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When Piggybacking Makes Sense

Recently we backed out of a deal, the reason being someone else didn’t sell as fast as we expected, and the flat we were considering was virtually identical to the one that they had bought, in fact they were next door to each other.

The properties in question were in Lennox Gardens, Knightsbridge, one of the most sought after squares in London. There are only a few squares which fall into this category, namely Eaton Sq, Belgrave Sq, Cadogan Sq and Londes Sq. Greenery is hard to come by and so a little patch of it in these locations becomes very sought after. A flat in this location can fetch in excess of £2500 per Sq Ft by virtue of its location.

The first flat was purchased a few months ago by a trader for £185,000, in this location. “It sounds too cheap” I hear you say, there must be something ‘wrong’. There was something ‘wrong’. Two things actually, one is the lease was three years, and the second is it’s a lower ground property. The trader bought this with the aim of agreeing the lease extension and selling the property on, note this does not mean he pays for the lease extension merely agrees the figure. The property came with the rights to extend the lease, this is known as a section 42 notice. With property, especially in these locations, it is rare to get everything on your plate, normally you need to have an angle to make the deal work.

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Here the angle was to extend the lease and resell the property with the benefit of a long lease. This alone adds value as an unknown variable has now become a know figure.

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The cost of the lease extension was negotiated at £500,000, which is an extremely cheap price. This means the flat ‘cost’ was only £685,000 in this location you cannot purchase anything at this price. The flat is a 569 Sq Ft, so a generous size for a one bedroom flat.

The trader expected the resell of this flat to be around £750,000, put simply you cannot by a property in this location for this amount of money.

When the next door flat came on the market at £175,000, naturally we were keen to replicate the deal, we had the knowledge of the previous lease extension and the surveyor was confident of negotiating a similar price for this new property. The second property was in a better condition, the layout was a squarish shape as opposed to the previous property, the sq footage was 713 Sq Ft. It was a deal to be jumped at. We secured the contract, all we had to do was replicate the exact same formula. In effect we were getting 25% more space, a better layout and it was in rentable condition, furthermore it was £10,000 cheaper. Therefore it seemed a no brainer. Not everyone was privy to the information of the lease extension cost, this was our trump card.

There were many close sales on the first property, but it didn’t quite sell. The trader decided to put the flat in auction on the 19th November 2012, it was guided at £180,000 with an expectation it would sell at £265,000. We waited to see the results of the sale, so we could secure the next door property with confidence. It was pretty much certain to sell at the auction – or so we thought, there was even talk of it selling prior to auction as it attracted a lot of interest. Neither of these happened. The property failed to sell.

Selling at Auctions can be a hit and miss process, things like the weather and holiday seasons can affect the sale of a property. However even after the auction there was much interest and expectations it would go, but it hasn’t to date. That’s not to say it will not. Out of the two initial reasons why this property was not a sure sale one still remains, it’s lower ground property.

Although on the surface the property looked like an attractive deal, the overriding factor of it being a lower ground has proved to be a stumbling block. It will sell, it’s a question of time and price. After all there are only so many properties around this one square.

However in the same way we were going to piggyback from the success of first flat we made a decision to pull out as a precaution. Despite the failure of the first flat to sell in time, we were still bullish that if we had purchased the second flat it would sell if released at the right time, i.e. spring next year. However regardless of our confidence, the decision was taken to exit the deal and use the funds for more aggressive and sure deals, not where funds could be tied up for longer than expected.

Previously we have had success with lower ground properties, in 40A Westbourne Terrace in W2 we purchased a 1,600 Sq. Ft lower ground property with a Share of Freehold for £1.05m which we then resold for £1.23m within a couple of months without doing any work. Though this is a strong location it has no way near the pull that Lennox Gardens has.

The attractive feature on this deal were the numbers involved. The property could be bought in cash for £175k below even the stamp duty threshold of 1%. The lease extension can be agreed with only 10% down. Even on a three year lease the properly can be funded, as long as the rights to extend came with the property, in this situation it did. So the return was potentially very lucrative for a nominal investment.

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Investors are often amazed at the premium you can get simply by a lease extension.

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The first question is if it’s so simple why doesn’t the owner just get it done. One reason is they may not be alive to get it done. Often these are probate properties. The siblings who inherit the these properties often haven’t got a clue regarding the laws surrounding lease extensions nor the patience, in the majority of cases their aim is to sell and divide the profits in the shortest space of time. Another big reason is many of the owners are abroad and are out of touch with the current legislations, the agents who are selling are often not aware of the laws surrounding lease extensions themselves.

In this situation all we were doing was following a previous deal, it was very coincidental to get deals so close to each other, the vendors in both of these were not related. Knowledge of previous deals can serve to give powerful guidance on whether to invest in a property and identify the time taken to sell. Our aim in this situation was always to follow the flow of the first flat, in this case the indication was to step out of the deal.

The Real Deal

2 bed flat in Atherstone Court, Delamere Terrace, W2 for £310,000

  • Superb two bedroom property
  • In the heart of Little Venice
  • Long Lease
  • Expected rental of £21,840 per year
  • Low service charge

This is a very attractive price for this property and we feel this will both rent and grow very well in the future

Call us now to view!!

Suresh Vagjiani

Sow & Reap

A Property Investment Company

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!Tips of the Week

When renovating a property remember the cheaper quote may prove to be expensive in the long run.

Remember to factor in the time value of a property when arranging works, if it’s a buy to let then the value will be the rental lost.

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