The Accidental Deal

25th May 2022

A first time buyer approached us for a mortgage.  This was easy enough to place.  She wanted a five year fixed.  The only point of concern was the expectation of rates to be rising.  So, the trick was to try and lock in the current rates, either by paying a booking fee, or an arbitrary property to commence the application.

However, her main issue was finding a property.  The market is heated and her experience is that properties are going above asking price. So, she has struggled to find something.

This prompted me to have a cursory look into the auction market, which is not where the client had ever considered looking, using her chosen postcodes to guide the search.

A number of properties popped up, but what caught my eye was a three bedroom ex-council  property, very close to Wembley Park station.  The guide price is £100K and it is producing £18K per annum.  What’s the downside you will be asking?  Well, it has a short lease of 40 years left; therefore, this needs a cash buyer.

There is a direct comparable which is being sold in a later auction, and this is guided at £275K, on a long lease; though technically a comparable is something which has actually been sold.

On a short lease, as is common practise, the seller issues a section 42 notice upon the freeholder.  In this case, a premium has been quoted for £33K.

The aim will be to extend the lease as soon as possible, and then refinance on a 5 year fixed rate; the objective being to extract all the seed funds in the deal out.

The deal, and the slight complexities involved in terms of lease extensions and financing, placed this deal outside the realm of the original first time buyer.  This is a deal for a property investor.

Actually, it was whilst writing this very article the deal was confirmed with a seasoned property person, who made the decision within 10 minutes to go ahead with the deal.  It needed someone who would move quickly as the auction happens to be tomorrow!

There is much ground work to be done on the deal, as well as the registration for the auction, completing anti money laundering requirements etc.  We would like to drill down on to the proposed premium for the lease extension, and ideally get the legal paper work looked at by a lawyer.  Although this is a block we have bought in before, so everything should be in order, the devil is in the detail; and, therefore one can’t be too careful.  The aim is to be ready by the end of the day; my feel is to go up to £175K on this deal.

Even if the lease, in the unlikely event, cannot be extended, you would be earning a very healthy income on your funds.  Allowing 25% for maintenance costs plus expenses on a purchase price of £175K this equates to a net income of 7.7%.

Suresh Vagjiani

Suresh Vagjiani
Suresh Vagjiani
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