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How to play with a seed, but take the whole harvest

Last week we agreed a deal in Colindale, the property is not really a property but only has site value. What attracted me initially to the deal was not actually the deal but the structure. There were two things which attracted me, one was the exchange amount and the other was the time period.  The property can be bought with only 5% exchange deposit, ordinarily it’s 10% which is required. The completion period has been agreed at 12 months.

The purchase price is £3m and this deal can be entered into for £150k.

This is a cheap entry for a £3m game. One of my partners would even treat this more like a roulette game, where you put the money on a double or quit strategy. Where you are prepared to forgo the exchange money. The idea would be to exchange on this property and then apply for planning permission and once it has been granted you resell the site with the benefit of planning.

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You could resell it for £3.5m, maybe even more depending on what type of planning you get. There is potential to go very high on this plot as precedent has been set around the site where many high profile builders have come on to the area and have built and are building.

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There exists a misconception in that the amount used to exchange is all you will lose if you fail to complete a purchase, you will also be liable for any loss the seller suffers by you not completing at the stated price.

In this situation if you have the planning in place it is very doubtful the seller will not be able to sell it for even more than what we had bought for.  Therefore the likelihood of this occurring in this situation is very unlikely, though of course not impossible.

These types of situations are more likely to occur in the case of new build properties, where you give typically 10-20% and the rest on completion which could be two to three years down the line. New builds normally attract a premium in the same way new cars do. The Chinese love new builds, one of the reasons being no one has died in the property which is bad Feng Shui. If the market was to take a turn for the worst the chances are these types of properties would be first affected. Certainly domestic purchasers would mostly be buying with most of the money coming from a mortgage. If the valuation does not value up the mortgage will not be granted. The purchasers may find they cannot fund the purchase. In this situation the developer has every right to sue the purchaser into completing the transaction.

This is a planning game, one where the cost is cheap and the potential is very high.

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We deal with many business people, no matter what line they are in they like to work their cash, it is rare their funds will be sitting idle; the cash comes in and out like a tide. They know even more than the average person to make sure their cash is being worked hard.

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These types of deals suits them, they can digest the numbers and the risks easily, and the structure of the deal suits them.

One angle is to develop this site in isolation. There is another angle to this deal as well, and that is to tie up with the neighbour; here is where the big money is.

If a tie up, or a buyout can be agreed with the next door site then the deal changes and you are talking about a very big site with circa 70 units possibly even more as the acceptable height of development around this area is going higher and higher.

This is dependent on agreeing with the other owner of the site who I have been told is a property man, and not desperate for cash to agree a common ground to work from. But if this can be reached there can be huge reward for both parties. So this will be an added bonus if it happens.

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It is often the case where the deal becomes not about the deal, but more about the egos of the personalities involved. The issues then cease to be about numbers and profits, though this fact is never admitted, and therefore it cannot be solved so easily. People will go beyond common sense and even money to protect their egos.

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The best approach is to exchange and push full steam ahead to apply for the maximum planning possible, and during this process open up dialog. This puts you in a position of strength when negotiating and not in desperation. This is an important stance even from a purely psychological point of view.

I came across this property last year and it has taken many failed offers for the current seller who is retiring to finally agree to our proposal.

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Had the same deal been presented without the extended completion I would not have pursued it but this goes to show the structure is often more important than the price.

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To enter this deal without the delayed completion would have cost approximately £1.5m, not to mention the stamp duty and arrangement fees which would have been spent from day one. Instead we get to play the same game for less than one tenth of the normal entrance fee.

It is however prudent to prepare for the worst case scenario and to ensure you have the funds to complete if required, unless of course the client has a gambling nature and is prepared to forgo the £150k!

The Real Deal

Bayswater, London, W2 Purchase Price: £1.575m

  • A large flat within a grand white stucco fronted building on the award winning Cleveland Square, one of Bayswater’s most premier addresses
  • High ceilings
  • Long lease
  • Fabulous views of the gardens of Cleveland Square
  • Close to Hyde Park
  • Properties in this location are being sold for around £1,400 to £1,500 per sq. ft. while this is coming in at around £1,100 per sq. ft.
  • End value after refurbishment expected to be around £2.2m

Call us now to reserve!

Suresh Vagjiani

Sow & Reap

A Property Investment Company

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!Tips of the Week

Always focus on the capital growth of an investment property – never sacrifice this as this is how the bulk of your money will be made in property, rental income is secondary.

A heavily discounted property may not be the best buy. Where the price will be going over the years to come should be the question. It may stay the same, or go even lower.

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