Speed More Valuable Than Price
We started looking at a deal in Kilburn a few months ago for the benefit of a group our investors. The deal comprised of two buildings, one of which constituted of 18 flats mostly studios, with very cleverly done mezzanine floors which were the sleeping areas of the flat. There were about 4 or 5 one bedrooms within these 18 flats. I say 4 or 5 because sometimes people put a plasterboard up and simply turn the flat into having an extra bedroom. And guess what? Sometimes it does! The price and the rental can actually reflect this.
We had done something similar with a property purchased for an investor for £235k, it was a one bedroom duplex flat and we spent around £5k converting it using plasterboard and minor touch ups; soon after it attracted an offer of £325k from an agent. In this case the investor decided to hold on to it, as the property was generating a £550 per week rental income. In this block the service charges were low at £800 per annum, and the lease was long. In essence he had made nearly £90k for a £5k conversion!
Going back to the Kilburn deal, the other building constituted of five self contained flats, one large three bedroom and 2 two bedrooms, a one bedroom and a studio. Four of these were rented all with ASTs generating £57,000 and one was empty, these were all under rented; fully let at current market levels this property should be generating in excess of £80k per annum. The tenancies were all holding over, meaning they had never been renewed.
The property had a few issues, but nothing which seemed prohibitive to purchasing. It’s very difficult to get a ready made deal landing on your lap, often you need to take a view on certain things. For example one of the issues with this building is the studio has no planning permission, however we know it has been in existence for over 7 years, on this basis planning should not be a big issue under established use.
This is the benefit we are able to provide investors who come into our deals, it’s not that we have all the answers, but we know the best place to go to get them.
At first is seemed like there was a massive amount of work to be done on the property with the 18 flats, as there seemed to be damp on the first couple of floors. However one of our builders traced the cause of this to a leaking pipe on the upper floor, so this wasn’t as bad as first envisaged.
The property came with a 994 year lease, not freehold but as good as – well nearly. This means we own the property for this period of time, however we do have certain restrictions not being the freeholder. For example we cannot insure the building with whom we wish, if we wish to get further planning we will need to get the freeholder’s consent, these are among a few other restrictions.
The price we were paying equates to £299 per sq ft, the normal price in this locality ranged between £600 to £650 per sq ft; this was a deal. It was a massive amount of property for the price we were paying.
The freehold of this block is owned by the owner of the commercial premises below the 18 flats, this is the popular chicken serving restaurant called Nandos, which has expanded heavily. There is a strong chance we can purchase the freehold, once we have completed the deal.
Premises such as Nandos say something about the location of a property; franchises don’t just open up in any location. They do a great deal of research before they open up, for example they count the number of people passing different times of the day, and they analyse the local population and divide them into segments. Only when it meets their criteria do they open a branch; this is why banks will lend you 70% of the purchase price when you buy a franchise their chances of failure are minimal.
In the sales particulars there was oddly a mention of it being a HMO by the marketing agents, however it wasn’t as all the flats are self contained. The rules with HMO are often misunderstood as there is a national definition and a local council one.
In total the square footage of the net internal of the whole building is just under 9000 sq ft, this is the area which can be sold excluding common areas. The property had been guided at a price of £2.75m. We made a slightly cheeky offer of £2.675m, unsurprisingly we didn’t get the contract as there were much higher offers on the table.
However we held our position, whilst a higher offer was entertained. A couple of months later the purchasing party’s solicitors were still asking questions, dotting the ‘I’s and crossing the ‘T’s as they say.
We kept in regular touch with the agent, whilst this was going on, as you never know when a deal can fall out of bed; we need to be keeping an eye out to be ready to catch it if and when it does.
What made this deal frustrating is any offer we made had to be passed from the agent to the receiver for it to be signed off, as this was a receivership sale; the agent can merely recommend our offer. After a couple of months of pestering and reminding the agent we are still here to do the deal, the offer was passed to the receiver who again sat on it for another couple of weeks. Finally we got the go ahead for our lawyer to get the contract.
Once a contract is issued the other purchasing party get informed there is another buyer. All of a sudden you may find the original buyer and lawyer develop a laser focus and get the deal done within hours when previously they had been dithering for months.
When our lawyer got the contracts he actually commented: ‘the starting pistol has been fired’; it really does become a race to exchange.
So we could not relax, and the other party had the lead; firstly it was offering several hundred thousand above what we were offering, and secondly it had a head start of a couple of months, which is a strong head start.
We had to put our skates on. With the deal being at this level we planned to bring in a number of investors so the deal is spread out. To ensure this was done properly we needed a corporate wrapper, meaning a company or partnership needed to be set up with proper paper work in place to protect all the parties involved.
However this would all take time, and time we did not have. The solution was to put a clause in the contract to swap the investors’ names for a corporate vehicle at the same price.
The property market is like a triangle, in central London for example there are many buyers walking around with £300K- £500k to spend, so in short it’s difficult to get a deal at this level. However as you go up, for £500K- £1m there are slightly less people; and as you go above £2m+ and £5m+ the deals start to have some juice in them.
Our aim is to give investors with small amounts of capital the benefit of buying into higher margins and therefore bigger deals, without having the capital individually to purchase these by themselves. This takes them from the bottom of the pyramid to somewhere close to the top. At these levels you really can buy property in a solid location at a good price.
We raised £1.4m within a couple of days and we exchanged in the last hour on a Friday afternoon a couple of days after receiving the contract; had we have left it over the weekend we were not sure the deal would have still been there. We had very limited time to arrange the structure and the funding, and the structure had to be in place prior to getting the funding in place, otherwise who/what were the lenders going to lend to? However it was surprising how many lenders struggled to understand the structure, let alone be able to fund it. Some had never come across this type of structure before and needed a lot of hand holding, we had applied for bridging loans given the time involved and the type of building we were purchasing. There are many novice companies in the bridging loan market, Why? Because it is a market which is due to increase in size by 50% by next year. Name any other market which will grow by this amount in a year, apart from insolvency practitioners, and pawn brokers, not many. Hence there are many who have entered this lucrative market, to fill a funding gap left by more traditional lenders, such as banks.
Our original intention was to purchase and resell, bit by bit; in effect buying wholesale and selling retail. However the more I studied this deal the less I became inclined to follow this strategy. Why? Find out NEXT WEEK! If in the meantime you want to get a serious return on your money give us a call!
Maida Vale, London, W9
Purchase Price: £370,000
- A large one bedroom apartment in the heart of Maida Vale
- Excellent buy and hold opportunity
- Share of freehold
- Close to the popular cafes and restaurants of Little Venice
Call us now to reserve!!
Sow & Reap
A Property Investment Company
!Tips of the Week
To generate good profits by flipping properties you need to be able to pick the right property, in the right location, at the right price. And all this requires the right LOCAL knowledge.
Always remember to see an investment from the markets’ viewpoint and not your own, don’t let your emotions carry you away!