We have just agreed a deal worth £1.8m for £1.25m. So I should be pleased? Nope, I would still like to squeeze the deal.
How? Not on price, the seller with good reason is unlikely to go down in price. There are a number of other ways to still squeeze water from this stone.
Let me describe the situation. There are two buildings valued at £1.05m and £750,000, producing a below market rent of £75,000. The first is a detached block in Harlesden consisting of four flats with one regulated tenant and the others on AST’s. The second is a block of three flats in Shepards Bush. Both strong locations and very easy to sell on or rent.
The rise in Harlesden comes from Notting Hill, or so I have been informed by a local agent. This is the ripple effect, as the market in this location heats up the surrounding areas namely Kilburn, Queens Parkand Harlesden all benefit.
The sellers require a quick exchange and want commitment of sale.They are not so concerned with the other variables i.e time and structure. The blocks are freehold and were bought decades ago. The owners were at that time business partners, they have now moved on individually, and want their monies out. The properties have gone up substantially, originally bought for a small fraction of their current value.
Here are some of the variables we have to play with:
- Time
- Structure of deal
- The property titles
- Tax efficient methods of sale for the seller
- Stamp duty saving scheme
- Doing the deal based on the actual valuation rather than purchase price
Let’s consider some of these and see how they can be used to sweeten the deal further.
If we delay completion we play with time. How does this benefit us? People do not recognise the time value of money.
If we delay completion we have the potential to sell on the deal without ever having to pay the expense of having to complete. This means with only 10% deposit one can make a manifold return on one’s investment.
It would be dangerous to rely upon this alone, if you cannot sell you will lose the 10% and potentially more.
What if the market turns and the properties are worth less than what was paid? Pretty unlikely but let’s assume the worst.
To enter this deal we would recommend you would need to have the means to complete the purchase of the deal. Better to face the worst scenario head on and be happy, the rest will be a bonus. The best case is we sell on for the full £1.8m and enjoy a return of £650k from an investment of £120k. The worst case will be you purchase the property for £1.25m, pay all the fees and you have an income of £75,000.
The likely scenario will be somewhere in between. If we make the contracts reassignable we can sell the properties on before completion and use this money to complete.
We can also cut the leases, this would mean we will be selling individual flats on the market rather than the original freeholds.
Getting freehold flats funded would be difficult. Not many lenders like this, the way forward would be to split the building into leases.
The exchange will be subject to the seller having use of the money rather than sitting in the solicitor’s client account. Ordinarily the exchange amount stays in the solicitor’s account. Due to the dire need for money the seller has insisted on having the funds released to him, hence the reason for the lowered purchase price.
The other way to sweeten the deal for the seller might be to offer a tax efficient manner to dispose of the asset, as the potential liability between the original purchase price and resell will be extortionate.
Another aspect we can play with is to increase the purchase price to the valuation price of £1.8m, then any funding from the lender will be based on this amount. If we consider 75% lending against £1.8m this comes to £1.35m. This means we put nothing in the deal.
This is the trick: give the seller a ‘loan’ for £650k, a second charge is put against the property. £1.35m is passed from the lender and £650,000 from the buyers, this can be obtained from a bridging company for one day. As soon as the seller’s solicitor gets the funds they have to satisfy the second charge of £650,000 before releasing the funds to the seller. Therefore any money in excesses of the £1.25 is transferred back out of the deal.
So something which looks plain vanilla with closer inspection is not. The issue to bear in mind is not to get too clever for your boots.
There is a danger here with the deal, if you try to get too clever you may scare the seller into going with another offer to avoid the perceived hassle.
The other point of note is the seller is likely to be guided by his solicitor. The solicitor normally has two objectives. In order of priority, the first is to cover themselves from all liability, the second is to choose the path of least hassle to themselves. In all fairness this I guess comes down to just human nature.
There would be little point in having clever ideas for us to fall down at the time of execution.
The solicitor on the seller’s side must be singing from the same hymn sheet. Therefore given that the deal is well outside of the box it is essential the seller’s solicitor is on board. Practically it would be better if we suggest the solicitor for the seller to use.
This is by no means a thorough analysis on the different approaches to this one deal. It shows how very quickly there are many things to consider when trying to work out the best way to execute something. Again the danger is if it’s presented to the seller in the wrong way it may destroy the deal completely. So the overriding factor is the comfort level of the seller. This is perhaps in one way harder to define as it’s emotional. If he is not comfortable with the scenario the whole deal will collapse and there will be nothing to structure.
Suresh Vagjiani
Managing Director
Sow & Reap
A Property Investment & Financing company.
