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Viewing a deal through different lenses

17th November 2021

We have been circling a deal for the best part of a year, the contract went to a higher bidder, but the game is not over until it has exchanged.  And sometimes not even then; we have won deals when the winning party has exchanged on the property but failed to complete.  We have often been the underbidder, and still ended up doing the deal.

We received a call from the agent to say if we are still interested, it seems the current buyers are not performing.  When this occurs, the seller is psychologically on the back foot, as he has no one else and therefore is approaching the underbidder.  Therefore, once you show that you are capable of executing the deal you are then in a stronger position to dictate terms.

We presented this deal to an investor, and he informed us that he had come across this deal before.  However, the way it had been presented to him did not justify the asking price.

The deal had been packaged as a knock down and rebuild deal.  The idea behind doing this was that there was a new build with several stories more than the existing building just opposite this site.

A new build could trigger a few things which will bite into the developers profit margin, one is typically that a proportion of the new build has to go to social housing, a CIL payment is triggered.  The construction is more cumbersome, and you have the utility supply companies which are like the mafia, they tend to have long lead times and charge extortionate amounts.  It’s not like you have a choice.

These factors and more all lead to two things, one is it will increase the build costs and therefore reduce your profit margin, the second is doing a new build will take more time, both to get the planning and execute the build.  So, more time and less profit.

This makes absolutely no sense to how I was seeing the deal.  The downstairs is a commercial premises, therefore this can be converted into residential using specific legislation, which will not attract any S106 obligations and will be cheaper and quicker to execute.  Not everybody knows this, including the standard estate agent.  This means the profit will be higher and quicker than the proposal sent to the investor.

This is very interesting, as it is the same deal, viewed by two different people, both seeing a different end product.

Admittedly there may be somethings I am missing, for example, the zero VAT in new builds, the energy efficiency of new build properties, the longevity of a new build property, as opposed to patching up an existing building.  However, our goal is pretty binary at this point in time, and that is to return the maximum profit in the shortest amount of time, and that too needs to be done with pretty much certainty.

Suresh Vagjiani

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