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No Such Thing As A Free Lunch !

We have had much interest over the last two properties we covered. One was the heavily discounted property, a one bedroom property on the Edgware Rd at £230,000 which has exchanged. The other a three bedroom more  picturesque  property with  stunning  views  over  the canal priced at £375,000.

There were admittedly issues regarding the one bedroom property,  you  simply do not  find  a property with  a 40% discount  in  this area. This is the level of discount you expect in the North of England and  overseas  –  generally with  good  reason  because  nobody  else  is purchasing.

The  reason  for  the  discount  on  a  property  in  this  location  is twofold. One the service charge information was not supplied in full. This does not mean it has not been paid, simply it hasn’t been supplied. When service charge is not paid the lender will pay the  service charge and then add it to the mortgage. So all the freeholder has to do is notify the lender. This is of course is only applicable if there is a mortgage on the property. As the flat was in a conversion the service charges  tend not  to be  too high. There are no communal areas leading into this particular flat and no lift in the building. Therefore one would expect the charges to be around £1000 max per annum.

As these are unknowns and we are speculating, this lack of information makes novice investors nervous.

The other  issue was  the property, according  to the  land registry and lease, comes with a back garden. A much prized bolt on to any London flat. In actual fact access to the garden has been blocked off and the upstairs flat has access to it.

There is nothing on the land registry or on the lease to justify this.

What happens sometimes with repossession is the former owner, who is most bitter at being repossessed finds creative ways to spike the deal by sealing doorways up and mudding information  regarding the  property  to  put  potential  buyers.  This  then gives  the  former owner  the  upper  hand  allowing  him  to  repurchase or  sell  on  this information. Only  he knows  there  are  no  issues. The  bank  consequently will slice a  large chunk off the value, in this case the information is valued at perhaps £100,000.

Perhaps  it would  be  better handling  this  project  in  two  stages. First quickly do the property up inexpensively and rent it, and then tackle the garden issues which may involve litigation. When/if it gets resolved redo the property again making the design more inclusive of the garden. These kinds of issues are a bit like pealing an onion, you can only tackle the next layer once you have removed the one before.

Of  course  it  is  always  good  to  get  discounted  properties,  but there’s no such thing as a free lunch and generally discounted properties come with complications. I say generally because time to time you do find diamonds if you keep looking.

Investors often are addicted to words like BMV- meaning Below Market Value and off market. However technically speaking even if one person is selling something it is on the market, not off it. So in one  sense  this  is  impossibility. And below market value may come with its own consequences as illustrated with our one bed flat if it is in a good location. If the location is not good then it may be there is simply not enough demand.

We have in the past sourced properties fully on the market which just seemed to cheap to us, a good example is a building in 31 Ivor Place NW1 6DA which we  sourced  for a client.   The building was sold for £700,000 in 2005 and our client resold it for £1m in Feb of this year.  The gain was £300,000 on a deposit of £100,000 – at that time 85% was available  for BTL properties. This  information  is on the land registry for anyone to verify. This gain has been  achieved in a buyers market not a sellers one.

It is important not to get carried away with BMV and off market deals,  and  appreciate  the  ascetics  such  as  the  views,  the  light,  the direction  it faces and the feel of properties, this will reflect on how quickly a property rent and resells. You cannot measure some things by price  as  very  few  apartment  in  this  location have  superb  views which the three bedroom we advertised last week has. The property is not really discounted much, probably only £20 – £25,000 not much given the price of £375,000. It’s the views and the greenery the flat over looks which will ensure strong future growth.

Suresh Vagjiani

MD Sow & Reap

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