Last week we agreed a property with a view to purchase and resell, the property price was £365,000 and it was worth £475,000 to £500,000 with some works required. It’s a two bedroom flat in West Hampstead; the property was actually being bought for £325,000 but with the lease extension done at the same time of purchase it was coming to £365,000.
There’s only so much you can do to a two bedroom flat therefore it’s reasonable to estimate a maximum of £20,000 for a standard refurbishment, on the assumption everything needs to be done.
The location is a strong one; and the property consists of 750 Sq Ft and the end value was based on £665 per Sq FT, on a long lease we came to the figure of £500,000. The numbers stacked up, but the problem with flats is you have no control over the communal areas no matter how nicely you do the inside of a flat up. The communal areas here had the musty smell you get in a hospital or a school. This can be off putting for a future buyer. The flat too is a bog standard flat you would expect in a purpose built block, meaning there was nothing grand or special about it, however the location is strong and this is the first mantra of property investment.
It is very important the communal area looks good even if the numbers stack up; if the communal areas are poor it can be a real downer on the deal.
In order to resell a property from a quick buy and sell perspective it needs to appeal at first glance, in the same way a new car appeals to a buyer. It’s an emotional appeal. When you look at the numbers most of the time it makes no sense to purchase a new car, as soon as you drive it out it loses the most money from its value. For this reason we decided not to proceed with the purchase as a buy and sell project. We were doubtful the property would resell quickly enough to justify a flip.
However as a Buy to Let it worked very well due to the location, the inbuilt equity and the achievable rental of £500pw. So we are going ahead with it on the basis of a long term buy and hold property. The client we are working with on this will be purchasing a property worth at least £475k for £385k, so with £90k in equity.
Not easy to get something which has nearly 25% inbuilt equity in this prime location of West Hampstead.
I get emails with this kind of discount and more all over the UK pretty much on a daily basis but the questions that arise are: where will the price be in a year’s time from purchase? Will it be higher or lower? And what is the reason why the property is discounted?
The reason why many of these properties are heavily discounted is plain and simple, no one is purchasing them and so they have been packaged up and sold to a naive investor who really believes there’s a genuine discount to them. Sometimes these properties have been packaged so as to reduce the deposit required so the purchaser has to part with very little money thus making it easier to agree the sale especially to investors who have little funds available. When a large number of units are sold this way there is no actual discount as the discounted price becomes the market price; as a property is only worth what someone will pay for it. Many of these are sold on a high yield; this may be correct but what if the underlying capital value decreases? This is what one should be focusing on when investing, not the yield. The yield is secondary.
The interesting part of this particular deal is also the benefit gained from financing. A normal BTL mortgages require a 25% deposit. As there is a 25% discount on the property this property once developed can be refinanced after a six month period and the initial deposit can be extracted from the property, meaning you have no money tied up in this deal and you’re able to be in a position to look for another one; of course you would need to obtain a mortgage with no penalty on it. You need to wait six months before the mortgage lenders will allow you to take money out. There are a few which will consider the fact you have done work on the property and hence consider the enhanced value but their terms tend not to be favorable.
This time period exists as an at tempt to reduce fraud in the mortgage market; what it has done is slow down the pace at which investors with limited funds can progress.
In short this has served to slow down the pace of the housing market at a time when housing needs are not being meet adequately.
We decided this wasn’t a flip not because the numbers weren’t right, but the feel of the property wasn’t right. This feel factor is very important for a quick resell. Only two kinds of buyers are in the market one is the investor and the other is the end user. It’s the end user we want not the investor. The investor is like us and will not pay the right price; they will be looking for a deal. The end user is likely to purchase with emotional appeal and therefore pay a premium if they like the property.
A property we did agree on with a view to buy and resell was a lateral flat in Hampstead. This was a probate sale, it has a high ceiling and is a light and airy property with an extremely good feel factor. This is one property which will have a emotional pull once developed. Even in its present state we believe there is a chance we can sell this prior to completion. The property will be purchased for just over £1.1m and we believe the resell will be around £1.5m developed. It is rare to get lateral flats in this location, most flats of this size tend to be spread over 2 or even 3 floors, this destroys the look and feel not to mention the wastage in space.
It is very important to be aware of the emotional aspect of property, I have seen properties go for ridiculous amounts at auction where emotion really comes into play. Specifically I remember a property which had a guide price of £1.5m and it sold for £3m! It was in a super prime location. Clearly there were some emotions at play here, compounded by the lack of properties which come on to the market.
Two Bedroom Flat In Marylebone
- Purchase price £575,000
- Long lease
- Portered block with lift
- 6th floor flat
- Market value in excess of £650,000
- Long completion
Call now to reserve
Sow & Reap
A Property Investment Company
!Tips of the Week
Property is not as illiquid as many think, potentially it can sold within a month or refinanced in 2-3 weeks time
It’s cheaper to raise funds by remortgaging your residential property than by raising on a BTL property, contrary to popular belief you’re still personally liable either way