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Don’t expect the deal to work, instead learn to work the deal

My attention was focused on the Allsops auction this coming Tuesday. The reason: it’s coming up to Christmas, and this is the time of year when the property industry quietens down. People are busy getting drunk and generally in holiday mood, so even if they’re ‘working’ there’s not much work being done.

Anything which keeps buyers preoccupied is a good thing, as it serves to keep them away from the auction room. This is something I saw during the auctions during the Queen’s Jubilee and the Olympics. An auction room which should be fully packed was half empty. Consequently property which should have sold at top prices failed to do so. These properties were sold later just after the auction for more money.

It’s rare you get a deal on the plate, normally you need to work the deal or take a view on incomplete information, often this comes from having come across a similar scenario previously. When looking at auction properties at times the name of the seller is also mentioned, especially if it’s a corporate body, such as a Housing Association or Fixed Charge Receiver etc. When there’s a property being sold on the instructions of a receiver it means it has been repossessed from someone. A mortgage company appoints a receiver to act on behalf of the borrower – believe it or not – to obtain the most money from the property. Often these properties are put into the auction, this way the sale is transparent and there is no chance brown envelopes have been passed by somebody to secure a sale.

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Now, although of course no one likes being repossessed, some people like to carry on holding on to what they have rather than accept the situation and move forward.

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For example, some people when they are about to be stripped of their property, they start to work overtime and find various means of holding on to their belongings. One of the ways they do this is to create a tenancy for a small amount, or simply not provide the details of the tenant – in which case the auction house has to then sell the property as ‘tenancy terms unknown’. The danger for the buyer is this means you can have a sitting tenant; this can reduce the value of the property to possibly half.

Previously we purchased a block of flats sold by the ex-husband of a lady who lived in one of the flats in the block. The lady was managing the block and therefore had in her possession all the agreements, the ex-husband did not. So the property was sold with unknown tenancies. However our enquires told us they were all AST’s though we hadn’t seen the paper work, and so we purchased managed to property for about 65% of its true value.

A couple of receiver sales with unknown tenancies in the upcoming Allsops auction jumped out at me, the first one was a flat in Mayfair, a triplex consisting of 1500 Sq Ft and a long lease of 148 years in a portered block.

The property is being sold on the instructions of receivers; the current owner is the ‘tenant’ paying zero rent. This look suspicious as it’s a repossession with a rental of zero. It could be the former owner will come back and purchase the property through another party at auction as he will be able to terminate the tenancy, which no one else can do, not as easily anyway. This will allow him to purchase the property for potentially 50% of the value and resell the property at market price. He could net £1m if he manages to purchase at £2.25m and sell at £3.25m – the property has been guided at £1.75m. The £3.25m is going by a conservative value of £2166per Sq FT, which is very conservative for this location.

The other property which caught my attention is a freehold house, again sold by fixed charge receivers, this property is on the border of Kenwood Park in Hampstead. This time there was no tenancy in place, simply the property is being occupied by the owner’s relative according to the auctioneer’s information.

This property has not been internally inspected and the information given has been obtained from previous marketing material. This means the property must be purchased blind, i.e. without it being seen internally. This alone is enough to scare most purchasers, certainly end users will be put off by this but even the few which are happy to purchase blind, they will be put off by the unknown terms of tenancy. This could mean they cannot evict the tenant or if they can it will possibly be through a lengthy legal process. This leaves only a segment of die hard investors for the purchase.

The other issue will be that you may need to purchase the property in cash, as the there are no guarantees in being able to get the mortgage valuer into the property. This then knocks out a lot of buyers for this property, which is presumably the idea. Unless one is happy to take the challenge on and have their cash parked in the property.

However, when purchasing a property in this situation, things may not always be so abysmal, it may be possible that someone purchases the property, sends a letter from their lawyer and the problem disappears. Or perhaps they sit down and negotiate with the tenant a settlement figure along with the threat of legal action.

Either way this property which ordinarily would been sold for full value with vacant possession has been scarpered by an unknown tenancy and the problems which came with such a purchase.

This filters the number of buyers heavily. Only those with a strong appetite for risk and who can take a punt will go for these types of properties. In short the number of buyers will have been whittled down, which seems to be the objective.

If you analyse what’s really going on it is to do with human behaviour and what motivates humans is not common sense or logic. It’s emotion.

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The emotion of fear and loss is what drives humans more than gain and pleasure.

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When you have an unknown in an investment it scares people more than is justified, and therefore most run the other way. The fear of loss weighs more strongly than the pleasure of a gain and so the way this manifests is as an irrational response. When something is unknown most people will consider the pessimistic angle rather than the fair one.

I guess there is only so far you can analyse these types of situations, you can look at them in several different ways and put figures to them and then something which you haven’t anticipated happens. You need to have the expertise around you to handle every eventuality, and I guess the bottom line is: Do you feel lucky?

Whilst I’m writing this article my colleague is in the auction room bidding for the Park Lane lot, time will tell whether we are successful. It only takes two people to drive the price up in an auction. There’s a lot of cash chasing prime property lots, so anything can happen.

The Real Deal

Christmas has come early

  • We have secured a great BTL property in Westminster
  • Purchase price of only £250,000
  • This comes to only £577 per Sq Ft, comparables are above £700 per Sq Ft on the same road
  • In a period conversion
  • Share of Freehold
  • Only 1% stamp duty
  • £62,500 deposit req @ 25%
  • Or £37,500 deposit req @ 15%
  • Great first time buy

Suresh Vagjiani

Sow & Reap

A Property Investment Company

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!Tips of the Week

Buying a BTL property is not like buying a home. Don’t get emotional regarding the BTL property, you’re allowed to get emotional about your home.

Property prices in good locations tend to be high, but these are the areas where you get the maximum capital appreciation. So it’s better to save or club together to ensure you purchase a diamond.

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