The Power of Structure

23rd September 2020

We have an interesting deal currently on the table.  The way it has been structured is the interesting aspect.  It is a first floor flat in a prime area of West London, and it has planning to convert it into a duplex; in other words, to build another floor in the roof space.

So, everything is ready to go in terms of planning.  The end value is expected to be around £550K when completed.

The price we have agreed the deal for is £375K, the build cost we estimate to be around £75K give or take, so leaving about £100K in the deal.

Ordinarily, if one was doing this deal one would need to put in around £100K as a deposit just for the purchase, and a further £75K for the works; so, £175K in total.  However, the way this deal has been arranged means there will be roughly only around £50K in the deal.

The way this deal has been structured is that the contract price will be £550K.  Assuming the investor qualifies for a 75% loan, they will obtain £412K from the lender, leaving a surplus of £37K to spend on the build.

This means only £38K is required to complete the build cost, and this is all that will be required on the deal.  Of course, you have the ancillary costs such as stamp, legals, valuation etc on top.

We have left these out in the interest of simplicity.

There will be a three month delay, or perhaps a touch longer could be negotiated, between exchange and completion, allowing plenty of time for the works to be completed.  The lender’s valuer will then attend to inspect the finished development.  Based on the valuation of £550K you should be able to draw the relevant amount from the lender.

This deal will need to be looked at carefully, depending on the profile of the investor.  A deal is only as good as the weakest link, therefore, it might need to be negotiated to compensate for any weakness.

There are a few things which could go wrong, for example, what if the valuation comes in lower?  What will be done then?

One would need to make sure they have a back up source of finance.

This is not a plain vanilla deal and therefore the investor needs to be comfortable with the moving parts of the deal.

On the flip side, this is a rare opportunity to acquire a half a million pound property for about £50K, leaving very little money in the deal.

To find a similar deal you would need to go back in time to the pre credit crunch era.  Then you could do deals such as these and even better, as the mortgages with a little structuring could be bought based on the valuation and not the purchase price.

Suresh Vagjiani

Suresh Vagjiani
Suresh Vagjiani
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