We have recently closed a deal in Bell Street, W2 for £4.4m. The investors in this deal should do well out of this as a property on the same street which isn’t as good, both in terms of the location and the property itself, sold for £5.25m only a few weeks ago.
The property comprises of four office buildings which have planning for residential development. The goal is to enhance the planning and then develop and resell the properties as individual houses in excess of £2m each, giving a resell figure of £8m.
With the way the market is rising we are confident by the time the properties come up for resell the price would have increased even higher than we have assumed currently.
When we purchase deals we always aim to put around 50% in cash; at this Loan to Value it is doubtful we will have an issue with raising the other 50% by way of a loan. The documentation between investors is also kept clear and watertight. If problems do occur then we want them to only occur with the property, not in any other department.
This is an exciting project and it is rare to get lumps of property this size in this location. This property never came on to the market, it was sold to us without ever touching the open market, like many deals in London.
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There are several reasons for this, for example many sellers do not want to make it known they are selling a property. Some properties are owned by wealthy or prominent persons, these parties want a discreet sale so as not to create any bad perceptions in the market, which is actually a very small place. There was one deal we had been working on for two years which belonged to the former ruler of a middle eastern country and for obvious reasons it didn’t hit the open market.
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Another reason is many people in the market want to flip the property, meaning resell the property after exchanging on it. In this situation they do not necessarily want the original owner to become aware of this.
If you think about it no one really wants to market a property; what they want is to have one person come and buy the property at an agreed price. Marketing means you will have lots of inquiries and viewings in order to filter out the one person who will actually do the deal. And note it is only one party who will do the deal. At times this process can take many months to generate a genuine buyer, therefore having a serious buyer in advance who you know will execute the deal with discretion is very attractive to certain sellers. This ability to move quickly and quietly allows you to demand a margin on the property price.
Indeed the property we purchased for £4.4m had a valuation for £4.8m, which the seller was aware of. We had agreed the deal at £4.4m and so it was honored.
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We are also in the process of refinancing a deal we did in July of last year which we purchased for £2.675m and is now valued at £4.75m. Not because we have spent any money on it, it’s because a nice housing association came and gave us £500k for free to develop it in return for renting it back to them which we were more than happy to do anyhow.
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I’m reasonably sure the valuation will come in close to this level. What I didn’t like too much was the bank who is offering us the lending didn’t like the fact we are now in a position to take all the cash which was originally put in completely back out. See, at 65% of £4.75m we will get £3m back out; this means all our initial investment is out within a year and there is a passive income.
They would like to see what they term as ‘hurt money’ in the deal. I don’t like this term very much, I like ‘free money’ much better. It almost seems a little spiteful, after all, their funds which will be only 65% are secured by a first charge on an asset which will be producing £260k per annum and rising in value every month. What’s more is there is a potential planning gain on the building for another £1m at least.
It also begs the question at which point can we take this money out of the deal? If after spending £500k (ok it wasn’t our money, but it was spent) to enhance the building, how long do we have to wait – 2 years, 5 years?
At which point does it stop being hurt money and become simply equity in the property? I’m not sure they can answer this question satisfactorily and I’m pretty sure it’s not in their underwriting criteria. It seems this is simply something they would like to see, a preference. In their world you should not be allowed to have what they see as a free lunch.
We also have the choice to decide whether we wish to draw down upon their offer or not, after all despite complaining we are not forced to take their offer. Good or bad it’s their money and their terms. But it is interesting to note this condition they have placed on the deal.
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Believe it or not it is st ill possible to get a ‘free lunch’ even in the post credit crunch we live in now. If you can find a property cheap enough, say 35% below the market value, there are ways and means to finance this in a way that leaves none of your money in; and if the discount is more you can even get some cash back.
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However these aren’t the good old days of Mortgage Express when you could buy a property with no money and even get a cash back when you completed the deal, but there are some methods still open.
During these times we would openly write regarding how to do no money down deals, with little response. This is strange and did not make sense to me. It took me a while to realize that people fundamentally do not believe in getting a free lunch. They always think there must be a catch – it cannot be so easy. After all they have to work hard all year to get this kind of money.
This is something which has been ingrained in the psyche. This is the blockage, and nothing else; similar to our bank manager friend who doesn’t want us to have a free lunch too!
The Real Deal
London, W3
Purchase Price: £1.9m
- Freehold property in this highly sought after location
- Currently arranged as six commercial units
- Planning permission in place to convert it into four residential units and one commercial unit
- Approx 3,250 sq ft area
- End value after conversion expected to be more than £3.25m
- Will benefit from the cross rail regeneration now in full swing
- 30 seconds from Paddington station
Call us now to join in this deal
Suresh Vagjiani
Sow & Reap
A Property Investment Company
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!Tips of the Week
Central London property prices are higher than the rest of the country with good reason; demand outstrips supply. Don’t look for rental yield in this location, it’s sheer capital growth which drives this market.
A heavily discounted property may not be the best buy. Where is the price going to go in the years to come, should be the question. It may stay the same, or go even lower.
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