Think twice before tackling a derelict property

published 19 May 2008

If you believe reports appearing over the past year in newspapers and Government press releases, Britain is on the verge of a housing crisis. The shortage is so dire that Gordon Brown even wants to build on flood plains.

Yet a new report from Halifax shows that there are almost 290,000 houses standing empty across England, a figure that has fallen by just 6% since April 2003, despite the property boom.

That's far more available properties already in existence than the Government's housebuilding target of 240,000 properties a year and the Halifax figure is conservative. The Empty Homes Agency estimates there are 840,000 empty dwellings across the UK. Moreover, most of these are exactly the type that are in demand, family houses rather than city centre flats. So why are they empty?

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A very small proportion of abandoned homes are due to property speculation. Property investment has hit such feverish levels over the past few years that some people are buying homes purely for the investment potential and don't want to find tenants. These buy-to-leave' investors target the new-build market as they want to maintain the new-build premium'. Booming house prices mean they've relied on the capital gains of a property rather than the regular income of a tenant. This sort of ploy will, of course, die out with the end of the house-price boom.

But most empty homes are deserted due to ownership arguments, or are in need of repairs beyond the budget of the owner. Apart from simply being a waste of housing stock, these abandoned homes also cause problems as they are targets for crime. The London Fire Brigade estimates that one in every four fires they attended in 2006 were in empty houses. And the properties adversely affect local property prices. In 2003, a Hometrack study reported that a property next to an empty house sells for 18% less than one with an occupied neighbour.

So what is being done about the problem? The Government has announced a number of measures to try and bring empty homes back into use. Firstly, Chancellor Alistair Darling has extended the VAT reduction that applies to renovation work on empty houses. A property needs to have been empty for two years now, rather than three, to qualify for a discounted refurbishment VAT rate of 5%. With the average renovation cost being estimated at £29,824, that is a £3,730 saving.

Local authorities are also being encouraged to reduce the 50% discount on council tax for empty properties. On top of this homes that are returned to use are now included within the Housing and Planning Delivery Grant system, which gives financial incentives to councils that meet building targets.

But these plans don't tackle the main problem of abandoned homes. The vast majority are found in the least desirable neighbourhoods. The Halifax report shows that out of the 15 local authorities with the highest level of empty properties, 12 are ranked "amongst the 20% most deprived areas in England". So even if they are brought back into use, finding someone willing to live in them might prove difficult.

Derelict homes are a difficult investment prospect for numerous reasons. Local councils have the power to take over the management of empty properties under an Empty Dwelling Management Order (EDMO), meaning they can renovate and let the property, but they are not permitted to sell it. As a result few derelict properties come up for sale. If you do find one and are tempted to invest, think very carefully before you do.

Firstly check the deeds and make sure the rightful owner is selling the property most homes are empty due to arguments over ownership. Then check for squatters. While professional squatters can be a bonus for neighbours as they secure a property, reducing the crime opportunities, the majority only speed up the building's decomposition and can prove almost impossible to evict. Bear this in mind once you've bought the property and act quickly to secure it. You also need to get a thorough survey done. You want to buy a property that can be salvaged, not a money pit.

Most importantly of all, remember that while in a rising market renovating derelict properties can be arduous but profitable, with the market now falling the risks become even greater. Empty homes tend to be in the worst neighbourhoods in the country and these are always the first places to be hit by a price slump as buyers can afford to buy in nicer areas. Realistically, for most people, these projects aren't worth taking on.

Where the empty houses are

Region, No. empty homes, % of housing stock, Change since 2003

North West, 63,606, 2.6%, -0.1%

North East, 18,079, 2.1%, -0.1%

Yorks & Humberside, 36,326, 2.0%, 0.0%

West Midlands, 35,565, 1.9%, 0.1%

East Midlands, 24,831, 1.6%, -0.2%

East of England, 26,996, 1.3%, -0.2%

London, 30,470, 3%, -0.6%

South East, 32,890, 1.1%, 0.0%

South West, 20,000, 1.0%, -0.4%

England, 288,763, 1.6%, -0.2%

The figures shown are from April 2006 and represent the private housing market.

Source: Halifax

Ruth Jackson-Kirby is a freelance personal finance journalist with 17 years’ experience, writing about everything from savings accounts and credit cards to pensions, property and pet insurance.

Ruth started her career at MoneyWeek after graduating with an MA from the University of St Andrews, and she continues to contribute regular articles to our personal finance section. After leaving MoneyWeek she went on to become deputy editor of Moneywise before becoming a freelance journalist.

Ruth writes regularly for national publications including The Sunday Times, The Times, The Mail on Sunday and Good Housekeeping, among many other titles both online and offline.