This week we present a very lucrative deal which is sitting with us. The properties are two freehold blocks consisting of three and four flats. One block is situated in Shepherds Bush and the other in Harlesden.
Both properties have been in the same ownership for over 30 years. The reason for the sale is the partners who hold the blocks have split up and this is the last link they have with each other and they are desperate to break it.
The block in Harlesden consists for four flats, three on AST’s and the other on a regulated tenancy. It has been valued realistically at £1.05m. The second is a block in Shepherds Bush consisting of three flats valued at £750,000, again this is a realistic open market valuation.
Regulated tenancies though they may scare most people, can be sold on the market, the price of the property is typically 50-70% of the value of property. The main factor which determines the percentage applied is of course the age of the tenant. If the tenant is 90 years old the property is worth more, as the tenant is likely to pop off soon. The other big factor is whether someone else can inherit the tenancy, as this means the tenancy will not end on the death of the tenant, and of course the amount of the rent also comes into play though not much as they tend to be miniscule. There are many investors who only purchase these types of properties, usually with cash. Their money is made on the death of their tenants.
We have negotiated the price of both these blocks down to £1.5m on the condition of a quick exchange. There are two ways this deal can be done, one is plain vanilla and the second is a more creative way which will yield more funds.
Firstly the properties can be picked up for £1.5m and then the individual flats can then sold in the open market piece by piece. Both the blocks are generating £67,000 and are under rented. The stamp duty on both these properties will be £15,000, moderate given the purchase price. This is due to the change in the way stamp duty is calculated, covered in previous articles.
The second method is to exchange now for 10% equating to £150,000 and then make use of the extras we have agreed on this deal. The first is we have agreed a six month completion period, so we do not have to pay the remainder of the funds until after this time is up. The purpose of this is to allow us to resell the flats on individually. We can do this because we have been granted leases on the individual flats and secondly we have arranged for the leases to be reassignable, meaning we can transfer them to someone else.
All of these conditions allow us to sell the leases on before completion. This means we do not potentially have to come up with further funds for completion. The aim is to sell the flats on individually at their market value for a total of £1.8m, giving you a gross profit of £300k from a £150k investment. This would be the ideal scenario.
If you manage to sell only half, the others can be purchased with a regular mortgage as individual flats on a 75% LTV loan.
One option to resell these properties is simply to put them in an auction. This will give you a sure sale within a specified time period. Generally people go to auctions to pick up bargains, so you may end up getting less but at least the sale is confirmed.
Most people when negotiating property deals get caught up in one thing, that’s the price. If the seller has the same narrow vision you only have one variable to agree upon to do the deal.
If the seller is very caught up in price you can play with other factors such as the time period, the amount of the exchange money – it doesn’t have to be 10%. You can even allow the seller to keep the exchange funds, normally these funds would be held in the solicitors account until completion. This is a very strong factor in getting a deal agreed if the seller is desperate for the money. As mentioned above you can ask for the contracts to be reassignable. You can also ask for access into the property to start works if required prior to completion. This will save on your mortgage interest.
If the property is not mortgagable due to its condition, this time period can be used to bring the property up to scratch prior to the valuer coming in. Time to time when investors purchase properties they do not realise mortgages are given on a Buy to Let basis only. This means the loan has been granted not on the income of the purchaser but the letability of the property. The property has to be rented a short time after completion and this is what will service the mortgage. If you purchase property which requires work or is completely dilapidated to bring it to the standard of being lettable the property does not meet the criteria required for the mortgage company. In this scenario, two things may happen: one is the mortgage will be outright refused, the other is the lender will retain some of the funds until the works are done and are inspection occurs by the valuer to ensure this.
So as you can see there are many variables which can be exploited for profit in a property transaction. Deals become all the more lucrative when other factors besides price are used to enhance the transaction.
This is a live deal and is on the table now, if you’re interested call the office for further details.
Sow & Reap
A Property Investment Company