Over 36 years of property investing experience!
The Great Recession 2022
The Great Recession of 2022…
There’s not many people using that phrase at the moment, and for good reason: the recession hasn’t started yet!
It’s not a question of “If,” but “When.” Recessions are cyclic, and return with monotonous regularity just when we don’t need them.
Recessions seem to occur every decade or so in modern economies and, more significantly, they seem to regularly follow periods of strong growth.
The last major UK recession started in 2008 and lasted for a couple of years before we slowly started to struggle our way out of it, eventually finding a sense of calm in 2012/2013.
The property market was booming in the early part of the 21st Century on both sides of the Atlantic, and there was borrowing on a huge scale to finance what appeared to be a one-way bet on rising property prices, but the boom was ultimately unsustainable because, from around 2005, the gap between incomes and debt began to widen. This was caused by rising energy prices on global markets, leading to an increase in the rate of global inflation.
The main culprit then was the subprime mortgage: that being a mortgage that was offered to prospective borrowers who had impaired credit records. The higher interest rate was intended to compensate the lender for accepting the greater risk in lending to such borrowers. These mortgages were repackaged by lenders into mortgage-backed securities (MBS) and sold to investors who received regular income payments just like coupon payments from bonds, but consumer demand drove the housing market to all-time highs in the summer of 2005, which ultimately collapsed the following summer.
It all started when Lehman Brothers – America’s fourth largest bank – filed for bankruptcy on September 15, followed by the stock market crash on October 24, 2008.
Economies around the world crashed.
The sub prime mortgage crisis didn’t just hurt homeowners, it had a ripple effect on the global economy leading to the Great Recession which lasted between 2007 and 2009. This was the worst period of economic downturn since the Great Depression.
After the housing bubble burst, thousands of homeowners found themselves stuck with mortgage payments they just couldn’t afford. Their only recourse was to default, leading to repossession by the banks, which in turn led to a huge increase in BMV (below market value) properties on the market.
At the same time the banks suspended giving mortgages – unless you could prove you didn’t need one – which meant that investors couldn’t take advantage of the situation and build their portfolio cheaply.
Many investors were further hammered if they had taken advantage of the mortgage situation in the early naughties when banks were giving 125% mortgages and a £10,000 cashback deal!
Investors then were buying a property a week, on a ten year interest-only mortgage, and were doing very nicely, until that deal term ended during the recession, and the investors were faced with either paying off the mortgage or re-mortgaging, neither of which they were able to do. They couldn’t sell the properties either, not least because they were in negative equity, caused by the property crash and the 125% mortgages the banks had been giving, and anyway, nobody could get a mortgage!
It was havoc. I was going to property meets every week and listening to tales of woe as ruined investors cried into their Red Bull.
Luckily I didn’t buy a single property in those crazy days: common sense told me that such idiocy by the banks could only end in trouble.
However, I did manage to do very nicely indeed from that recession, albeit I didn’t really get into it until 2011 – the tail end of the recession, and a bit late, but not too late!
I actually started my Recession Success in the later part of 2009, when I read a book by a guy called Donald Trump! Yes, a forthcoming president of the USA!
Well, this book blew me away. Here was a guy doing property deals in Manhattan without actually buying any property! He was using a product called a Lease Option Contract. Now at that point I had been in property investing for 24 years, and I’d never heard of Lease Options.
He was talking about them as if he expected all his readers (which he supposed would be Americans) would know what lease options are, and in fact, most of them do.
It turned out that you can lease a property for a number of years – up to twenty, legally, and you have the option to buy it at any time within the lease period, at the value at the time of writing the contract! You had the option to buy the contract, but not the obligation – you didn’t have to buy it if you didn’t want to, but if you did, the owner could not refuse. Crucially, you can also sell the property itself, or the contract, on to other people. I couldn’t believe how such a simple idea could make so much money. I was determined to make it work in the UK, and jumped right in.
The first problem I faced was the contract: the idea was so new that no solicitor knew what it was or how to write one. I eventually found one willing to have a go and between us we cobbled up what we thought a lease option contract should be.
Then I hit the road. For six months I travelled the length and breadth of the UK, visiting estate agent after estate agent, and didn’t do a single deal. Not one.
Disappointed? Yes. Discouraged? NO!
Not getting a deal in six months with a completely new strategy didn’t make me a loser, but quitting would have!
I sat down over the Christmas holidays 2010 and dissected my strategy. I knew it would work, I just didn’t know, yet, how to make it work. I finally came up with a new angle: instead of going into estate agents and trying to get deals from them, I went in and showed them how I could help them make money.
Bingo! It worked! I did 48 deals in the next seven months and made a lot of money. The most I paid for any property was just £55, and that included the fuel to go and see it! I then wrote my book, “How To Acquire Properties For Just £1 Each”, (available on Amazon), went on the speaking circuit talking about this new strategy and started running courses and the rest, as they say, is history. Today, most property investors know what lease options are, even if they aren’t doing them. (And they should be doing them!)
Clearly, doing 48 lease option deals in just seven months, single-handedly, at the tail end of a massive recession whilst it was still hugely difficult to get a mortgage showed me the potential here: Lease Options are a massively powerful tool not only in property, but other businesses too. For example, lease options are now part of car sales; you can lease a car for a few years and you have to option to buy it at the end of the contract. Lease Options are a huge part of commercial property sales now, but sadly lag behind in the residential side of property.
I put that down to poor training by the many “gurus” out there professing to be experts in every aspect of property investing, but in practice know very little.
For example, I was at a property meeting just last week (middle of June, 2022) and the speaker was a guy who had just spent £25.000 plus VAT to go on a twelve month course to learn property investing. On this course he ‘learned’ about lease options, and then proceeded to negotiate a LO deal.
At the meeting he had slides showing his figures for various property deals, including the lease option. For starters he called Lease Options “Purchase Lease Options”, or “PLO’s”. He obviously does not know that no such things exist! The contract is a combination of a ‘lease’, with which you lease the property, and an ‘Option’, with which you have an option to purchase. Calling them a “Purchase, Lease, Option (to purchase)” makes no sense grammatically or factually, and shows the lack of knowledge by the instructors. They are Lease Options, pure and simple. Be careful where you do your training!
When the lease option slide came up I nearly choked. This guy had paid a lease option fee (which is normally £1) of £315,000!!!!
He clearly didn’t have a clue what he was doing, proven even more when he bragged about it then proudly told us that he the sold the property for just £330,000.
I was aghast. There were virgin newcomers to property investing in that audience. What do you think their reactions to those kind of figures would be?
Do you think they would ever be tempted to try doing a lease option, or to learn more about the strategy?
Unfortunately, lease options are achieving a negative reputation among residential property investors, purely because badly-trained wanna-bees are attempting them whilst totally unprepared. Naturally they fail, then justify their failure on lease options “being too difficult to do”, when, in fact, the complete opposite is true: they are very easy indeed to negotiate, but like everything in life, you have to know what you’re doing.
Remember this: Lease Options are the closest thing to free money you will ever get, and should be the number one strategy for every single property investor. You will never build a bigger portfolio, for less money, than with lease options.
The fact that you are reading this shows that you have an interest in becoming wealthier, and property is certainly one very good way to go.