This week we are looking at a ‘before’ case study. We have seen lots of refinances recently but we also complete the initial purchase to allow the refurbishment.

The property

These clients came to us after spotting a fantastic opportunity in Croydon. The property was originally 2 semi-detached houses but many years ago was converted into one large family home. It hasn’t been looked after for the last few years, and our clients saw the potential to bring it up to a lovely new standard as well as splitting it back into 2 homes. Our customers both have a background in property, and have worked with new build properties so knew the layout, size and standard required to compete with the many new build houses popping up in the local area. They recognised that they would have competition in the resale market, especially given the current market conditions and ensured that they worked with their architect to put them in the best place possible. This is something that’s really important to consider, the exit strategy is the most important factor of a deal. Adding a few months can really affect your profit.

The figures

The property was purchased for £425,000. The planned works were budgeted for £81,000 although the surveyor suggested that a more realistic figure would be closer to £106,000. This prompted the clients to speak to another architect and builder in order to move things around, and it was agreed that the top figure would be the most appropriate. This would allow the bathrooms to be moved upstairs and make the houses more desirable.

The surveyor was very happy with the plans to extend the property and increase the living space. On this basis, they gave an end value of £700,000 for both houses.

The finance

Due to the heavy nature of the works, most bridging lenders want to lend the refurbishment costs in this scenario. This means that we can work back from the end value (the GDV) and can borrow 70% of the purchase price with the interest rolled up and added on top to the loan. The refurbishment costs are then funded in arrears as the works are carried out.

With this example, the planning application had been submitted but had not been approved. There are a number of ways around this:

1. Buy the property on a bridge and then wait for planning to be approved and move (ideally with the same lender) to a refurbishment facility. This can have additional costs with arrangement fees, and can mean you get less money to buy the property as you don’t have the opportunity to roll up the interest on top of the loan.
2. Delay completion until after planning had been approved. This can cause issues with the vendor and mean you lose the property so isn’t ideal either
3. In this instance, the lender decided to allow the client to complete before planning was approved on the refurbishment facility. It did mean that they paid the arrangement fee on the whole loan (with no guarantee that they would use that money), but the client and lender were confident it would be approved.

This really shows how working with lenders who we have good relationships with can help. We have saved the client from going back once planning has been approved, meaning they can start works as soon as possible.

We completed this at the end of October, and the clients received confirmation that planning had been approved 2 weeks later. The clients have now started the works and we will keep you posted on how it progresses – we can’t wait to see the end pictures!

We had a fantastic day at the NLIS Olympia this week. It was our final show of 2019 year and definitely the busiest. It was great to see so many familiar faces and clients who had come specifically to see us. It was also a fantastic opportunity to meet potential new clients and have a chat about how we can work together.

I had the pleasure of listening to a great debate chaired by Andrew Neil on the impact of the election and possible Brexit outcomes with regards to property market. It gave an insight into the potential outcomes of the election taking place in December, so I thought I would summarise it for those who couldn’t make it.

So what do the experts think?

David Smith, the Economics Editor of The Sunday Times and Ian Duncan-Smith had very similar views on the outcome of Brexit. They both suggested that voters need to very careful in the way they vote, and may need to be tactful depending on their preferred Brexit outcome. A vote to the Brexit party could mean less seats for the conservatives and therefore a higher chance of Labour getting a larger minority – which would be counterproductive.

Ian Duncan-Smith commented that this is the most diverse election since Margaret Thatcher gained power in 1979, with the two main parties at such polar opposites in their policies. It’s not all about Brexit either, Jeremy Corbyn has some grand ideas about other areas of policy, which appear to be very controversial within the property industry in particular. Rent controls and allowing tenants to buy their privately rented properties could have a big impact in this market. It’s important that voters look at the full picture, as the next government will be in power far longer than it takes to get out of the EU – hopefully!

What are the Brexit options?

There was much debate around what the Brexit outcome would be for various government set ups. Largely, the speakers agreed that a conservative government would mean that a deal would be agreed and we would leave the EU relatively quickly. The big question is whether they are able to gain power again with a majority big enough to enable this to happen. Given previous political relationships it may be tricky for them to form a coalition or an informal agreement, leaving them unable to form a government at all.

