Last week there was a Savills auction and we had our eye on a studio on 506 Edgware Rd guided at £130k; the reason being we knew this building well, we had purchased a one bedroom ground floor flat in the next door building for £230k. The location is great, it is right near Little Venice canal, which is a very quaint place. People like to live there, as walking there gives you the feeling you’re in the country. The reason why this property was so cheap was because there were a few issues with the title and the management. The title showed the property had access to the rear garden, the actual situation was someone had built an extension of their flat into the garden and blocked access from the ground floor flat to the garden.
To us it didn’t seem like a big problem as long as we knew we were definitely getting the flat in the purchase and if we got the garden all well and good, it would be a cherry on the pie.
The other issue was the freeholder was missing, though we did manage to track him down after the transaction.
£22,000 was spent on developing the property and turning it into a two bedroom. The property was quickly let out at £400pw, the property then was revalued by a mortgage company for £330,000. The draw-down based on this figure is £247,500, this means only £4,500 remains stuck in the property. The property will be producing £5,625, after mortgage payments and management fees are taken out. Not bad for an investment of £4,500.
Given the above we were naturally eager to grab the property when it came up in the Savills auction. We were ready with our client to attend the auction and bid but there was one issue, the legal paperwork was not available for examination. Normally you would get your solicitor to have a quick look at the legals prior to going into the auction.
Given our past experience we weren’t expecting the legals to be crystal clean, hence we wanted to ensure they were looked at carefully. But there weren’t there!
We waited and waited but they did not appear until late Friday afternoon at about 3.30pm. Given it was a bank holiday weekend there would be only one working day before the auction for anyone’s solicitor to go through the paperwork. Luckily our solicitor looked at them straight away and told us the paperwork was a mess and no lender would lend on this property. This was the same solicitor who was involved in the purchase of 504 Edgware Rd so he knew the background of the block.
This is a trick used by some sellers when there are issues with a property they are selling. Sometimes there is even an addendum on the day.
It is obvious that the information on the addendum was known in advance, and they were slipping it in ‘last minute’ so a naive buyer might miss it.
Luckily we pulled out well in time, the property ended up selling for £140,000. If this chap is going to need a mortgage he will be severely disappointed, this will need to be purchased in cash. I doubt even a bridging company will be lending on this. The opportunity cost of tying up £140,000 cash in a property like this is about £560,000 of purchasing power with a mortgage, as £140k can be used as a 25% deposit. If you were making say 10% on a £560K property, then that would be £56k. In order to match this you would need to make 40% on £140,000!
With so many naive buyers coming in to the auction rooms it has become a dumping ground for properties which cannot be sold conventionally, properties with issues. Auction means you do not always have the luxury of checking everything out prior to putting money down. You can choose to check everything out prior to the auction but this could prove very expensive if you don’t end up purchasing the property.
Here are a few stories of dud properties I’ve come across. Recently a property was sold in the auction described as part of a bigger block, a conversion. The picture which was given was of the block described. The actual property was not in the block, it was a garden shed which had been converted into a one bedroom flat and was rented out. This was explained by way of an addendum on the day of the auction. This is an outright attempt to mislead as the property was always a converted shed and not part of the block. The person who exchanged on this property got their 10% back after threatening to sue the other side.
Another scenario was someone who buys a house, converts it into two/three flats and then resells at auction. The conversion is not only not legal – which sometimes can be fine, but the conversion is done in one day. The bathrooms and the kitchens are not plumbed in! The ‘conversion’ is designed to give the appearance of flats but actually they are not! So the buyer pays a premium for buying ‘flats’ and actually all they’re getting is a house.
The other story is about a small ‘flat’ which is described as a self contained unit.
The property is so tiny someone can’t even lie down in it!
This property is in a strong location in W2, so viewings on the property are never conducted. What happens is many people in the auction room purchase blind, without seeing the property. A studio flat in this location should be worth at least £250k, so when it goes up for sale it looks like it’s going for substantially less than what it should be, some investors get excited and decide to take a punt. After exchanging on the property they go to view it and after seeing the size of the property they decide to drop the exchange money. The seller of this property does this a number of times throughout the year in different auctions.
It is not always the sellers who mess around with auctions, I know of a buyer who doesn’t have a huge amount of money and so he looks at properties well outside of London: Newcastle, Manchester etc. As looking at all of these properties physically would take a day each he decides to set up many different companies which he uses to purchase the properties in. If something looks like it’s going cheap in the auction he decides to purchase. He then takes a trip to see the property, if he doesn’t like the property he simply dumps the company!!
Auctions can yield good bargains but they can be a minefield for the uninitiated. So make sure you do the right due diligence prior to purchasing.
The Real Deal
- Cheapest two bedroom maisonette you’re going to find
- In a strong student location, sales should complete around September, prime time for students
- Three separate rooms and large eat-in kitchen make it ideal for students
- Only 1% stamp duty
- Rental income £20,000pa
Call us now on 0207 096 1354 to secure it, this will go fast!
Sow & Reap
A Property Investment Company
! Tips of the Week
* What to choose: New builds or existing? New builds generally have high service charges andground rents, these will dampen the rental yield. Existing property especially Ex Local Flats have very reasonable service charges and will give an income month to month.
* Where will your money work for you? and you not have to work for your money? It is accepted £ per Sq Ft is higher at prime locations, but these are the areas where in the capital appreciation is maximum and renting out properties inthese locations tends to be easier.
We offer a Property Sourcing Service, so call us now to see how we can help on 0207 096 1354 or email on email@example.com
Our Address: Westbourne House, 14-16 Westbourne Grove, London, W2 5RH