Learn how Community Sponsorship group, Family Matters, were able to gather together a group of investors and purchase a home for a refugee family!
As we see more Community Sponsorship groups investing in properties in which they can welcome a refugee family, one group have navigated this by gathering a group of investors and setting up a Declaration of Trust. This is by no means the easiest route of securing a property, but nonetheless, this is exactly what Paul Tomlinson’s group, Family Matters, set themselves the challenge of doing! They were able to successfully purchase a property thanks to the number of investors they attracted with a prospectus, a plan of action, and sheer determination to help.
Paul very kindly sat down for an interview and talked us through the ins-and-outs of how he and his group gathered a number of investors, raised the necessary funds, put together a Declaration of Trust and most importantly, purchased a home for a family in need. Continue reading to find out more about how Family Matters were able to do so, and what groups should know if considering this route.
Furthermore, Paul has also provided us with a template prospectus which your group may use as a basis for your own, should you wish to.
Why did you decide to buy a property?
We had spent ages looking for a rental property at local housing allowance rate and with a two-year tenure, and we just weren’t finding anywhere suitable. So that was the main reason for buying a property. An additional reason was that the first time we attended a Community Sponsorship event, there was a group there who had purchased their own house. And because we weren’t getting anywhere with finding a property to rent, we thought that if they can purchase a property together then surely, we can too!
What challenges did you face and how did you overcome them?
We are a Christian faith group, and so we had confidence and faith that we could do it. Challenges included putting together a prospectus for interested investors, because it had to be inviting, but it also had to avoid making any unrealistic promises or false statements. When thinking of who to advertise to, we had already built up a circulation list of around 40 people. And we also have a local organisation called ‘Christians Together in Fareham’ who were a good communication hub and facilitated us to advertise to even more people.
In order to purchase a property, how much were you looking to raise?
Initially, we were planning to buy a three-bedroom house, and that required about £250,000. And I have to admit, that at that point, we only had expressions of interest from potential investors, so people weren’t committed at that point yet. But the expressions of interests we did have surpassed the £250,000 in just 17 days. So, it made us wonder if we should be aiming to get enough money for a four-bedroom house. We then upped the target to £350,000, and we ended up reaching not far off that, about £325,000, in literally just one month.
Others may not have this issue, but the stamp duty holiday was there at the time, and so house prices rocketed. So, we had to carry on getting money in, and we eventually got up to £347,500 in four months, and that was from 31 investors. There was another issue, and this was partly to do with the market at the time, which is that houses were on sale at greatly inflated prices. And because it was effectively investors’ money we were using, we had to make sure that we bought a house at a reasonable and fair price.
What engagement did you have with the previous owners?
So, this was, in a way, a little bit of a one-off oddity. We made an offer on a property that was £10,000 less than another person had made. And the sellers wanted to check that when we said we were cash buyers, that we actually were cash buyers. So, they asked to see us to have a chat. And they hadn’t asked for this, but we decided to tell them our story and what their house would be used for – although we did swear them to secrecy that they wouldn’t tell all the neighbours! They were just delighted to think that their house might become a home for a refugee family, and so they accepted our offer even though they could have got more from another buyer. And for us it was just a lucky circumstance that they were actually relocating to Cyprus, and so they left a lot of white goods, curtains, blinds and all sorts of things which we were able to keep in the house, for use for the family. It also meant that we didn’t have to pay any money for these items from our funds, so that was wonderful.
How does this process work with such a large number of investors?
I would firstly say that anyone doing this really does need to check out the following facts for themselves. As a group you need to decide what your minimum and maximum investment is going to be. There is a legal reason to do with tax that meant that £40,000 had to be the maximum amount for investment from a single source, and that it would not be sensible to have someone invest more than that. But as to the minimum amount, that’s really at the group’s discretion and we decided on £4,000.
Only four people can be on the deed to the house. So, if you’re able to raise the money you need with four or less people, then that does simplify things a lot. But if you find yourself in a situation like ours, where we had 31 investors, then you need to have what’s called a ‘Declaration of Trust’. Since only four people can be on the deeds, the Declaration of Trust sets out the operating procedures of how the Trustees (on the Declaration of Trust) are going to work. So that way, the Trustees know exactly what their responsibilities are, and the investors know what they can and cannot do. And the Declaration of Trust also protects the investors who won’t be there on the deeds. But nevertheless, their investment is protected in this way.
What were the motivations of the investors?
I’d certainly say that their motivation was not the rate of return, their motivation was to provide a new home for a refugee family. And they wanted to be part of something that was going to change the life of a refugee family. Nevertheless, they do get a small return. We knew that we could offer around 2% in the first year. And that would enable us to have a bit of excess coming in, which would help us to build up a contingency fund to pay for things like repairs on the house. And then in subsequent years, that return will probably be around 4%. Most investors had their money in places that were earning low to negligible rates of interest. So, even though the money wasn’t the reason they were investing, they were most likely getting a higher rate of return out of it anyway.
