The role of property sourcing has been around for some time now, but it still always amazes me how many different titles the same role can be given; often to try to avoid the dreaded ‘compliance’ or simply the incredibly poor reputation that the property sourcing and deal packaging sector currently carries.
Property sourcing appears to have amassed an impression across many quarters that it is run by amateurs, carrying out ‘dodgy deals’, with very little knowledge, inaccurate or misleading descriptions and figures, and providing unsuspecting investors with a poor-quality service; and to be brutally honest, I would find it very difficult to argue with that right now!
If you search LinkedIn on any day of the week, you will find property sourcers, deal packagers, portfolio builders, property shoppers, property deal hunters, property traders and many, many more different titles used, but basically, they are ALL sourcing agents or deal packagers.
From speaking to property investors on a regular basis and reading posts and comments on social media platforms, I think that from the perspective of an investor, searching for a potentially legal, professional, ethical and honest sourcing agent to work with and trust, is to say the least, a minefield.
Even experienced investors can come unstuck working with a sourcing agent, if they don’t complete in-depth due diligence on the agent and a constant eye on what is going on in their project.Story Time – Real Life Cases Reported to Us and Asking for Help…Reginald (fictional name to protect the innocent) v HMO (house in multiple occupation) Sourcing Agent
Reginald was a very experienced investor, specialising in HMOs, but he was short on time for searching and finding his next deals, so wanted help from a sourcing agent. He found one that told him they could find what he was looking for, manage the refurbishment and conversion to HMO standards and deal with licensing requirements for that area.
The agent sent Reginald details of a property which fit his investment criteria exactly, Reginald purchased the property, paid the sourcing fee and the sourcing agent then commenced to supervise the full refurbishment and conversion of the property to meet HMO standards.
How brilliant, you may think, just what Reginald wanted; come on, how many times have you seen a happy ending in these situations!
Reginald decided to visit the site on the same day that the HMO officer was inspecting it in order to issue a licence. After inspecting the site, it was pointed out to Reginald that there was a long list of failures:
Two of the five bedrooms – too small.
Fire alarms – wrong type and poorly fitted.
Emergency lighting – non-existent.
Fire doors – poorly fitted and not to the required standard.
Hence, licence refused!
Upon questioning the agent further, it transpired that, shock horror, the sourcer had never purchased a property before, never refurbed a property before and had no idea what the standards for a HMO were, nor the specific standards for that local authority.
A huge amount of cash had to be spent to undo what had been done and bring the property up to standard for the licence to be issued. You would hope, lesson learnt by Reginald!
Edith and her three friends were first time investors and having just completed a training course on serviced accommodation, decided that was the strategy for them. They would each buy properties for cash, refurbish to a high standard, refinance, pull all cash out and hold a high demand and cash flowing SA investment.
They decided to work with a sourcing company that had a great website and what appeared to be lots of experience in sourcing, refurbing and managing this kind of deal in the northwest. So, they paid reservation deposits on three, two-bedroom apartments; one for each of them and completed on the cash purchase shortly after, using a solicitor recommended by the sourcing agent.
The sourcing company were employed to manage the refurbishment to satisfy the local serviced accommodation market, but Edith and her friends didn’t live locally, in fact, they lived some distance away, making it difficult for any of them to travel to keep an eye on progress. The months passed by, and progress appeared very slow.
Eventually, after six months of waiting, the properties were declared ready for their RICs valuations and refinancing to be put in place. Yes, you guessed it; the valuation came in lower than even the original purchase price, never mind the cost of the refurb!
But, to add insult to injury, when we checked land registry, the title deed had a restrictive covenant in place; ‘No subletting permitted’; double whammy!
They had bought three apartments whose value didn’t meet even the original purchase price and they couldn’t fulfil their SA strategy either. It appeared that despite having told the solicitor (verbally) what their intention was, to use them for SAs, no checks were done on whether this would be possible, before the purchase; or if done, the result was not passed on to Edith and her friends.
But it doesn’t have to be that way…
Know the chosen geographical area very well – boots on the ground (not 250 miles away and never visited).
Good understanding of the strategies chosen to source for – e.g. BTL (buy-to-let) HMO, SA etc., (not every investment type ever invented.)
Signpost inexperienced investors to independent finance or wealth advisors, for their guidance before working with them.
Build relationships with investors, understand their requirements and what is important to them.
Know and disclose all material information important for any strategy to succeed – e.g., local HMO standards, restrictive covenants, etc.
Have either experience or good knowledge of refurbishing a property and adequate insurance in place should things go wrong – a professional indemnity insurance policy does NOT cover for refurbishments.
Provide professional presentations, with all relevant information included, do not mislead or leave out important information.
Check the sourcer’s knowledge of the geographical area chosen – How do they know the area; do they live there?
Check the sourcer’s knowledge and understanding of the chosen strategy – Ask questions to gauge level of knowledge.
Ensure you have a good enough knowledge of any chosen strategy and the location before committing – If you don’t understand, how can you check that what is being stated is correct?
Don’t trust that another professional recommended to you is good at what they do or has your best interests at heart.
Ensure you make clear in writing, what the intended purpose of the purchase is, e.g., SA and get a written response acknowledging this and that the information checked allows for that strategy to be used.
Make the effort to visit the property to stay up to date with progress and standards of work; at least until you are sure of the sourcer’s capabilities to manage such projects.
Ensure there is adequate and relevant insurance cover in place for the services offered.
Never pay large sums of cash up front, without ensuring there is adequate protection in place and how and when you can get it back if things don’t work out.
A large number of property sourcers or deal packagers have never owned a property or carried out even a basic refurbishment and yet, time after time, investors risk their hard-earned cash working with agents and carrying out little or no checks on them.
Sadly, when complaints are submitted to either of the government approved redress schemes, the investor’s role in the process is also assessed, could they, should they have done more to protect themselves and this does affect any subsequent allocation of financial awards.
Property sourcing when done legally, compliantly, ethically and professionally, can provide a lucrative source of income and be a great support to those investors who wish to use those services.
Make sure as a sourcing agent you are the best that you can be and, as an investor, you do all you can to protect yourself.
Forget, ‘location, location, location’ and do ‘due diligence, due diligence, due diligence’!
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