France Property Alerts
30 June 2008
Dear FPA Friend,
I'm having something of a tidy up in my office as we are off to the US for three weeks from 12 July and I like to leave things straight when we go away. (FPA will continue as per normal by the way). Anyhow, I have been sifting through all sorts of property deals in France from new-builds to leasebacks and a good 60 per cent come with rental guarantees. In effect, you're promised a yield (return on investment) of some 5% to 10% a year for the first two to three years. Are they worthwhile or a marketing tool? Read on, and decide for yourself…
Take an overview of rental guarantees. A 'rental guarantee' is a simple enough deal. When you buy a, typically new, property the developer will guarantee that you will get a rent from it for a set period of time. They may guarantee a set sum per week for so long; £200 a week for one year, as an example. Or, more often, they will guarantee a yield – a return in relation to your investment – which will typically be in the region of 5 to 10 per cent; again for a set period of time, perhaps two years.
This is an appealing offer for many investors as it underpins their financial incomings for the first year or two, often whilst they 'find their feet' in a new market to them. Some of these guarantees are genuine. Others are less genuine, being little more than a marketing ploy at best to, at worse, a scam whereby you effectively overpay for the property at the outset and then get given your own money back over the one- to two-year 'rental guarantee' period.
Be aware of the main problems. There are two main issues. One is the developer or whoever is offering the guarantee. The other is the guarantee itself. You, and your advisers, need to do your due diligence on the developer. Sometimes, the guarantee simply doesn't materialise - after all, the guarantee is only as good as the people giving it. So you need to check out the developer on property websites and forums and see how long they have been trading, how many other developments they have built and try to talk to other investors who have received these offers from them.
More often than not, the guarantee is honoured only because you simply pay too much for your property and then get your own money back later on as the rental. Again, it's a matter of doing your due diligence. You need to compare the price of this property with similar ones. You may find yours is more expensive to allow for this guarantee. Talk to letting agents about local rents; if you are getting an above-average return, wonder why!
Ask what the property would cost without the rental guarantee! This can produce an interesting response. Peter Esders of the International Law Partnership has more to say. 'At a recent property exhibition, I saw a developer selling off-plan properties with guaranteed rentals. Basically, they were flexible and if you didn't want the guaranteed rental then you didn't have to take it. They had two price lists - one where you took the guaranteed rental option and one where you did not. It didn't take a mathematical genius to see that the prices of the guaranteed rental option were higher than the ones without - by exactly the same amount of the guaranteed rental that you would get back over the three years! In essence, you paid more for the property and you got your own money back in instalments. Not only did the developer have use of your money but he also kept any interest on it. Seemed like a great little earner for the developer yet people were still falling for it even when it was set out so blatantly!'
Recognise potentially genuine offers. Although there are many unscrupulous developers selling property across the world, it is not universally the case that each and every rental guarantee is a con. There are some products out there which are genuine rental guarantees backed up by travel companies and which are covered by an independent insurance or bank guarantee. These rental guarantees do mean something (although nothing is absolutely guaranteed).
Look for one where the developer is able to prove to your advisers that they have an agreement with a tour operator who guarantees a certain number of visitors. In this case you can feel reasonably secure in the knowledge that during the period of that agreement there will be some sort of guarantee. However, don't take the seller's word for it. Check that the contract with the tour operator is actually in place. There are cases where it's claimed a tour operator is involved and, when you contact the tour operator to check this, they have no knowledge of it!
Bottom line? Do your due diligence! With a rental guarantee product offering a two-year return at say, 5 per cent per annum, it's quite easy to wrap a 10% total rental guarantee up into a property price. The classic question to ask is, of course, "what discount would I get if I didn't take the rental guarantee". The developers that are feeding your price inflation back to you often appear to have no qualms about doing so and will quite openly offer a discount. Some even offer this option directly on their website.
You need to see where the tenants are coming from – and have that backed up independently. Otherwise, at the end of the rental guarantee term, you have a property you can't let; at least not at the price you were getting. What is amazing is that some of these deals are marketed as guaranteed rental yields even if you don't have a tenant – quite where some of these buyers think the money comes from beats me!
All for now – see you again soon.
Best Wishes,
Iain
Iain Maitland
Editor, France Property Alerts
France Property Alerts provides free weekly e-alerts on French property news for subscribed members. You can subscribe via the website at www.francepropertyalerts.co.uk. Unsubscribe by clicking the link at the bottom of this e-mail.
News provided by free FPA e-alerts is for general information only. Subscribers should not rely on this when making decisions. You are strongly advised to take independent professional advice before buying a property. Purchasing a property in France is not the same as buying a property in the UK. France Property Alerts and its staff do not accept any liability for losses suffered by subscribers.
You can write to France Property Alerts at Providence House, Little Sampford, Essex CB10 2QQ. You can email the editor, Iain Maitland, at Imaitland@aol.com. His telephone number is 01394 272338.
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