Retrospective Insight

Last week we missed an opportunity to make 100% return on funds deployed.  The funds would have been held for a little over a month.  But hindsight is a wonderful thing; there is no shortage of retrospective advice.

The opportunity was being able to underwrite a property which we felt would fly in the auction.  The property consisted of an under rented commercial property with a residential above it.  The owners DOB, which is relatively easy to find, showed they were in their 90s, which explained the grossly undervalued rent being received.  There was a development opportunity and a drastic rental increase on the property.  The overriding factor was it is located in Edgware, therefore in an area in high demand, especially when it comes to auctions.  Every time a development opportunity comes in these locations they often go way above the guide; a lot more than they are actually worth.  I, for a long time, assumed this was a combination of them being in high concentration of Gujarati areas, and to keep building teams busy.  However, it seems these types of developments go high because they are used to use up spare cash.  This seems to be a plausible explanation.

For these reasons we expected the price to go for a high level at the auction.

We had the opportunity to underwrite the development at £575K.  This means we gain 45% of the uplift, the other 45% goes to the vendor and the remaining 10% goes to the auctioneer.  If it goes for less, we would be obligated contractually to purchase at £575K.  This gives the vendor security the deal will sell.

However, our client was only willing to underwrite at £560K, and we spent a few days butting heads with the auctioneer in regards to the strike price.  I thought they would fold closer to the auction, however they did not, and the deal went for £716K on the day.

If we had underwrote the deal the return would have been double on the funds deployed.  But should have, would have, and could have; you can’t look back in property.

The downside, which isn’t really a downside, is you have purchased a great investment, with an uplift in yield and development potential in a reasonably strong location.  It’s this side of the deal one needs to be prepared for, not the upside of the underwrite. The upside is the bonus, if it transpires.  This is the mind needed to underwrite deals.

Auctions can be a hit and miss business.  Two parties wanting a deal could drive the price up.  Conversely, if it is holiday season along with other celebrations such as the Queen’s jubilee, the demand could be dampened.

It will be interesting to see what happens in the auction sector in the coming months.  Till now the results have been very strong, but we are seeing agents reducing the price of their stock, and properties sticking; and the market seems to be turning.

Suresh Vagjiani

Suresh Vagjiani
Suresh Vagjiani
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