Unknowns = Profits
16th July 2016
Only yesterday I was introduced to the seller of a duplex flat in Kensington, the property occupies the top two floors of a period conversion. The flat also has exclusive access to the roof. The property consists of 2,100 sq. ft.
The seller is a motivated seller. From the three boxes, distressed, divorced and death, he ticks not one but two of these boxes. He is stuck financially and is going through a divorce.
So he qualifies as a ‘good’ seller.
The property is worth £3.3m and there were offers from developers for 2.8m, pre Brexit. It’s important to note if the offer is from a developer this means there is further margin in the deal.
Post Brexit no prime minister – the price should be £2.4-£2.5m. Post Brexit with a prime minister -the price should edge up even more. Do not ask me why the price of a square cube of concrete goes up and down, depending on whether the country has a leader or not, but it does.
The seller has a need for money, one lump one to be released on exchange and another lump in a couple of weeks’ time.
The deal could be done in various ways. One, we exchange and release the funds to the seller with a very delayed completion. And then aim to sell the property prior to completion.
The other way is to use the current seller to procure the freehold, and then the roof garden, as well as develop the property and then resell for £3.5m.
As a plain vanilla flip you can resell for £2.5mish netting about £350k within three months assuming a current strike price of £2.15m.
The other option is to do the above, get the freehold and the garden and sell it on without the works, or a variation is to refurbish the extended flat and then sell it on.
The second option requires the sellers input, therefore it would be wise to cut him into the upside of the deal.
Rather than confusing the issue from the outset, I suggested we execute the deal plain vanilla and talk about the second possibility after exchange. It comes down to whether you want a bird in hand verses two in the bush, a bird in hand meaning a straight quick flip verses the variables involved in getting the freehold and the roof gardens for more profit in the future.
Several property funds, totaling £14.2bn, have closed their funds to redemptions, this is to stop panic selling in property stocks, owing to instability caused by the country voting to leave the EU.
Property shares too have taken some heavy losses with Barratts amongst the worst hit with a decline in share price of 42% since the 23rd June.
A shrewd Dragon told me early on in the year that property stocks will be taking a beating, and the clever traders were shorting the stocks in anticipation of this occurring.
The decline in property shares has not trickled down to the ground. The companies concerned have not started reducing prices quite as yet, much to the annoyance of one particular buyer I know who was hoping to pick up a bargain on a new build house he has been eyeing for some time. No such luck.
This is the stark difference between the stock market, even of property companies, which are fickle in nature and panic is caused even with the slightest breeze of uncertainty, and property, which stands firm. Property has even been seen as a safe haven during times of uncertainty. Money goes there seeking shelter during time of turmoil.
The word on the ground is properties from £500k to £1m are still flying of the shelves; agents cannot get enough of them.
However on the higher end there are price drops across the board.
More and more deals will be coming out of the word work as time goes on. This, after many years, is a good time to buy.
In general the environment is conducive to purchasing, however if you wish to exploit it, it is better to go for properties which have variables attached to them.
In particular repossessed properties appear to have many issues attached to them. I use the word ‘appear’, because often they do not exist, or they look more complicated than they actually are.
I met a Jewish developer many years ago, who following the credit crisis had many of his sites repossessed. Repossession does not happen overnight, the lender has to follow a process.
When it looked like he was heading down this slippery slope he would do some form of illegal works to his sites and ensure the council knew this had occurred. Thereby getting enforcement notices served on the property.
On one particular property, to make matters more complicated, he even encroached on the neighbour’s property to give the impression there was some litigation going on with the neighbour, who actually happened to be on good terms with him.
Once the property had been repossessed he would then go and purchase the same property for a fraction of the price of what it was worth, reversing the complication he himself had put into motion.
There are more simple variables too, for example if the property is put on sale but has unknown tenancies, this may give the impression they could be life tenancies, this has the effect of reducing the property value to possibly half the market price.
In some cases, in reality all that has happened is the borrower did not pass the ASTs on to the lender when the property was repossessed. Therefore, when it comes to auction they mark the tenancies as unknown.
Buyers get nervous when they see this. We purchased a property in an auction in W9, with 5 tenants, all terms unknown. We had some insider information that these were all ASTs. We picked this deal up for £1.1m and promptly resold it for £1.3m within days of exchanging.
It’s a great environment to buy at the moment, if you wish to exploit it call us now and see how we can help.
The Real Deal
London, W2 Purchase Price: £575k
- A beautiful one bedroom flat in a very deisrable purpose built block in W2
- Long lease
- Close to Hyde Park and Connaught Village
- Excellent buy and hold opportunity Call us now to reserve!
!Tips of the Week
Buying at auction is a good way to pick up a bargain, provided you don’t get carried away with the emotion of the auction itself.
In an auction if the bidding doesn’t reach the reserve price, try and negotiate with the seller afterwards. The property wouldn’t be at an auction in the first place if they weren’t very keen to sell.