Labour seem to be in a more favourable position to form a coalition, and top of their list at the moment seem to be the SNP. Would Labour be able to persuade them though? The experts seemed to believe that the outcome of a labour lead government (or coalition government) scenario would be a new negotiation with the EU for a more closely tied deal, perhaps including a customs union. It’s likely that this would then be put back to a public vote, and the consensus on the panel was that it would be turned down in favour of remaining in the EU. This would give more control over how it is run as we would be tied to it either way.

This is of course only speculation, and we will have to wait and see what materialises after the 12th December!

Where is this uncertainly leaving UK industry?

Gavin Fraser, managing director of High Street Residential believes that the biggest issue at the moment across the UK is the uncertainty that this delay is creating. We have now had 3 years of not knowing what direction the country is moving towards, and now with very different potential outcomes to the election, it’s making it even harder to predict. Foreign investors are holding out until a decision is made, and that is having an effect particularly in the motor industry but with many other areas too.

More specifically in the property market we are seeing valuations affected, particularly with the demand for future sale. No one knows what will happen at the election, and how that will change property related policy but at the moment it is becoming increasingly difficult to make a decision. In the midst of this we are seeing some lenders reduce rates and relax criteria so there is definitely still an appetite to lend and a willingness to continue.

What about the rest of the day?

Having said all that, there was such a buzz all day around the show. We spoke to so many new and existing investors and they were all speaking positively about investing in the current market and potential opportunities. It is a buyers’ market at the moment, and where buyers are willing to take a risk they may see an increased reward.

All in all it was a fantastic day and a great last show of the year. We are now looking forward to the awards on the 21st November. If you have a few minutes we would really appreciate your vote, voting closes at the end of tomorrow and here is the link.

This week’s blog is another case study, but I’m going to talk about it from a different angle. I have had so many conversations this week about interest rates, and I have had some surprised reactions when I say that you are generally looking at rates of about 4.5% on small HMOs. This is dependent on a number of things; mainly your experience, the value of the property and whether you will be happy with a bricks and mortar value or you are looking for an uplift on this. Please see my previous blog for more information on valuations!

The reason I generally quote this sort of rate is that there are far more factors to consider when looking at the company you want to use for your HMO mortgage, and one of the biggies is your experience. If you are looking for a lower rate, you will often need to jump through hoops to provide income verification, licenses with conditions and so on, and wait potentially months for the mortgage offer. You will also need to have owned another property for 12 months. Now some of my clients have done this, maybe that was their strategy previously so they have a few, or perhaps they wanted to get a simple buy to let before venturing into the world of HMOs. Some people feel that they don’t want to, or don’t need to as they have other experience that will help them but most lenders won’t look at this as it doesn’t tick their boxes.

Today I want to give you an example of how a specialist lender can work in your favour when the others won’t look outside the box.

My clients, Anna and Niall, approached me as they were being mentored by one of our existing clients. They had bought a property to convert into a 5 bedroom HMO, and approached us for the refinance. They were looking for an uplift on the bricks and mortar value, and knowing that they had carried out extensive works to the property including en-suites to every room and a high end finish I had a good feeling we would get it. What didn’t quite work though was their experience as they had completed one flip last year and this was the first property they had ready to rent out, so no letting experience. After finding out about some more about the clients and having a chat with Shawbrook I decided it was worth putting it through as an exception. This is where being able to have a chat with an underwriter, and them having a willingness to look at the whole case really comes into its own. I was able to put across all reasons I felt Shawbrook should consider them, and the underwriter agreed!

We received a valuation very close to the client’s expectations and overall they were really pleased with the service they received. The valuation was an uplift, although perhaps not quite as much as the clients were expecting! It’s tricky in this current market with all the uncertainty we are facing so we were pleased with the figures. We were able to complete relatively quickly, once the mortgage was offered we completed within a week.

There are many positives to take out of this deal as a case study:

• The clients were able to refinance quickly and without having to provide enormous amounts of information in order to move on to their next project. They also didn’t need to spend huge amounts of time gathering information or chasing anyone. What little chasing there was we did, and we were able to keep the clients updated as we are able to quickly see where we are with the lender
• They were able to leverage against a valuation with an uplift on the bricks and mortar value. In this market it’s really important to maximise the valuation as there is so much uncertainty, most valuations are coming in under what is expected so that would be far worse if you were relying on a bricks and mortar value
• The clients were able to jump straight into HMOs without a single let. They had completed a flip to maximise their deposit, so having to use this purely to gain experience would have meant a far lower yield and a big delay before they could venture into HMOs

As always, please give us a call to discuss your circumstances. Each client is different and has their own needs – what works for one person may not work for another!