Recently we have purchased a number of projects from investors who have been trading the properties on. This means they have exchanged on the deals but not completed on the properties. On exchange they put 10% of the property value into the deal; if they then sell the project on for 10% more they have doubled their money in a very short time without the expenses of stamp duty, legal and arrangement fees.
There are some traders in the market who only do this, thereby they need speed to resell and as time goes on and they get closer to completion they get more anxious to release their funds so they can move on to the next trade.
I used to be averse to purchasing anything which was flipped on, as it seemed used and not a fresh deal. It seemed someone had taken all the juice out of the deal, and to be honest there was some resentment at not getting the deal first. This is very one sided in one sense as I was happy to resell properties and contracts without any issues myself, but I never liked to be on the receiving end of them. However as time went on I realised the importance of divorcing yourself from any emotions and preconceptions you have and concentrating on the deal itself.
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Often novice purchasers do not realise the danger of purchasing a property being flipped within a short span of time. Many have been caught out.
There was one occasion where we purchased an unsold lot from one auction house and resold in another with only a lick of paint at a £22,000 uplift.
The reason why I chose to place it in another auction was because I knew if it was sold through an estate agency they would have agreed the offer, then a couple of months down the road I would have been told the purchaser cannot complete as they are struggling with their finance as their lender has an issue with the seller reselling the property within a 6 month period.
At auction the purchaser has to put down 10% straight away and must come up with the other 90% with 4 weeks, if he fails to do so then a notice is served and he normally has a further 10 working days to come up with the money. If they fail to do so they stand to lose 10%. Not only the 10% but they risk being sued for more money if the seller does not manage to resell for the same or a higher price.
In the above resale the purchaser as I expected did struggle to complete the deal on time, and so we went into the notice period, they even went over this deadline. But we gave them more breathing space and allowed them to complete later.
Pre credit crunch this was never an issue, you could even purchase a property and get cash back after the purchase. There were ways you could get a mortgage based on the valuation irrespective of the purchase price, and pocket the difference.
Now the lending environment has changed this has led to the bridging lending market mushrooming. The bridging market is worth £1bn and is due to grow at 50% by next year; they now fill the hole of traditional lenders at higher rates. However the astute investor can find lenders who are happy with lending on properties which have been resold. These are specialist lenders which most brokers are unaware of, many brokers like to give the easiest solution not necessarily the cheapest or most appropriate for the client.
Central London is a highly liquid market where there is a strong level of activity in all price ranges. In 2012 £16bn was invested in the Central London property market, this is the 2nd highest on record; much of it coming from overseas. Foreign funds are seeking a safe haven, and currently it seems they are taking shelter under things like gold, the Swiss franc and Central London Property.
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Where a market is very liquid at time properties are flipped and reflipped again prior to completion.
This is problematic if you’re trying to get a mortgage through a high street bank. If you’re cash buyer of course there are no issues. Generally bridging companies don’t have any issues lending on properties which are being resold. They lend on the purchase price as long as the valuer agrees with it. Where a property is being resold they will ask certain questions to ensure it is a bona fide deal. They will want to ensure the parties involved are independent and money is changing hands.
Basically the principle is if money is being put in by the purchaser then it mean they have a vested interest in the property and will ensure the lender’s money stays protected.
However this can be exploited, if a property is cheap enough, say its price is £70,000 but it’s worth £100,000, person A can exchange on it and then sell the contract on to person B for £100,000. B will get 70% funding on it from a bridging company which will mean in effect they will be getting 100% funding. Officially A and B are unrelated but in practice they are in collusion to execute a property deal without putting any of their own funds into the deal. This can work in practise, if not to get rid of the deposit at least to reduce the amount tied up in a deal.
This a variation of the method used in pre credit crunch times where you would get a remortgage in place first before buying a property. Say the property is priced at £80,000 but actually worth £100,000, in the good old days you could get an 85% mortgage, in this scenario as a remortgage you would get an offer for £85,000.
Once you had the remortgage offer you would then be able to purchase the property for £80,000. The remortgage offer would be used to raise the original sum to purchase the property, as there were companies which would lend you funds at 1% for the day known as a daylight bridgers, based on the fact that you had a remortgage offer in place. So £80,000 would be sent over for the purchase and then sent back once the property had been remortgaged the next day for £85,000.
It is always better to have access to cash, or at least a couple of offers, as things can go wrong, bridging companies can withdraw their offers last minute and you can be stuck with no money and risk losing your deposit. So it’s always better not to bite off more than you can chew.
The Real Deal
Property in Mayfair
- Purchase price £1.4m (£1,523 per sq/ft)
- Two bedroom flat in good condition in the heart of Mayfair
- Approx. 999 years lease and share of freehold
- End value would be £1.8m
- Ideal for a group of investors
- £700,000 required, 50% can be funded
- One of the most preferred locations for foreign buyers in the world
Call us now to reserve!
Suresh Vagjiani
Sow & Reap
A Property Investment Company
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!Tips of the Week
The general mentality is to invest in the same locality you live in, but the question you should be asking is where will our money grow the most aggressively?
Remember the mantra of property investment – Location, Location, Location, this is what drives the price of a property.
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