Last week Friday we completed on a property in 40A Westbourne Terrace W2. The property is on a lovely tree lined road starting from Hyde Park, and going up to the A40. The properties on this road are set back from the main road by an extra road lined with trees, this gives much needed privacy and quietness in this central location. The property was 1,819 Sq Ft, it came with Share of Freehold, a rarity in this location. It consisted of three bedrooms and three bathrooms and was in great condition. We sold the property for £1.23m a lot less than what it was worth.
There is a direct comparable on the same road at no. 50A which is slightly more towards the A40 but leasehold and only 1,600Sq Ft, this was sold by Hamptons at £1.55m and in worse condition than ours.
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The reason why this price was accepted was because of two factors. One was the structure of the deal , the other was the time.
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The property was purchased with a three month completion for £1.050m, with only a 5% exchange amount. This equates to £52,500. The idea was always to sell the property on prior to completion hence the low exchange money. The completion deadline was 30th June 2012. Using this structure our investor made £180,000 with a £52,500 investment. A 342% return within a three month time frame. If he had completed then he would have made £113,000 with a £420,000 investment which is a 27% return over a longer time frame. Hence structure and timing is everything.
We had an issue selling this property. Though the location was superb and the flat was in a great condition, it was a lower ground property hence had a stigma attached to it. Lower ground property has a reputation for damp and security, though this is not always justified. This coupled with the quite time of the year when the market is a little slack meant we could not resell as quickly and for more than we expected, but nonetheless given the way we structured the deal we could get away with selling for a lot less as we wouldn’t have the expanse of completing this transaction. Ordinarily the stamp duty on this property would incur another £50,000, hence reducing the profit margin.
The buyer was someone who lived on this road in a lower ground property and was upgrading. Having lived in a lower ground property they were comfortable and familiar with this type of property.
In these situations it is always prudent to prepare for the worst case scenario. In our case it was having the funds to complete. Hence the mortgage offer was in place and we even had a structure in placeto mitigate the stamp duty.
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Although it may be a completely unnecessary expense and in this case it was, it can be thought of more as an insurance policy to avoid stress later down the line. It’s a small price to pay for the peace of mind.
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In this situation we were arranging a 60% loan to value mortgage which would have reduced our deposit to £420,000 as opposed to the full amount. We chose this product because of the low set up fees and redemption penalties given our aim was to resell shortly. The redemption on this product was only 1% for two years, which is very low compared to the other products on the market. There was a time when you could get a fees free product with no penalties too, this was in the pre credit crunch good days.
There is another more clever way of arranging the mortgage on this property. Given this property is easily worth in excess of £1.6m, the idea would be to arrange a mortgage on the amount of £1.6m using another buyer. This would mean we put only £90,000 into the deal, so another £40,000 on top of the deposit already paid. This would allow us to use our funds elsewhere.
Again in pre credit crunch times you could buy this property not just for free (i.e no money stuck), but with some pocket money! If it was structured in the right way. It worked like this: you would not have applied for a mortgage, you would have applied for a remortgage based on a valuation not the purchase price. Let’s assume we get a 70% LTV remortgage on £1.6m, not an unreasonable scenario given, assuming the valuation is correct you would get a remortgage offer for £1.12m. This offer would be valid between three to six months. The issue is you haven’t bought the property yet and this is only to draw money down, on the assumption you own it. You go to a bridging company, show them the offer and borrow the money from them for one day to purchase the property and then refinance it the next day. This means though you have bought the property for £1.050m you have borrowed funds of £1.12m against the property and you will get a cashback of £70,000 and a ‘free’ property!
This type of purchasing was very prevalent amongst ‘wanna be’ landlords who had no money. This concept was taught for a fat fee by many property companies, who then went on to provide the relevant solicitors, bridging companies and properties. The properties were normally new builds, hence it was doomed to fail.
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For this simple reason, it cannot be a genuine discount if everyone is getting the same price!
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The value of a property is what someone is prepared to pay for it. Often in the past, in the case of new builds, the valuation would be inflated as at that time you could choose the valuation firm and if the firm knows it will be getting hundreds of instructions if it gives the right value, it will ask you what you would like the value to be! Given these were new build flats there would be no direct comparables. This of course has now all changed and we are in a very different market now, where it cannot be certain whether property prices will even rise in many parts of the UK. One needs to invest carefully to get the most out of your investment.
These are tricks you could have used historically and cannot replicate in the current environment. The environment has changed dramatically now, but there are still ways in which deals can be structured to maximise your investment.
The Real Deal
Unusual Deal in West Kensington
It’s rare to get deals given on a plate
20% discount off market price
Worth £300,000 but we have agreed this at £250,000
Only 1% Stamp Duty
Minutes away from West Kensington and Barons Ct stations
Share of freehold, minimal service charge pa £300pa
Call us now to view !!!
Suresh Vagjiani
Sow & Reap
A Property Investment Company
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!Tips of the Week
Always enquire as to why someone is selling a property. Reasons like moving abroad, getting divorced or going bankrupt will need a quick sale, which is when you are more likely to get a good price.
The speed with which you make decisions and commit to them will ensure you get deals time and time again.
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We offer a Property Sourcing Service, so call us now to see how we can help on 0207 096 1083 or email info@sowandreap.co.uk
Our Address: Westbourne House, 14-16 Westbourne Grove, London, W2 5RH
