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The early bird gets the worm; the early worm… gets eaten

23rd July 2016

This week we have managed to secure a property in the heart of a prime shopping district in Central London. We have got this at a price of £900k. For over 1,000 sq. ft. of space, with the lease extension the price come too £1,119 per sq. ft. Another property in the block was sold for £1,760 per sq. ft. in May of this year. The post Brexit environment doesn’t allow a 36% discount off the price.

The property is a three bedroom flat which is accessed from a passage way from a bustling street. It’s a ground floor flat with its own garden space as well as communal gardens. What’s great about  this arrangement is that there will be a strong demand from the short let market. The yields for renting out will be low, however this can be compensated by enhancing rents on short term lets, especially if you get the seasons right.

The occupants were there when I went to see the property on Friday, packing and getting ready for the inevitable move.

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I always like to dig into the story as to why the property is being sold. In this scenario the occupants had taken a bridging loan for two reasons, one was to extend the lease and the other was to refurbish the property; or maybe that’s what the broker told them to say just to get the mortgage through.

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They had done neither.  The property looked stale and it was being sold with a shortish lease, they had fallen into arrears with the lender and the property was on the verge of being repossessed, hence they required a speedy sale to keep the lender at bay.

This is a distressed sale and speed is paramount. I ensured I spoke to the negotiator at the viewing and found out who was leading the sale, it helped that they knew our lawyers and they knew of us having transacted previously. The more common factors you can establish with the agent the stronger the chance of executing the deal.

I discovered later there was another party at a similar level, on the table, but we managed to swing the contract in our favour. The deal was confirmed on Saturday and the memorandum should be going out shortly. This is the speed with which the London market moves.  At this point I hadn’t done any comparables, but I knew whatever they may be £1,000 per sq. ft. in this location is cheap. The comparables were done later and confirmed my assessment. This is a good time to renew the lease as well, as the price of the lease is worked out on the marriage value.

The 1993 Leasehold Reform Act gives you the right to extend your lease for an additional 90 years (i.e. the current term + 90 years) at a peppercorn ground rent, i.e. no ground rent payable for the remaining term of the lease. The main qualifying criteria is that you must have owned the property for more than two years, and you must have a ‘long lease’ i.e. one originally granted for 21 years or more.

The first stage in the lease extension process is for you to serve a Section 42 Notice on the landlord, which is basically an opening offer for the extension of the lease.

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On a property we purchased for a client in Durham Terrace, my lawyer put in a cheeky offer of £15k for extending the lease for a further 90 years. The freeholder, who was the Council, has two months to counter offer. Two months went by and they forgot to respond. We promptly wrote back and stated ‘this offer now stands please give us a revised lease on this property’. They made some feeble attempts to back track and cover themselves, but it was weak and so we got away with a cheap lease extension. Just goes to show you don’t know until you try.

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Ordinarily you must wait for two years before you have a right to extend the lease of your property, however the current owner can pass this right on to you as the new purchaser which negates the needs for you to wait. This is what we will be hoping for in this transaction. We may even try the same trick again, given the council is the freeholder too. I suspect we won’t get away with this twice. However this is a good environment not only purchase a property but also to negotiate a lease extension.

The sterling falling by 11% coupled with the current softening of the market as illustrated above is yet another reason why overseas investors are keen to enter the market. In April the rating agency Moodys, estimated that foreign nationals accounted for 49% of the sale of homes worth £1m and above.

The property mentioned above would be purchased at a massive discount of 47% if purchased by an investor with US Dollars. This is an unheard of discount especially as this property is in a prime location and you are buying at just under £1m.

It’s a great time to be buying but not a good time for selling, We are also in the unfortunate position of being in the seller’s seat for a high value asset. The question is do you hold on, or cut your losses and make the money back up given the kind of deals the market is offering?

After a hard think the latter makes more sense to pursue. We are not used to losses, and psychologically it’s difficult to stomach, however it’s best to crystallise and move forward. The chances of making up the funds are stronger given the market condition, than holding this asset in vain hope.

On the purchasing side we have a deal on the table which is seeking an investor, call the office now to get more details, especially if you have an overseas relative wanting to purchase!

The Real Deal

Great Buy to Let Opportunity In Harrow

  • Great BTL with a strong yield
  • First floor flat
  • Three bedrooms
  • Close to local amenities and Metropolitan Line station
  • Offers in the region of £225k

Call us now if you are interested!

!Tip of the Week

Don’t just walk into your bank and ask for a mortgage, you will get a product but not necessarily the most suitable one. If you are looking for advice consider using a specialist mortgage broker. Remember interest rates are not the only point to consider, arrangement fees and exit fees are also important.

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