An introduction to property sourcing and compliance
An overview of property sourcing and the rules property sources need to follow to stay compliant.
What is property sourcing?
Property sourcing is the process of analysing, negotiating and completing on property deals. The process involves researching the area for investment, choosing a strategy to invest and sourcing leads (whether this be via an estate agents or direct) and ultimately deciding which of those leads will provide the best investment opportunities to then make offers and complete on the deal.
Deal sourcing is the service of property sourcing in which a deal sourcer acts on behalf of a property investor to find and secure a property for investment. Whilst this might sound similar to the role of an estate agency, the way that property sourcers and estate agents interact with people and properties is very different. Property sourcers go out to find properties whilst estate agents often advertise these properties, with people approaching them to view them (which may in fact be a property sourcer).
A property sourcing agent should have a good understanding of the property market and can be hired by individuals who wish to invest in property but perhaps lack the time, despite being an experienced property investor, or expertise to find the right property for them. Property sourcers can be used for a variety of investment ends and types of property. A property sourcer might survey a range of possible investment properties in the real estate market to identity the one with potential for refurbishments to be completed by the investor so that the property can be sold at a profit. Alternatively, they might try and increase a client's monthly cash flow by finding the right property, such as a HMO, that could be put on the rental market to generate monthly income. A property sourcer might also have a better understanding of what properties are below market value (bmv). For first time buyers entering the property investment arena, using a sourcing service might be a beneficial way to get an introduction into the property market.
Compliance and Property Sourcing
If an individual is selling property sourcing deals to another, like in the instance outlined above, they will need to ensure they meet the compliance requirements, especially if they are handling client money to purchase the property. In this section we will touch on some of the things that property source dealers should have in place before reaching out and acting on behalf of clients. Whilst we distinguished them above, for legal purposes property sourcers are treated similarly to estate agents, largely due to the information and capital they hold and therefore need to ensure they meet the relevant regulation under the Estate Agency Act 1979. As such, property sourcers, if selling their deals to other people (clients) will need to make sure that they have done the following:
1. Anti-money laundering check
If accepting or handling money from clients purchasing property, sourcers will need to register with HMRC for Anti Money Laundering compliance. To do so, sourcers can set up a Limited Company. Sourcers must register with HMRC prior to engaging in sourcing deals and ensure that they pay the necessary fees. It is also important that sourcers renew their registration at the end of each registration period. A failure to register or re-register a relevant business will result in penalty.
2. Professional indemnity insurance
Sourcers should ensure that they have the necessary insurance policies in place to ensure that they are covered if they make a mistake that causes a client financial or reputational loss. The cost of insurance will depend on the provider, the size of the business and the nature of their transactions. Before committing, sourcers can compare indemnity insurance quotes online between some of the United Kingdom's insurers.
3. ICO Registration
4. Property Ombudsman Membership
Membership to one of the Property Ombudsman is also key. Sourcers can join TPO or PRS for a membership fee which will demonstrate their commitment to professional standards and provide them with dispute resolution, saving the need to independently hire solicitors in cases of dispute.
Property sourcers also commonly use contracts with clients to ensure that the obligations, limits and fees are clear between the parties. Whilst not a legal requirement, having a contract that clearly defines the parties obligations is crucial to ensure that expectations are aligned and to help arbitrate if disputes were to arise.
The opinions on this page are for general information purposes only and do not constitute legal advice on which you should rely.