Trade or ride the wave?

In the last couple of weeks we have closed three deals with a view to trade them prior to completion. One of the properties is a purpose built flat for £240,000, which will be sold in auction on the 17th April 2013; another is for £275,000 which is a conversion and a probate sale which we expect will be resold shortly for £310,000; and the other is a bigger freehold property in Shepherd’s Bush for £715,000 which we are expecting to resell for£825,000.

The Shepherd’s Bush property is interesting, Shepherd’s Bush is not a market I know intimately hence I had to rely on past sales figures; the past sales figures did not look very promising to me as the last sale occurred in December 2012 and the price was not much different to what we were about to pay for this so called deal, the previous figure in June was also at a similar level. I was not seeing the deal, yet the agent involved assured me this was a deal and we must purchase the property.

‘The figures are out of date’ he exclaimed, ‘and the market has heated up aggressively’. I have experienced this, where you purchase the property at market price purely because you know there is no decent stock around and the demand is very strong, this means in the coming months you will experience a strong rise. This information does not come from the internet or past research but reading the signals from reliable sources.

In one sense all past performance is an indication of is past performance, this does not necessarily indicate where price will go in the future. If you can read the currents on the ground this will give you a stronger indication. We once purchased a property for a client in 33 Davenport W2 for the full asking price of £495,000 on this basis a year and a half ago, the property is currently worth £700,000.

Luckily in the same week we were agreeing this deal we received an offer in Shepherd’s Bush for a two bedroom flat we sourced for our client for £380,000. In fact we had sourced the whole block consisting of three flats early last year for £650,000, we purchased this as part of a portfolio. The properties were on the market for £250k , £250k and £375k (the two bed), giving a total of £875k.

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The highest offer we got for the two bed when we put them on the market was£315,000, so to receive an offer at over the full asking price clearly was a sign from the gods for us to purchase this deal . This gave us the impetus to exchange on the deal. Shortly after we exchanged we received an offer for £800k!

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The point to note with all these three deals is not that we have purchased them at good prices but they have all been exchanged with the intention of selling them on prior to completion.

The combined purchase price comes to £1.23m, and the potential total sale price will be £1.41m giving a gain of £180,000. This will be on a combined exchange deposit of £123,000. So the percentage gain is 145% within a month of exchanging.

This looks like a good percentage return when you calculate the percentage return or the Internal Rate of return etc, but it is deceptive.

When you exchange on a property you must be prepared to complete, unless you’re willing to gamble the whole amount away if you cannot resell prior to completion. This means you will need the other 90% of the money either in cash or through funding, therefore although this money is not used actively in the deal, and perhaps it never will be, it needs to be in place.

This means the returns above are skewed and not as high as they look, as although the money is not used in the deal, and hopefully will never be, it needs to be blocked somewhere in case completion occurs.

However trading before completion does have other benefits. One is the stamp duty saved, in the case of the property in Shepherd’s Bush this will be nearly £30,000, on top of this you will save on the other costs associated with completing and then selling, for example the arrangement fee for any funding taken out as well as a redemption penalty. On the assumption of 70% funding and a 3% arrangement and exit fee you’re looking at another expense of around £15,000; thus with the trade you would be saving about £45,000 of expenses which would have otherwise eaten into your profit.

We use a combination of approaches: sometimes we trade deals, other times it pays to sit and ride the wave as it is rising; and of course there’s developing and adding value to the property as an option too.