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A bird in the hand is worth two in the bush

Today (Monday 9th April) we took an offer on a property and exchanged prior to it coming into auction on the 17th April. When we ‘bought’ the property we had exchanged with delayed completion, in order to allow us to place it in auction in-between the exchange and completion dates.

The aim was always to resell prior to the completion date, so in order to secure a firm sale we had entered it into the auction. With a normal sale through an agent there can never be any security until exchange of contracts occurs. With auction you’re almost assured a sale on the day of the auction, given of course that your reserve price has been set reasonably and there are enough people in the room. We anticipated it would resell for £275k (we had exchanged on a purchase price of £240k). The property was so popular it attracted interest prior to the auction and had two offers on it on the basis we agree the sale prior to the auction.

I suspected it would probably sell for more in the room but as the saying goes ‘a bird in the hand is worth two in the bush’, this means that it is preferable to have a small but certain advantage than a mere potential of a greater one. Auctions can be a hit and miss game. Bad weather, school holidays, World Cups etc are all events which serve to reduce the attendance at auctions; and all you need is for a couple of buyers not to turn up and the property will not go for what it should on the day. Your market in the auction is those people who turn up in the room whether physically or over the phone.

Some time ago, at one of these leading auction houses, we entered a block in Shepherds Bush; the property consisted of three flats and was given a guide price of £600k with a view of selling for £650k. Surprisingly the block didn’t sell.

It should have, it defied reason. However the Olympics and the Queen’s Jubilee celebrations had meant there was poor attendance and therefore the demand in the room was low, and this was our market in the auction room.

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The flats in the block are currently under offer individually, the offers totalling £875k – only 9 months later without spending a penny extra on them. Clearly the market missed this one.

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Hence we may be losing some money by taking an early offer but then again it’s a sure sale; and by executing this deal we are ready now to take on another one.

The client for whom we’re doing this property deal for is training to become an accountant, he had some money saved up and wanted to invest along with his brother. He realised the secret: it is better to have his money working for him to make money rather than himself. This is even more necessary given the current rates offered by institutions.

Only £24k was tied up in this deal, from 15th March 2013 to 8th April 2013. Therefore the money was tied up for only 3 weeks and the return was £25k, so almost 100% allowing for expenses, over a three week period a 33% per week return.

Of course there will be deductions from this, such as sales commissions and legal fees etc, but this is a big enough return to allow for this and still be left with an excellent return on funds employed.

In all fairness the above example is actually misleading as although funds have not been directly employed they have to be ring fenced and held just in case they are required for completion. So 30% of the property price would need to be held if required for completion, this comes to £72k.

A more appropriate return should be based on £25k over £72k which is a 30% return in 3 weeks. Still an excellent return at 10% per week and without the cost of stamp duty and funding.

The trouble is trading or flipping opportunities don’t come along all day, every day.

The investor is certainly chuffed at his first return with us. He originally wanted us to charge him a fee and to handle the property himself. I advised him this was his choice, but I suggest he should not as this is the first time he’s dipping his toe into property with us, and it would be better if we handled the exit too. The decision though was of course his.

He chose to follow my advice in both, us handling the deal and accepting the offer prior to the auction.

The advantage is he is now in the market to look for another deal and be in the position to purchase one with the confidence of having successfully completed one deal with us already. Although the danger is now the bar has been set fairly high, and so the pressure to out perform on this deal is on!

Trades don’t come by every day, there are some slow burners and other which cook faster, like popcorn. You need a combination of both when in property.

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Rather than running around focussing on trades it ‘s sometimes better to sit on deals and see them through – right through the development and resell. There is also a satisfaction which comes from completing something to fruition.

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You may find this approach sometimes actually generates more money than all the running around, as in between trades your funds are not doing very much.

Actually new build flats are geared perfectly up for trades, due to the long completion periods. You don’t even have to negotiate the long term completion – they offer them to you. Completion can be a couple of years away, in this time if the property increases in value you can resell. When you exchange you give the developer 10%, if the property rises 10% more you can exit and get double what you put in.

This however is a double edged sword, what happens if the price drops? You will lose what you have put in totally, and you will be forced to complete the deal. 10% will not be the limit of your loss. Many investors only discovered this after the credit crunch, many thought they could simply walk away from the deposit. Not so easy, in one particular case the developer sued and won a landmark case. The investors were forced to complete on their investments irrespective of the loss.

In all fairness if they had made money they would not have shared any profits with the developer, so why do they expect the developer to bear the loss in the event of a downturn?

If you do get the right development which rises in value you can be onto a good earner without having to worry about managing a property or completions costs. The resell however may be difficult though as the developer normally has hundreds of units and a nice marketing suite backed up by a full blown marketing campaign. Whereas you’ll simply be reselling a piece of air in the sky which is yet to manifest.

By the way, did you know….

Property Funds – Returns without the hassle of direct ownership

  • Investing in property directly may not suit everyone
  • There are funds offering returns of 15% to 20% in the market
  • This means you get a decent return without the hassle of owning a property
  • This beats the returns offered by banks and many other financial products
  • Underneath it your money is secured by property in a strong location
  • There is a reason why banks are still prepared to lend 75% of a property value in this climate, because they know it is a secure investment
  • Many funds are protected with external auditors and fund managers, this means your funds are kept as secure as possible

Suresh Vagjiani

Sow & Reap

A Property Investment Company

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!Tips of the Week

If you are planning to buy a property from the auction ensure you get a solicitor to read the paper work very carefully.

If you find a really good investment property don’t rule out the opportunity to buy it before the auction. Many sellers will be happy to do a deal.

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