Bhanu’s London Loft
by Tony Chavira
In 2007, the British economy was one of the most robust in the world. Funded by the international banking industry, properties in London were being sold furiously in all possibly shapes, sizes and styles. And none of them were cheap. Until 2007, Bhanu, being a Swedish citizen, never considered the possibility of pulling out a mortgage and buying a property in London. He had been fortunate enough to be offered his dream job as a news producer right out of his graduate degree program, but it didn’t come with the salary to justify purchasing a property. Somewhere in his mind, the concept of “buying a place” just seemed like an incredibly adult thing to do, and he was too busy enjoying his youth.
Seven years passed from the day he arrived in London to the day he finally made the decision to invest in property. No longer willing to submit to his father’s sage goading, Bhanu decided to instead take some of his advice, stop being lazy, and save some real money. It wasn’t that difficult a decision to make. Thinking back, he determined that he had put tens of thousands of pounds into the pockets of others, instead of viewing “living in London” as a personal investment. And this would simply not stand. Even if he went into debt in order to purchase a property, he figured that he should own one. On top of that, the Summer Olympics had recently been awarded to London for 2012 and the city was experiencing a revitalization bonanza. As he already lived in East London (where the Olympics would be held), Bhanu wanted in on the investment opportunity.
Based on conversations with financial planners, Bhanu intended to purchase a new place that would yield a higher return, like Rick in my previous article. He found one advertised on a gigantic billboard while bicycling around the city: “300 units, 1 or 2 bedrooms, starting at ...” When he visited the structure, it was still only a structural skeleton paneled with billboards, and the neighborhood seemed somewhat rundown. But knowing that the Olympics would affect the space positively, Bhanu spoke with a property manager, got some information, and just sort of put it in his back pocket for a while.
Sometime later, after checking out a few more new spaces and speaking to a few mortgage advisors, he decided to purchase one of the building’s properties. Despite only having a printout of the floor plan to go off of, he knew that the space suited his needs. And the building managers offered him a 5% discount on the purchase price, called buying “off plan” in the U.K., since they were asking people to buy an unfinished space.
Once they knew he was serious, the process, overall, went rather smoothly. Bhanu found the unit he wanted, paid a £1,000 deposit to reserve the space, and got the official receipt. From the point of submitting his reserve, he then had 30 days for his mortgage provider to pay the developer before his reserve would expire and he’d lose his reserve and the space.
Once he found out that most people secured the financing before they put in their reserve, Bhanu became nervous and asked his father, who had experience purchasing properties, for assistance. The building managers then referred them to their mortgage advisor, Mr. Crenshaw (who Bhanu calls for financial advice to this day). With the help of his father, Bhanu was able to pull together a solid 10% down payment, and Mr. Crenshaw was then able to shop around for mortgage plans.
When he returned with a few offers, none of the rates seemed particularly great: they were all bound to the Bank of England’s interest rate (which was high, since the economy was blasting along on fake money). Bhanu’s father’s then suggested that they approach another mortgage advisor and compare rates, as Trevor was advised in my previous article. The other mortgage advisor came up with a better rate: a 5.99% mortgage, fixed for five years. Bhanu then asked Mr. Crenshaw to find him something comparable (or better), and naturally, Mr. Crenshaw then found the exact same mortgage.
A few signatures later, Bhanu had officially landed himself a mortgage. It took exactly two weeks for the process to begin and conclude. His mortgage providers made him the offer, accepted his application, transferred the money, and the deal was done. The paperwork and legal jargon were daunting, but clearly not insurmountable. And at the time, getting a fixed mortgage at 5.99% was a smart idea. Now that we’re in this huge economic downturn, the interest rate has dramatically fallen and Bhanu is kicking himself a bit. But how could he have known?
To be clear, Britain has two kinds of property ownerships: lease-holding and free-holding. Free-holding is when you own the land on which the property stands (like a house or villa). Lease-holding is when you technically own the property, but formally own a 99-year lease of that property on that land (like a flat/apartment, condo or loft). As an official lease-holder, Bhanu then filled out paperwork that outlined his rights. Next, solicitors fleshed out his financial and personal info, the developers got involved to insure that the solicitors were on the ball, the bank approved his loan, the money was transferred to the developer, and bam ... Bhanu was officially a lease-holding property owner.
Like Rick, Bhanu’s bought a brand new property, but, unlike Rick, Bhanu was not an architect or designer. He was asked for details, like preferred flooring, colors, tiling, kitchen details ... and wouldn’t know what to do. And the learning curve was steep. He didn’t know if the prices they offered him for these details were fair or not. Were wood floors better than concrete? What were the differences between cabinets? What materials would hold their value and which were complete rip-offs? He often felt that maybe he wasn’t paying attention to something important. Or that maybe he had missed something. Even his father, who lived in Sweden, didn’t know enough about the pricing system in Britain to help Bhanu as much as he wanted. All Bhanu could do was ask friends who had already purchased homes, search websites for information, and pray that he was asking the right people and looking in the right places.
Despite the whirlwind, stress and research, Bhanu moved into his new property on his 27th birthday. He and his (then) girlfriend spent the whole day breaking their backs to move all their stuff in.
And the next day they celebrated.
One week later, the subprime scandal rippled across the pond from New York to London. Had Bhanu tried to purchase property then, only a few weeks after had he negotiated his mortgage, it would not have been approved. Working as a news producer, he had begun to notice stories of people defaulting on their mortgages, and he (and many others) could see that the market was beginning to struggle. Though this made the whole process especially nerve-wracking, the bank had still signed a five year deal with him, his mortgage was still approved, and the place was irrevocably his. He had slid to home base and was safe.
Yet the abrupt shift in the housing market has affected him in a way he only now has proper perspective on: he cannot afford his mortgage payments on his salary. Had he accepted the mortgage rates that were tied to the Bank of England's interest rate, his payments would have become much more manageable by now. But even after his recent dramatic raise, the payments are just out of his ability to pay by himself.
He had put himself in that situation though. He knew what he was getting himself into and had planned for it accordingly. He always had a roommate while living there, and currently, while he lives and works in Qatar, he has renters who can cover the mortgage’s costs. But who knows what the future will hold? What happens if his renters’ situation changes? What happens if home values change dramatically? Will he be able to continue to cruise along with the space as an investment?
So far the property has increased in value slightly, as it’s new and in a revitalizing neighborhood, and it’s possible that the Olympics can do more to increase its potential value. How this will affect his circumstances, who knows? But maybe this is the beginning of a great investment plan. After all, Bhanu does want to purchase more properties for investment purposes (as do Trevor, Reid and Rick).
Next week, I’ll focus on a couple who bought an older home in Salem, Oregon. Their homebuying process was equally seamless and far less stressful. But very unlike my stories so far, they bought their home as a place to make a home ... and they did it in a very different way than you might expect.