I was introduced to a property trader / developer. He had just exchanged on several deals outside of London from someone he knew. The point being this was not a third-party transaction.
The properties had been purchased for around £220K each and they would all be refurbished into high standard HMOs, with about £150K being spent on each of them. Therefore, his cost would be around £370K each but the end value is expected at around £550K each. This means the cost is less than 70% of the end value. The properties are expected to produce £30K per annum rental, which to me seems a little on the low side.
Back in the day during the pre credit crunch era, one could fund a transaction such as this with no money, on the contrary you could even get cash back from a transaction like this; in essence extracting the discount and turning the equity into hard cash.
Post the credit crunch era, these types of transactions are only to be reminisced at.
Currently, if one purchases a property which is below market value, they would need to wait 6 months before they could take money out on the market value. The mortgage lender would use the purchase price, irrespective of what the property was worth. Previously, if one structured the transaction properly you could get funding based on the open market value, straight away without the need to wait 6 months.
However, when digging around for a suitable lender to place this deal with I came across a lender who surprisingly would lend on the open market value not the purchase price on day one. There are some conditions attached, one being there should be some substantial works to have been done on the property, so not just a lick of paint, which is the case on these deals. They would require a schedule of works.
This means all these deals can be funded with no money in the transactions, and they would be producing about £15k each cash flow positive.
This means the return on the investment is infinity, as there is no investment in the deal. Pre credit crunch when I was writing about these types of deals, there was very little interest given that I was describing how transactions can be funded for free. Many probably believed it was too good to be true.
If you’re a property trader, you don’t want money stuck in deals, you want to be able to keep moving on. Therefore, this type of product is a Godsend and would allow one to keep building their portfolio, without the standard time lag.
Even after writing everything I have, I would not recommend someone who has no funds to structure and execute a transaction such as this. It is not wise to be dependent on the whims of one lender or possibly more so the valuer on the day; as often they are a law on to themselves, with no recourse for the borrower.
The above is to be used as a cherry on the pie, and not as a crutch.