When Losing Is Winning
6th August 2019
Last week we went for an underwrite, the idea was to not hold on to the property. It was an extremely small deal, which closed in 30 seconds with the client.
The property is in North Humberside which is about 4.5 hours away from London. It consists of 3 flats, all rented producing £10K per annum in total. A property a few doors down sold for £177K in the middle of last year. Having dug a little deeper we have discovered this was a guest house. So, although not quite a like for like comparable, it does give an indication as the building is the same, and there can be an uplift simply based on rezoning the property.
We closed this deal at £70K, therefore we feel there is a large upside to be made on this deal; assuming there are no major works to be done in the property.
We are currently looking to raise the rest of the funds by way of a mortgage, therefore only £20K will be used in this deal, against a large potential upside. We were hoping to come in and out and make some beer money on this deal, instead it may transpire that the client makes a tidy sum from this very small investment.
The aim now is to simply split the three flats and sell them individually.
At times you can get very tunnel visioned in regards to buying property in London and miss deals outside. Of course, the London property market is a 500-year-old market, and weathers well during a downturn, and there is also a herd mentality which keeps the focus in and around London, with good reason.
It is specifically for this reason why deals like this in auctions are missed and therefore provides opportunity. This is not the first time we have bought ‘odd’ lots in the auction. By ‘odd’ lots I mean spotting properties which are not meant to be in that particular auction. They are ill suited and probably ended up in the London auction either because of an over zealous sales person or some connections from the auctioneer to the owner.
The reserve was £70K and we underwrote this deal at £70K. It could be argued if we didn’t underwrite it and it never sold for £70K we may have had the ability to go back and offer a lower figure. However, in property there is little point speculating about the past. The point is the present and the future.
There is another interesting angle to this deal. During the pre credit crunch era if you bought below the market value on a deal you used to be able to get lending based on the valuation and not the purchase price, if structured in the right manner. Sometimes, you could even get cash back on a deal. I remember buying a property with no money and getting £40K on completion!
It is still possible to do this with bridging lenders, as bridging lenders are more flexible in regard to funding deals which have been flipped as opposed to High Street lenders. With High Street lending one normally has to wait six months before they can get borrowing at the market value.
The other angle here is to wait the 6 months, and then simply refinance at market levels.