valuation stage, so when valuers were able to complete physical inspections again, our client would be at the front of the queue and would hopefully be able to complete reasonably quickly. The risk here was that, at the time, no-one knew when valuations would resume and whether the investment value issued would be what our client needed. Ultimately, the client agreed that the risk was worth it for the investment potential the property offered.
Fortunately, physical valuations resumed in mid-May, by which point the lender had underwritten the rest of the purchase. Despite delays while lenders began working through the backlog of cases on limited staff, the mortgage was formally offered less than two months later. Here are the details: