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Why doing things back to front makes sense

Today I’m going to see a property we might be exchanging on, the property is a freehold building consisting of 11 studios. It’s described as being in St John’s Wood, however closer inspection shows it backs onto railway lines close to Kilburn Station. This property has been listed in the coming Allsops Auction; auctioneers often list properties in posher locations than they actually are as this attracts more interest than the property deserves. When you’re given a few seconds of someone’s time you need to have a hook in order to focus the reader’s attention, this is one such hook, even though it is misleading.

Often we end up doing things back to front, offers are made prior to seeing the properties. Agents generally take offers only after they know you have been to view it otherwise they tend not to entertain any interest. However if we went to see every property we offered on it would take up a lot of unnecessary time. After all it costs nothing to put an offer in, it can be done for free. There is no real obligation to follow through, however you will stand to lose credibility if it’s been accepted.

Most of the work can be done prior to actually physically seeing the property. With the aid of google maps and the internet the pounds per sq. ft. of nearby properties can be ascertained. This is in two forms, one is known as a comparable, these are properties which have actually been sold and the other is properties currently on the market. A point of note is comparables by nature can be out of date, as the price is agreed a few months prior to completion, therefore the date given in the land registry is already a few months out of date; in a rising or falling market this is important. So comparables have their limitations. A property we purchased in Shepherds Bush made no sense at all from the research we carried out on the internet, based on this it wasn’t a deal. However the market had moved on so fast the data was out of sync with what was happening on the ground. We ended up purchasing for £710k and reselling for £875k in three months without doing any work.

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However we are in a flat market at the moment and due a combination of events, the market has changed rapidly from even a few months ago. In my opinion, the reason is partly seasonal, and partly due to the world cup. The coming elections and the new mortgage policy have also served to create uncertainty in the market and many are pausing for breath to see what happens. It i s at times like these when the masses are sitting on the fence; the time is ripe to start picking up deals.

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The price we offered for this property is £1.8m for 2,800 sq. ft. of property, which is about £642 a sq. ft. Our research tells us the correct price is around £800 per sq. ft. Furthermore the information given on the EPC regarding the sq. ft. tells us it is more than 2,800. This means the property is actually worth £500k more than what we are paying. In the absence of floor plans we can only speculate as to what the actual sizes are. The offer is almost confirmed and hence we are doing the viewing! The aim of this purchase will be to buy and resell. Stamp duty fees under the new rules will only be 1% of the purchase price, contrary to many lawyers’ opinions. There is a break up profit to be made in this deal. There are a couple of issues in selling these properties. One is if you’re selling prior to holding the property for more than six months, the incoming purchaser will have issues in obtaining a mortgage, the second is because these are studios many lenders have a minimum square footage rules therefore there will be a restriction in the number of lenders you can place this with.

The deal in effect means you’re buying property in bulk as wholesale and selling individual units at retail price and making a margin in between. The same as what cash and carrys do.

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There are only so many reasons why you can purchase discounted properties, these are death, divorce and distress, and sometimes occasionally sheer ignorance. No matter what phase the market is going through these will always be occurring, and so there’s always a deal to be done.

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A few years ago we bought a freehold property in Hugh St, Victoria, the property was exchanged for £1.04m and resold promptly for £1.242m within 38 days prior to completion. What was even more interesting is we only used 5% of the purchase price to exchange. This means from £50k we made £177,500 within one month.

A similar deal has been struck this week, a property nearby has been agreed at £1.8m with a resell of £2.1m prior to completion. With a 10% deposit of £180k you stand to make £300k in a short space of time. With a trade most of the time you can see the exit prior to coming into the deal, this is because there is plenty of meat left on the bone, and it is rare to see a good level of margin in these locations for the incoming purchaser. 

Of course there is a risk that you may have to complete the deal, in this scenario we like to work with 50% in cash this means you will require £900k in cash for completion. Here the stamp duty will be 4% i.e. £72k, this will cut into the profit margin, which you will not have in the above deal. There is however a positive to completion though the costs have increased. The time pressure has been removed from the deal and you can then sell for as close to the true market value which will be well in excess of the £2.1m we would be willing to accept prior to completion.

The Real Deal 

South Kensington, London, SW7 Purchase Price: £1.15m

  • A large and beautiful one double bedroom raised ground floor flat in an excellent location
  • High ceilings and attractive features
  • Share of freehold
  • Priced at around £1,620 per sq. ft. while properties in this location are being sold at around £1,800 per sq. ft.
  • Excellent BTL opportunity
  • Potential to increase the Sq Footage.

Call us now to secure this deal!

Suresh Vagjiani

Sow & Reap

A Property Investment Company

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!Tips of the Week

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

To determine if anything is a good investment, you should look at the risk versus return factor. Generally if an investment is high risk it is high return and low risk means low returns. Property is considered low risk, hence the banks will lend you 75%, BUT you can make high returns, if done well.

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