Last week Friday we resold a property we ourselves had exchanged on, on the 3rd September 2013. The property was purchased for £1.81m and as per usual we parted with £181,000, which was 10% of the purchase price. The resale price was actually low at £1.925m.
However we knew in order to meet the tight deadlines for completion and for someone to move quickly on this deal we had to leave meat on the bone in order to make it attractive.
The incoming purchaser was unlikely to be an end user, we were aiming at a developer. When you know the type of buyer you’re trying to attract it is easier to package the deal. End users buy more emotionally whilst when you’re aiming for an investor they want to see margin left in the deal.
We had a couple of investors whom we put the deal to who thought this deal was not a worthwhile deal to invest in. They felt the price was too high coming in. Interestingly these people also fancied themselves as ‘people who know about property’.
Here’s where a little knowledge is a bad thing. They don’t know the area really, they don’t work in this patch day to day. They do not speak to agents on a daily basis. They do not know what the word on the street is. Yet they feel they can form an opinion and not trust those who do work in the field. These are the Doubting Thomases; as this is property many part time people tend to hide behind opinions for various reasons. The results speak for themselves, they do not need any interpretation.
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It is prudent to remember this property may not have sold prior to completion, however this too would not have been an issue. It was a shrewd developer who saw the value in this proposition and knew there was enough meat on the bone to make this an excellent investment. In short this was a three to six month deal and had a resell value of £3m in a location where prices are rising week on week.
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When we presented this deal to our clients for investment the trading potential was not mentioned. What was mentioned was the purchase and redevelopment of the property with a view to resell with some generous time scales, meaning the time period is exaggerated to ensure the assumptions used are very conservative. The trade, if it happens, is always a bonus; though we had a fair idea of the exit plan prior to exchanging.
Charles Lane was a mews house in St John’s Wood consisting of 1,745 sq ft. freehold, and a probate sale. It was exchanged on, on the 3rd September, for £1.81m and resold on the 27th September for £1.925m. At this level there’s money left in the deal for the incoming purchaser.
An end user would probably not have the appetite to do this deal in terms of time and the financing required as most lenders do not lend on flips. They are nervous the property is being traded by the same person and there could be no personal money in the deal. They like to see ‘hurt’ money; meaning if it was 100% loan money it’s easy for the purchaser to walk away from a deal.
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In short from £181,000 a profit of £71,000 was made, net. This is a return of 31% on the money used over a two month period.
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This level of return is attained with using a safe asset to underpin the transaction, even if we had to complete this would have been a good deal. Within six months this property would have been back on the market for a resell.
These are the types of deals we will be engaging in for our new fund which is currently open for investment, where we will be exchanging primarily on deals where we can see there is a resell possible prior to completion. Many of the investors from the St John’s Wood deal will now be investing their gains into this fund.
Of course this does not mean we will always be able to resell on time, there may be deals where we will have to complete the transaction. All this does is alter the timings of when money comes out, but most times it gives the chance to sell the property properly, meaning full marketing to achieve the maximum price; which from experience more than covers the completion costs, namely stamp duty and arrangement fees.
We were supposed to exchange on another property on the Friday as well, however the solicitor happened to be away and left no one else in charge. The lawyer’s office held the funds and was ready to exchange. Here we were also exchanging on the property without a mortgage in place. With an 8 week completion we were confident of getting an offer in on time. The client had already been credit scored, and had enough of an income coming in. We even went as far as calling the surveyor, just to double check the property from a valuation point of view. Everything passed fine.
The lawyer however had a bee in her bonnet regarding the client exchanging without a mortgage offer. Understandable in one respect, but there comes a point where the lawyer is more interested in protecting themselves than getting the deal done and in pursuit of this aim scarpers the deal entirely.
This was such a situation, despite having exchanged on a deal only a few weeks ago which didn’t have a mortgage in place. It seemed this policy is practised selectively. This solicitor decided to be particularly uptight about this issue. She decided to call the client in person to her office before she would agree to exchange. Even though we were under time pressure and even though she had written instruction from the client to go ahead and exchange.
In this situation the client had never bought a BTL property, hasn’t got a mortgage and has never seen the property she is purchasing. It’s a question of faith in contrast to the previous example.
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The client, even after the meeting, had no hesitation in proceeding with the deal. The property was an ex local authority, three bedroom flat in St John’s Wood for £580,000. You may say this is very high for an ex local flat. However the word high is a relative term; it’s not as high as it’s worth currently, nor is it as high as it will go to in the near future.
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The property had some nice aesthetics which will help carry the price higher in the future. Firstly it is a pent house apartment meaning you have no floors above you; also it is south facing and has a balcony. The block itself is extremely well maintained, both the communal gardens and the exterior of the block itself. In truth the only give away is the concrete stair case and passage in the inside of the block itself. The location is only minutes away from St John’s Wood station. Here the prices are heating up strongly.
Ex local make excellent Buy to Let; however you must be selective when purchasing. There are some blocks which look better and are managed much better than private blocks. The service charges tend to be very low and the lease length long. This means you will have a good rental yield coming in after expenses. From a tenant perspective the rental attracted is similar to what you would get in a private property; so you have a high rent with low costs.
This property with some light work will be worth north of £700k. It has the potential to look stunning, but if the aim is to rent long term then this may not be the best avenue to pursue, as the tenant is not likely to take care of the property as well as you would. However, when it comes to resell, this would be a good time at which to do up to the point where it looks like a show home.
The Real Deal
Ealing, London, W5 – Purchase Price: £275k
- A one bedroom flat in a prime location of Ealing
- Off plan purchase
- Comparable properties just opposite this flat are being sold for between £400k to £450k
- Close to proposed Crossrail station in Ealing
- Realistic expected price of £325,000 on completion
- Area is experiencing massive growth and regeneration
Suresh Vagjiani
Sow & Reap
A Property Investment Company
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!Tips of the Week
When flipping properties it is good to sell quickly, rather than holding out for the best price, so that you can rotate your funds into the next project. If you are getting 5 – 6% less than similar properties in the area, you should secure a sale faster.
While using mortgages for buy and flip deals, the most important fees are the arrangement fees and the exit fees, not necessarily the interest rates.
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