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Preaching to the converted

Last Friday we exchanged on a freehold house in Victoria at £1.85m. This property in our opinion is worth £2.6 to £2.8m after a little TLC. The property consists of nearly 2,000 sq. ft. of space.

We had commitment from an elderly couple, who had invested with us previously only a few months ago. On that investment they put in £71k and received £92k in a flip over a two month period. The property was in prime Hampstead on Kidderpore Gardens and was purchased for £720k and was resold for £910k within two months. We always leave a margin in the deal and hence it’s back on the market now for £1.15m. The end buyer for our flips is rarely an end user for a couple of reasons. One is most end users require mortgages, and mortgage lenders will not lend on properties where the seller has held on to the property for less than six months. The second is we need someone to be geared up to exchange within days of agreeing the deal, this therefore is most likely to be a developer or investor who wants margin in the deal. Therefore knowing our likely buyer we need to ensure the deal is also lucrative for them.

The couple who put the bulk of the money in this deal needed no persuasion. They came to us originally to purchase buy to hold properties for their retirement, which is the way they perceived best to invest their savings. Flipping is not at all what they had in mind given the stage they are in life, they didn’t want too much variation and surprise.

They were surprised and in truth a little pessimistic when we told them the property had been resold and the profits of £100k were in and would be distributed back to them.

Actually there was much disbelief, even after we told them we sold the property they were even questioning whether they would actually receive this much money in their account even after we told them the property had been resold and exchanged!

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The last deal they had done was clearly meant for them, and despite their conservative nature they had the audacity to purchase that property blind completely on our say, thereby beating other investors who were interested in purchasing the property but wanted to view etc, etc.

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Needless to say after the money was firmly in their account they have felt a level of reassurance and hence are entering the second deal with us, the second time was easier as we were preaching to the converted. This deal also looks like it will be flipped. Of course we can never be 100% sure on this, but mostly we can see the exit before we enter and exchange the deal.

There was understandably a lot of interest in the deal and so it was slightly over subscribed and so the original investors agreed to sacrifice some of their share in favour of the other investors; a generous gesture as they know money will be made on this deal.

Interestingly we had purchased a property around the corner from this property in 33 Hugh Street, Victoria; this property was purchased for £1.04m back in Dec 2011 and resold for £1,242,500 just 24 days later. Notably this property if held would now be worth in the region of £2m in just over two and a half years, nearly double the price we got it for and £750k more than we sold it for. There is also much merit to holding property and allowing it to rise naturally. I guess it comes down to the amount of funds you have to play with and your enthusiasm for dealing. If you have a fixed amount of money and you wish to do proportionally more than your money can do, buying and selling quickly will help you achieve this.

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What compounded the gain which was made was we had only used £50k in the deal which equates to only 5% of the purchase price. Hence there was a profit of £177,500 from an investment of £50k within 24 days.

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In all fairness there are a couple of points to note, in order to do these types of deals £50k is not all that is required, it is however the cash which was used in the deal; we must always prepare for completion. This for us means 50% of the property purchase price must be available in cash in the event we have to complete the deal. The second point is we always have to be prepared for completion in terms of the lending, including to have the funding set up and ready if required.

The IRR which is the internal rate of return is extremely high on this deal as it is based on the actual amount of cash used and the time it is used for. This however is not a true picture, and gives a distorted figure of returns, furthermore you cannot expect to do a deal like this every month. Therefore an annualised figure will not give a true rate of return. The amount of money used is very small and the time period is short therefore the IRR is exceptionally high. In fact when we had to work out the IRR for all our flipped deals in order to put this in our fund document it went into the thousand percent range. We had to dampen this figure simply to make it more believable – even though it was the truth, hence we wrote the IRR was in excess of 40%. We had to dampen the figure so it became more digestible to the investors’ psyche.

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Currently on a few deals we have had three valuations down valued in quick succession, this to me is a signal which shows valuers seem to be covering their backs, anticipating a slowing property market. Many times it seems when doing a valuation the aim is more to protect the valuers rather than giving a true market valuation of the property. This is the same of many professionals, where in the name of serving clients the truth is it becomes more about protecting themselves.

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However the market does indeed seem to be pausing for breath. Only a few months ago deals were being bought which didn’t make sense, they were bought by investors in the anticipation of a price rise and a fear there was a lack of stock. I think this is an interesting period where decent deals will start to emerge again.

The Real Deal 

Edgware, HA8 Purchase Price: £195k

  • A large two bedroom ground floor flat
  • Open market value £235k
  • Very long lease
  • Communal garden
  • Only 1% stamp duty
  • Currently generating £900 per month rental income
  • Very good buy and hold opportunity

Call us now to secure this deal!

Suresh Vagjiani

Sow & Reap

A Property Investment Company

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!Tips of the Week

Always enquire as to why someone is selling a property. Reasons like moving abroad, getting divorced, going bankrupt or property belonging to a deceased person will need a quick sale, which is when you are more likely to get a good price.

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.

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