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Purchasing problem properties without inheriting the problems

Following on from last week’s story our buyer for Lindfield Gardens in Hampstead did eventually complete, like we suspected he would, otherwise he would have dropped £100,000.

However we couldn’t take the chance that he may not have completed, and so we had to be ready with cash to complete the deal. The deadline was on Monday, on this day we could have forfeited our deposit of £85,000 and gained £100,000. So we would have been £15k up. This was not what we wanted though, we wanted to purchase the property for 750k, reduced from our original purchase price of £850k by the buyer’s £100k deposit.

At such short notice it was proving difficult to get a lender comfortable with the situation surrounding the property, consequently we had to draw upon cash to complete the deal. The investors who put money in on Friday morning done rather well, they ended up with a 7% return on the money for a few hours of investment. Money was transferred in the morning and the buyer ended up completing the deal by the afternoon. A couple of investors who put in £100k and £200k got the money returned by the evening with a handsome return, needless to say they were both very pleased. Their money was to be used as an insurance policy, to protect us from the risk of our buyer not completing. Both the investors had worked with us before and so had a level of trust in our ability to make the deal lucrative even if we had to complete.

Another property we purchased for £250k in Northolt a month ago is a three bedroom freehold semi detached house. Again it had its fair share of issues, it came with a tenant who was in the process of being evicted. Her defense from what we had heard was that she was a sitting tenant – supposedly.

This was not true.

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We were not able to see the property from the inside due to the ongoing issues with the tenant, so we had to purchase blind. For a three bedroom this was very cheap the actual price of the property should have been £325k minimum. So we went ahead and exchanged on the morning of the auction.

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When we approached a local agent to ask about the property they had already heard about the property and knew the original owner. They were shocked he would have let it go unless there was something wrong with it as he had a shrewd reputation and owned many properties. When I heard this, it was not an immediate cause for panic, it is better to start from a clean slate and assume nothing. Often due to differing personalities issues may develop between the landlord and tenant.

We got not one but two firms to check whether the contract was an AST. Our own lawyers confirmed the situation and another firm specialising in evictions confirmed the same thing to us. We also went and spoke to the tenant, the issue was the seller’s solicitors had filed all the notices wrongly and so they were rejected. The tenant was also annoyed at the landlord for not having done any works to the property.

It is important to start with a clean slate as any previous problems could be to do with the tenant and landlord relationship exclusively. As a new buyer you have a new perspective, and should not be clouded by any problems which have occurred previously.

If we had taken this standpoint and been influenced by previous problems with the property we would not have bought Lindfield Gardens for £850k and resold it for £1m within a couple of months. We did need to get a barrister’s opinion on certain issues surrounding the property, but only to confirm what we already knew and to ensure we followed the correct process in doing things properly.

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Many properties come with issues, it’s rare to find a deal where there is nothing wrong and it is simply cheap; they exist, but many come with dramatic stories. It’s important to hear them and explore the problems, but not inherit them.

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In July 2013 we purchased a block on Kilburn Road with a group of investors. There were numerous issues with the deal and there was also a buyer on the scene who was plodding through the various issues and about to exchange on the property when we arrived on the scene.

We were given a green light by the sales agent and sent a contract out. Our lawyer on the Friday evening called and said he didn’t think we should exchange as he had spotted something which was done without planning. This would have caused a problem with the lender which we needed to finance the rest of the deal. We made a decision to go ahead regardless. If we had left it any longer there was a strong chance the existing buyer would have woken up and done the deal.

We purchased the property for £2.675m, and last week the property was valued by Savills at £4.675m, which is a bit low in my opinion but even then it’s a good valuation. We plan to add another £1m on the property by adding another six studios to it. The great thing about this deal is we didn’t spend a penny on it at all, the money was supplied to us for free, all £550k of it – in return for renting the property out for ten years to a housing association.

It later transpired the planning was in place but our lawyer simply didn’t have the documents at the time we exchanged.

Had we have not been able to take on and seen through the issues we would not have been able to do any of the deals listed above.

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Many problematic properties are often listed in auction. The sellers are banking on many buyers not doing the due diligence properly and not having checked the legal paperwork properly.

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Another cause for concern is most lenders are not currently lending on property which has been held by the sellers for less than six months. So traders who buy to sell know selling through an agent is not always the best route as at some point any issues will be raised and the sale will be blocked by the buyer’s mortgage lender. One way is for traders to sell via auction, many buyers will not realise the property is being traded and therefore expect a normal BTL lender to fund the rest of the purchase. By the time they come to realise it is too late, they would have already exchanged on the property. These are the potential pitfalls of purchasing through auction. One safeguard is to see who is selling, if it’s a public body such as the council then there is a strong chance all the paperwork will be in order and it will not be a resell. It’s also worth seeing whether the property has been up in auction before and if it failed to sell or if it exchanged and the buyer failed to complete, this may help to shed some light on any problems surrounding the property. 

The Real Deal

A Precious Diamond London, SW7

Purchase Price: £1.05m

  • A large one double bedroom raised ground floor flat in a highly sought after location
  • Very high ceilings
  • Share of freehold
  • The property is coming in at around £1,480 per sq. ft. while properties in this location are being sold at around £1,700 per sq.       ft.
  • Excellent 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

Beware when purchasing in auctions, these can be used by many traders as a dumping ground. Check who the seller is and do full due diligence prior to bidding.

More people lose money from not making a decision than making the wrong decision when it comes to property investment. Remember – The early bird gets the worm!

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