Taking the distress out of the distressed property
Last week I spoke about a property we were looking to purchase in Knightsbridge for £600k, unfortunately the deal did not happen, someone came in and gazumped us for £650k, even though our funds were in the lawyers account ready to do the deal within 24hrs of agreeing it. You lose some and you win some, it’s the nature of the best, all we can do is always be poised to strike; as long as over all we are winning.
However we did close one deal last week, it was presented to us on Wednesday and exchange had to happen by midday Friday. The property is a lower ground floor flat in Hampstead, comprising of 1500 sq. ft. of lateral space. There is a distinction which many people often miss, and this is lower ground flats are not the same as basement flats. Lower grounds can be very airy and are sometimes on ground level on the rear of the property, this happens when there is a slope across the property, whereas basement flats have little or no light and have been created by digging down.
We secured this flat for £850k, we believe this property has an end value of £1.5m. The reason why we were able to secure it so cheaply is that this deal falls under the category of a distressed sale.
What clinched the deal for us was meeting the owner directly, we were able to get to grips with the issues involved in the building. It basically boiled down to a conflict of two personalities.
The former owner purchased the property and when it came to completion the freeholder who lives in the block had erected a fence to separate the communal gardens from his own private garden.
He wasn’t happy with this, and so he tackled it by going in with guns blazing through his lawyers and wrote a heavy letter arguing rights of light, enjoyment etc. This wasn’t the best foot to start a relationship from; there’ s a saying which comes to mind (which I have amended to be polite): ‘you don’ t make a mess on your own door step’. I assume he lost, as the fence is still there.
He then hired builders to patio his portion of the garden, which included a manhole cover for the whole block. There was a leak in the building and the manhole cover could not be reached because it had been stoned over. This too didn’t go down very well with the freeholder, so this was strike two.
The straw which really broke the camel’s back was when the owner wanted to do works, his structural engineer provided calculations which were challenged by the freeholder’s structural engineers. This led to a stalemate which took the courts to resolve. When the leaseholder’s engineer was scrutinized in the dock he admitted he felt he got his calculations wrong and therefore if they had proceeded based on his calculations the building could have collapsed. He then settled out of court, and was left with a half completed property, a building site. And this was strike three. Clearly it was time to get out.
Unsurprisingly the culmination of these events led him to want to abandon the project and move on, he felt any move he made on the build would be scrutinized and challenged. Not the best environment to work on a project.
It was at this point we were introduced to the deal, it had been floating around for a couple of weeks but the owner didn’t want to stoop low enough to accept our offer of £850k, until he was forced too. This is not exactly end user property, or even mature BTL landlord, due to the issues involved. Once they are tidied up the property could be resold even in shell condition to an end user. The freeholder also wanted to purchase the property for £925k, but he’ll be dammed if he sells to her!
The owner is now in the process of suing his structural engineer. We agreed a 3 month completion on the basis we would release the £85k exchange money. This was done so he could pay for the legal costs involved in taking him to court.
Though we have bought a distressed property, we need to be careful to make sure we inherit just the property and not the distress. Clearly the freeholder will need a lot of reassurance given the background of the property, to ensure one set of cowboys don’t get replaced with another set.
We have just completed the refurbishment and design of a flat a stone throw away from this property in Ferncroft Ave which is on the market at £1.8m, the condition for this property is stunning. We had it fully furnished with bespoke furniture, the feedback from several agents has been this is one of the best finishes they have seen in a long time.
Our logic in taking the property to this level was simple, there are only two types of buyers in the market the investor and the end user. The end user buys more with emotion and the investor buys with the motivation of profit.
We do not want the investor to purchase, we are after the end user. Because they purchase with emotion we need them to fall in love with the property. In the same way when you buy a new car it makes absolutely no financial sense at all, but you want it! You pay £10k – £20k more than it’s going to be worth in a year’s time; in fact as soon as you drive it out it drops thousands in value. This is because it’s an emotional purchase. We are trying to replicate the same emotion in our future buyer.
We will attempt to tidy up the issues in the property first and then look to resell the project ideally before completion. We will need to work quickly for this to happen. Simultaneously we will be preparing for completion as well. Therefore we will prepare ourselves for the worst case, which isn’t too bad given the market is rising week on week.
We also managed to exchange on a property in Abbey Lodge in a purpose built block in St John’s Wood, this was a roughly 500 sq. ft. property which we sourced for a client for just under £500k. This property in my opinion will fetch possibly £700k in a month or two after completion which has been agreed in 6 weeks, and will do very well for them. In this market there is a possibility for reselling for less money prior to completion. The question is whether we will take a smaller piece of the pie in a shorter time or wait and take the whole piece.
Earls Court, London, SW5
Purchase Price: £1.6m
20% discount in a rising hot spot
- A large top floor flat in this highly sought after location
- 1,300 sq ft area.
- The property will benefit greatly from the Earls Court regeneration scheme, being located close to the proposed ‘High Street’ and parks.
- Comparable properties in the market are priced around £1,500 per sq ft while this property is coming in at around £1,230 per sq ft.
Call us now to secure this deal!
Sow & Reap
A Property Investment Company
!Tips of the Week
It is important to pay attention to the type of job your tenant has and not just that they are working. Doctors, nurses and teachers tend to be hit very little by economic downturns. This will reduce the rotation period.
Always consider the projects which are happening in and around the borough you’re purchasing in, this will ensure strong capital growth into the future.