The Shape Of The Deal
28th April 2018
I’m averse to new builds in general. Why ?
Because they normally have the following characteristics:
Firstly, they are over-priced, sometimes grossly; symptomatic of this is they are sold mostly overseas to Asian buyers, who for cultural reasons like to purchase new properties rather than second hand ones, god forbid if someone had actually died in one.
Secondly, they tend to have exorbitantly high service charges, and more recently, they have been sneaking in higher and higher ground rents. This is because ground rent streams form a whole other business, which can be hived off from the development, and resold; adding a fat layer of cream to the deal.
Hundreds of thousands, if not millions, are spent on marketing the developments. The investment angle, though mentioned, is hardly emphasised. What is sold is a lifestyle choice, meaning the whole approach is one designed to appeal to the emotion rather than a strong case for investment being made by the developer.
These are just some of the main reasons as to why I have an instant aversion to them.
Over the years we have successfully transacted numerous flips. What this means is exchanging on a property and reselling the contract for a higher price. This generates a massive return on the money invested. One example is in Shirland Rd, in Maida Vale, which we purchased on behalf of our client for £1.1m from auction, no less, and promptly resold for £1.3m within three days of exchange!
The money used to generate the £200k was only £100k. This was the fastest flip we have done. Most will take longer. The essential point in these transactions, is that the money used in the deal is only a fraction of the purchase price, usually 10%. In this example, we only had four weeks to complete the deal.
The current environment is a tougher one to conduct these types of deals, as we are looking at a sluggish and uncertain market, especially in more central locations. Therefore, investors do not have the buoyancy they possessed in more rising markets. They are in more of a sit on the fence and see what happens mood.
Ironically, the new build payment structure is tailor made for flipping. You have a long gap between exchange and completion, one you could not even dream to negotiate in a normal deal; you have years before completion. Therefore, the money used in the deal is very small, in proportion to the returns you could potentially make.
You would of course need to ensure a few fundamentals are in place, in order to maximise your chances of success. Firstly, you need to ensure you are buying at a reasonable current market price, and not one which has a built in price rise to completion. Secondly, do your homework to check that this is an area which is regenerating and gentrifying, so there is an upward push on prices between exchange and completion. Thirdly, do ensure there is a nice long gap between the exchange and the completion, allowing time for the deal to mature.
We have secured such a deal, which ticks all of these boxes and more. Only a small fraction of the purchase price is required to secure this deal. It’s on the Cross Rail line, and the time period for completion is a massive three years, by which time the Cross Rail will be up and running, and the deal should have matured nicely.
The testimonial for this deal is that 50% has been sold in only two weeks, this is no easy feat. Get in touch now to find out how you can invest.