Don’t bite off more than you can chew!
Last week we were debating whether to bid on a repossession auction property which was coming up on the Allsops auction. What triggered my interest was not what was known about the property but what was unknown. Let me explain, the auction catalogue described the property: it was a freehold block in Churton Street Pimlico SW1 with a commercial on the ground and basement and residential on the top two upper floors.
The commercial was occupied by a tenant which was subject to a tenancy agreement – point of note they didn’t describe the length of the tenancy which they would usually do on a commercial unit. The upstairs was however occupied on unknown terms. The property was being sold by Fixed Charge receivers.
I have come across this scenario previously. When there exists very little information on the tenancy of a building the property can sometimes go for as low as half of the price it’s normally worth. Previously we had purchased a block of flats where the tenancies were unknown and was coming up in auction, when I went snooping around the property I met an agent who knew the owner and informed us all the tenancies were on AST’s ( Assured Shorthold tenancy) which means basically you can get them out of the property at some point. Armed with this information we managed to purchase three flats in Maida Vale for£1.1m which we traded on a week later for £1.3m.
This is because people are motivated more by fear of loss than pleasure of gain, sothey will generally take the more pessimistic option.
We only had a couple of days before the auction, so as soon as this property came to my attention I took a drive to the property in the evening and started by speaking to the Bangladeshi owner of the restaurant on the ground floor. I asked him how long had he been there, he mentioned this was a charity and they had a 10 year lease with the owner of the property. I asked him who lived upstairs and he replied that there were ‘many people from all different places’… OK… so I asked where are they from exactly? He then admitted it was a brothel operating upstairs.
I thought I would try knocking on the side door of the flat…but strangely it was open. There was another door which was closed. I knocked – no answer.
I left the premises and knocked on the next door neighbour’s property. He was a polite English man who had been living in the area for five years, and said he had enjoyed living in this location. I asked him if he knew the people from the next door property, he said no. I asked if he knew there was a brothel operating from there and he said he heard rumours, but they seemed to have quite a discreet operation going on.
I then tried knocking on the flat again. This time it was locked. Strange as the previous time I had tried the lock hadn’t been there.
As the clock was ticking I called a landlord who I knew had the same issue in a flat she owned in Baker Street. She said if there is a brothel running from the property the police are very hot in cleaning up the area and one phone will result in the building being raided. In her experience she was confident of the above tenants being evicted very quickly.
We had someone looking at the legal paperwork on the building, and they had discovered the commercial tenant had signed a 118 year lease on the property which is very peculiar. NO one signs a lease this long.
The lease was signed in December 2011 which was well after the bank commenced repossession proceedings against the former owner. Clearly what had happened here was the individual, realising he was about to be repossessed, signed a ludicrously long lease with the tenant. His name was Mr Malik, which indicated they shared a similar ethnicity. By signing this tenancy the new owner will have an issue getting the tenant out and therefore this building will be worth a fraction of what it should be.
This tenancy however could be contested as the spirit of the tenancy was clearly to destroy the value of the building as it was being repossessed- this was not a market level commercial lease.
The top of the property which we thought would be the issue was not actually the main issue, as from our investigations this could be resolved with some pressure from the right places. The main issue was this commercial lease. This came to light from the legal documentation held by the Auction House, so it seemed strange they had not put this on their catalogue.
The tenancy can be argued in court, should the tenant refuse to cooperate in signing a more reasonable one.
A vacant building like this in the location should go for £1m to £1.2m, as this is a very desirable location in Victoria.
I do believe there would be a good margin on this building. The danger is at what cost? Unraveling the issues may be sticky and perhaps not so straight forward. With all this taken into account we decided not to pursue this property. It ended up selling in the Allsops Auction for £695,00, more than we were prepared to pay. When we first started looking at the property our original price in mind was £800,000 which decreased to a maximum of £600,000 before we shelved the property.
I wonder if the purchaser was fully aware of the issues around the building. Or perhaps it was the former owner Mr Malik who ended up purchasing the property again?
Sow & Reap
A Property Investment Company
!Tips of the Week
With the current economic climate it is important to pay attention to the type of job your tenant has and not just that they are working. Doctors, nurses and teachers tend to be hit very little by economic downturns. This will reduce the rotation period.
Always consider the projects which are happening in and around the borough you’re purchasing in, this will ensure strong capital growth into the future.