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When debt ceases to be your problem

Recently I was introduced to what’s known as a PEP. Meaning politically exposed person, a current member of parliament in a high risk country. I got an insight into how this person operates when he expressed interest in acquiring a property I had access to. He was interested in purchasing a property which was in The Bishops Avenue. This property consists of 27,000 sq. ft. set on nearly three acres of land. It started off on the market priced at £100m and then got reduced to £65m and is now available at the bargain price of somewhere in the region of £27-£30m depending on who you ask.

He knew more about the property history than I did, knowing about the original purchase, and who the buyer was. What the purchase price was, how much was spent on development and the amount it was refinanced at.

In short the former owner had bought and developed the property, and managed to take all his money out of the deal together with a big fat profit margin via a remortgage. The debt currently owed on the property according to my sources is £29m. When you owe the bank £29m, you cease to have a problem……..instead the bank has one!

I told him I can deliver the contract as I have some control over the deal. But this would be the straight forward way of purchasing the property……too straight actually, but I guess if he played straight forward he probably would not be in the position he is now. Therefore he had a different plan, and that was to value the property to a higher figure of £47m and then purchase it on the basis the loan is on the valuation of £47m rather than the actual purchase price, with the loan covering most if not all of the purchase price.

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These types of purchases worked in the pre credit crunch era, when prices were rising; you could choose your valuers, and the mortgage companies turned a blind eye in their rush to lend to you. After all it wouldn’t be their problem if you didn’t pay, as after they have lent to you they sell the debt on to someone else. This was the merry go round, fun until it stopped turning.

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I thought the scheme was a little farfetched to say the least, but I wanted to see how far this can be pushed before it buckled. I was given the contact of a valuer in the area who would do the valuation at this level, or so I was assured.

I contacted the valuer giving the reference of my contact, he was very enthusiastic, and responded very quickly offering to meet me the very next day to discuss the matter. No doubt a sizeable instruction attracts a sizeable fee. In this scenario it was £20,000 which relative to the purchase price is not much.

Normally there are two stages in valuing a property, one is a desktop valuation, which as the name suggests is conducted without the valuer leaving his chair whilst sitting at the desk. The other is a full valuation in which a visit to the property is required. Some valuers try to charge for the desktop valuation, so did this one, but I told him we are in the habit of getting the desktops for free and therefore would only be looking to pay once the full valuation had been instructed and the desktop one is acceptable.

The initial conversation was encouraging, he clearly knew the area and had valued several properties on this road. His comments were positive and he had comparables ready at the tip of his tongue, the size of the grounds seemed to sway him towards our magic figure. At £47m it was priced at £1,740 per sq. ft. which sounded possibly plausible to me given it was after all The Bishops Ave. But all my reference points were around central London where ex locals were now being sold for £1,000 per sq. ft., however The Bishops Ave is in a different league and appeals to a different market and type of buyer.

I was told the road has gone through some changes and at one time it used to be the in place to own a property but recently it has fallen out of favour, unsure as to the precise reasons why. A property such as this will only appeal to only a handful of buyers.

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I had some experience on this road some years back, showing a pastor from The Philippines a pastoral mansion in The Bishops Ave. Clearly he didn’t have to wait until he was in heaven to experience his father’s wealth, this was a taste of heaven on earth. We managed to get something which suited his requirements, which had a swimming pool, cinema room, but in the end the deal fell through.

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I kept an eye on the property and came to realise it didn’t sell for over two years. This is not a fast paced market and it would be unwise for the uninitiated to venture into development on this road without due study and experience. If things go wrong here they could go badly wrong, unless you’re clever enough to make it go wrong for the bank and not yourself.

However from the initial flurry of interest and enthusiasm from the valuer it all went deadly quite, I felt rejected and ignored. I managed to get him on the phone where he stated -unsurprisingly – his enquiries had pointed him in the direction of this property being worth north of £25m, he did however state he had a few more enquires to make and will come back after he’d made them. However it was clear this road of enquiry had come to a dead end.

I reported back to my PEP and told him the response, undeterred and still determined he instructed me to go back and buy the debt behind the property.

In this scenario when the bank has a problem and not the borrower they are sometimes open to doing deals with the debt rather than the property. If the debt looks like it will not be serviced or at worst not repaid, the bank may consider swapping the borrower. The new borrower in this situation will most likely be a company. This would mean rather than lose everything they may still be able to retrieve most of their money.

In scenarios like this one can even ask for some of the loan to be wiped off before you agree to take on the debt.

The Real Deal

East Sheen, London, SW14 Purchase Price: £2.8m

  • A large development opportunity
  • Freehold
  • Existing property can be converted into three flats
  • With space for two more
  • Total saleable area to be around 7,200 sq. ft.
  • The end value of the project expected to be around £5.75m
  • This is an exceptionally lucrative development opportunity

Call us now to secure this deal!

Suresh Vagjiani

A Property Investment Company

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!Tips of the Week

The desirable features of a property will appeal to the emotions of both tenants and buyers alike, and the more you have the easier to sell/rent the property.

Investing in bricks and mortar means the investment is real, hence it cannot simply disappear, like non tangible investments such as stocks and shares.

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