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Deal By Stealth

Currently we are working on securing a freehold house in St John’s Wood consisting of 1,900 sq ft. It comes with planning permission for a side extension and there is also potential to go into the loft. When prices per sq ft normally go for £1,250 to £2,000 in this area, when developing property it’s important to squeeze every square foot you can out of a property.

One of the ways this has been done is through basement conversion. This has the benefit of passing planning very easily, the issue of neighbors complaining due to right of light or privacy issues are nonexistent. Generally in these areas neighbors seem to have a lot of time on their hands and get involved in whatever work is being done.

Basement conversions were being done wholesale without any objection, and certain areas go up to £4,000 per sq ft, so doing one which costs about £250-£350K makes sense. This was until an incident where half of the road fell in because someone had dug too deep and disturbed the foundations of the whole street. Now it is not so easy to get permission for more than one basement.

Last week I was shown a freehold house in Kensington which had dug three floors underground as well as having three floors above ground. Beautifully done with panic rooms and a swimming pool where the floor comes up to turn it into a ballroom. However the original asking price of £21m a year ago came down twice to £16.5m and now to 13.75m which in my opinion is now very cheap. The cost of purchase and refurbishment is £12.4m.

However many people from other countries do not like to live underground and this property is half below ground level. The property is not really a family home, more like a bachelor pad for a footballer.

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Back to our deal , we’re purchasing at a touch over £1,000 per sq ft in St John’s Wood, this is very cheap. This price is very low for St John’s Wood. A similar property next door is selling for £2.5m, you cannot get a stronger comparable.

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This will not have the possibility for a side extension, as it’s a mid terraced property.

The aim will be to purchase and resell. Ordinarily as the stamp duty for above £2m is 7% this would serve to reduce the profit margin, however in this situation it will not as we are purchasing a company which owns the property, which means we will be only paying 0.5%. This is a substantial saving of £139,750 which would have been shaved off our profit margin when it comes to reselling.

This is a development deal, being freehold it has many benefits.When developing flats you will need to get approval for works from the managing agents of the whole block. They can be slow and pedantic. There were times when we had to threaten to stop paying the service charge in order to get a response from them! Simple things like hard wood flooring can even cause an issue, some insist on a ridiculous amount of sound proofing in order to get approval for this. In addition you have restricted working hours and potential issues with flats below and above to deal with in case of any cracks appearing. This can lead to delay and further unnecessary expense. If you’re on a bridging loan this can be especially expensive.

Having a freehold means you can dispense with these issues.

Though none of the houses on this road seem to have a basement it is something we will be exploring, although we will not be going down more than one level, unlike the house mentioned earlier. Paying £250 per sq ft for a basement dig out to get £1,000+ seems a no brainier.

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The resale on this property is conservatively expected to be £3m. The works cost will be no more than £200k, without the basement. If the basement goes ahead of course the cost will increase and the resell will go up much higher.

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Prices are rising fast and stock is short. This is on our side. I have no doubt if we were to do nothing to the property we will get more money in one year’s time.

We have just put a property on the market after developing it at £1.4m, it was purchased roughly a year ago for £892k, undeveloped. The flat below has just gone under offer at£1.15m, undeveloped. This means if we had done nothing to the property it would have gone up by £250k. This is the state of the market at the moment and this is likely to continue.

One of the reasons we are able are to pick this property up cheap is because it was negotiated by another party 6 months ago, and therefore it already has 6 months of growth on it. It has never hit the open market. The other party is sitting on the contract and is still trying to purchase it; they have been ‘trying’ to purchase for the last 6 months.

We will be using our connection to do the deal, coming in under the radar to close this before the other party knows what’s going on.

When a lawyer sends out another contract they legally must tell the first buyer there is another offer on the table. At this point the original buyer will all of a sudden develop a laser focus and get moving to close the deal, they will find the money.

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We don’t want this to happen, so we will do all the ground work first , without even informing the other lawyer, therefore no one is alerted. When we are ready to strike we will put the lawyers in funds and exchange within an hour of the contract being received.

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This is our plan, let’s see what transpires. With such little stock on the market and so many buyers you will see this type of activity increasing more and more as the year goes on. Time and the way the deal is done will be major factors and not simply the price paid.

Ordinarily with development projects if you need to get funding the only route open is to get bridging, very few banks are in the business of lending for development and if they do they will make you jump through many hoops and hurdles, take their time and in the end perhaps say no. The bridging market has grown by 50% over the last year, in contrast to high street lenders they ask for minimal information and they can do the deal in as little as three days, but they’re expensive and reduce the profits massively.

On this deal we will either aim for a straight BTL mortgage or we will purchase in cash. This will serve to take the stress out of the deal so we can do it comfortably without added pressure.

In order for the mortgage to be approved the valuer must be confident the property is lettable. The other issue here is the property is held in a company, not all High Street lenders will be happy with this set up.

This is a deal we will be looking for investment in. If it’s of interest why not give our office a call…

  The Real Deal

Hyde Park, London, W2

Purchase Price: £610k

Summary

  • A bright one bedroom apartment in the heart of Hyde Park Estate with tremendous views Of London skyline
  • Off market property
  • Excellent buy and hold opportunity
  • We believe it will be worth £700k after refurbishment
  • We have sourced a flat in the same block for £500k and the price rose to £700k in just one and a half years
  • Massive capital growth potential in the future
  • Close to the beautiful open spaces of Hyde Park and shopping amenities

Call us to reserve!

Suresh Vagjiani

Sow & Reap

A Property Investment Company

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!Tips of the Week

There are two ways to get a deal, one is a discount from the present value and the other is to see where the market’s going in the future.

Remember that investing in property is a decision based on logic, don’t get emotional when developing property.

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