What happens if an investor wanted to suddenly pull out?
Through our prospectus, we had already made clear that the investment was a five-year investment. The Declaration of Trust made it clear that if they wanted to leave before the end of the five years, then it was their personal responsibility to find a replacement investor. Now, it could mean that, for instance, someone who invested £10,000 might find that they can only get a replacement investor by offering the £10,000 share for a sale of £9000. So, they could make a loss on it if they pulled out before the five years were up. But again, that was made absolutely clear in the prospectus and the Declaration of Trust, as was the fact that it was their responsibility to find a replacement investor. That being said, as a group we would give them as much assistance as we could.
What happens with the investors after five years?
The Declaration of Trust does run only for five years. And so, at the end of five years, if any investors wanted to carry on being owners of the house and to continue renting it out, then a new Declaration of Trust would need to be organised. So, if there are, for example, ten investors who didn’t want to carry on any longer than five years, but all the other investors did want to carry for longer than that, then it would be the responsibility of the investors who wanted to continue to find replacement investors. And if they couldn’t find them, then the Declaration of Trust makes clear that the house would have to be sold, and then the money would be divided amongst the investors.
With so many investors, who is the actual landlord of the property?
Technically, it’s the Trustees, as they’re the people on the deeds of the house. We tend to think of all the investors as the landlords, but it is the Trustees. And as our group is supporting the family, if there was any dispute between the family and landlords, we felt that we had to be completely separate from the landlords. And so, although we were instrumental in setting up the investors group, once the Declaration of Trust had been written and signed, we then effectively cut ourselves off from the investors so that we could remain independent from them. However, there is a very close and friendly relationship between us and the investors.
What other things should people be aware of if considering this route?
Firstly, it is very time consuming. There’s lots of little things that need to be done when buying a house, such as identity checks and money laundering checks. And if you’ve got, like us, 31 investors, then that’s a lot of people to organise going to the solicitor – although nowadays, a lot of it can be done online.
Getting 31 lots of money to the conveyancer in time for the exchange of contracts and completion is another large task as well. Before that, you’ve got to make sure that you’ve got very good communication with investors, because they will have concerns and you don’t want to lose any of them. So, we were constantly checking in, informing them of progress, discussing what still had to be done, and addressing any concerns they had. So having really good communication is key.
And the investors’ concerns also related to tax, so income tax and capital gains tax. Now, we always stressed to them that we were not tax advisers, and that there was no possible way that we could know about the individual circumstances of any investor. So, whilst we would give them our knowledge of the circumstances as we saw it, we did stress that each individual investor should verify the situation for themselves if they were unsure or concerned.
Because we had so many investors, it means that each investor actually owns quite a small share of the house, and even the biggest investors only own about 11.5% of the house. That of course means that each investor only has that percentage share of the rental income, and therefore they’re unlikely to have tax issues with it. The situation, as we understand it, is that if for an investor this is their only rental income, and if their share of the rental income is under £1000 per year, then it’s completely tax free and doesn’t even have to be declared. If the income is between £1000 – £2500, then they will have to pay tax on the excess over £1000, but it wouldn’t incur a tax return. And it’s only if their income was over £2500, that it would then require a tax return. Now that meant that for 29 out of our 31 investors, the money is tax free and they don’t have to make a tax return.
It’s a similar story with capital gains tax; for 29 out of our 31 investors, as long as it’s their only capital gain, then the house would have to increase in value by 64% over the five years for them to incur a capital gains tax. And house prices might go up, but it’s unlikely to go up by 64% in five years.
What are the biggest benefits in buying your own house?
I think a huge benefit is the fact that you get the guarantee of the house at local housing allowance rate, because all the investors came into it on the basis that they were going to rent the house at that rate, and also with a two-year tenure. I think those two issues are the two main things that make it incredibly difficult for people to secure private landlords.
With buying a property, you get a friendly landlord who’s got exactly the same motivations as yourself. And for me, personally, I think you create an opportunity for a whole new extra lot of people to have the joy and the privilege of being an important part of Community Sponsorship. It’s been an incredible amount of work to do Community Sponsorship, but we’ve also got an incredible amount of joy from it. We’ve forged new friendships, and that’s true for the investors as well.
It can be a long and slow process, but it does avoid relying on the luck of having to find a compassionate landlord, as well as the benefit of feeling much more in control.
Thank you very much to Paul!
Family Matters Prospectus [36.5KB] Download .DOCX