A great deal has already been written about the new mortgage rules. Owner-occupiers have come to terms with the new lending criteria and resigned themselves to the impact they have on the type of home that they can afford.
The impact of the new lending rules for buy-to-let landlords will have a significant impact on the market and on the availability of homes to rent. I cannot understand why a lender who is providing an absolutely safe loan for 50 or 60 per cent of a property’s value needs to see details of all the landlord’s other properties and personal income and expenditure, but this now seems mandatory. One client who has a £7 million buy-to-let portfolio and an income from his estate agency business of £650,000 per annum was recently asked by his buy-to-let lender how much he spent every month having his hair cut! The world has gone mad.
FAILURE TO FUND
But another type of credit crunch will have a real impact on the estate agency business – the near impossibility of borrowing money to buy a business. I recently had a business sale delayed for six months because the buyer couldn’t raise finance. He was buying a business at £2.75 million, paying £1,375,000 upfront and the balance over two years. The business’s profits were £800,000 per annum, so the payments could easily be funded from cashflow. He was paying £700,000 from his own savings and wanted to borrow another £700,000, secured by a first charge against the business and a charge against his £1.5 million home. He had thirty years’ estate agency experience and the security covered the loan five times over but he was turned down flat by his own bank and by three other lenders before he eventually secured a loan via a specialist broker. If the banks won’t lend to such a strong applicant, you wonder what purpose they serve.
“Even investors seeking just a 50% loan are being blocked by lenders.”
We got this sale through in the end but plenty have fallen through because credible, secure buyers were denied funding, particularly with sales-only agencies which the banks are even less keen to lend on. This is a tragedy for the business owners. Many have worked hard all their lives to build a successful, profitable business in the expectation that they would sell it to finance their retirement. Now, through no fault of their own, they cannot do so. Even partnerships are affected because incoming partners cannot raise funds to buy out the retiring partners.
So, what can you do? Your first step is to ensure that the buyer approaches a specialist finance broker instead of their own bank. A good broker should be able to give a good idea of how much finance will be available, the security needed and the likely interest rate and repayment period. If it is not going to be possible to raise funds, it is best established before time and money is wasted on legal fees.
If finance is not likely to be forthcoming, you may consider lending the money to the purchaser yourself by way of a deferred payment repayable over two or three years. This is not ideal but the loan can be secured on the business in addition to any other security that the buyer offers – it may be better than postponing the sale.
A NOTE OF CAUTION
You might be tempted to put a manager in to run the business for you on a salary or sell part of the business and retain the balance. Based upon many years of experience, I urge caution with these options. Managers often become resentful if they do all the work whilst the owner gets most of the money – this resentment can make them lazy, sloppy, greedy or even dishonest.
A sale of part of the business may seem tempting but it can end in arguments about how the business is run by the new shareholder/ manager and how profits are calculated and distributed. You will remain liable for any fines that the business might incur through poor compliance or other breaches of legislation.
This problem is not confined to the estate agency business. Many baby boomers who started businesses in the 1970s, 80s and 90s are reaching retirement age. It would be a tragedy if these successful businesses employing thousands of people were shut down because the people who are able to take them over are unable to raise finance.
I sincerely hope that the present scarcity of business finance will be short-lived and the banks will learn to assess the risk more accurately so that they can make better lending decisions and support business people who deserve it.
Adam Walker is a management consultant, business sales agent and trainer who has worked in the property sector for more than twenty-five years. www.adamjwalker.co.uk