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Month: January 2021

Case study: When you need 75% on a tricky semi-commercial property

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It’s Friday again everyone.  I hope all of our working home schoolers are asking for as much help from relatives/friends as you can.  I decided to take on Ellie’s daughter’s schooling for RE…  With no children at home, I really didn’t understand just how time-consuming home schooling was.  I’m only doing 2 hours a week, but if a few people can do zoom lessons, it really does help in more ways that you can imagine.  Employer empathy and support is key to keeping good staff in a healthy mental state at the end of this tough time.  We all need to dig deep.  I took my actions from watching the Ernest Shackleton Antarctic trip in 1915…. Absolute team work is key to long term survival.  It’s worth a watch for some inspiration.

So to the weekly blog.

As it is the last of the January case studies, this week it is on a refinance of a semi commercial property.

The property is in London, has been extensively refurbished over the last few months, extended and fully tenanted out.  As you are aware, using commercial rent can be difficult during this time, particularly if you need 75% loan to value!

If you want the maximum LTV, then comprehensive knowledge of the property and client is key.  Most commercial rent cannot be used if the tenant has not been trading in lockdown – which for some industries was sadly not an option.  The tenant also needs to have been trading for more than 12 months and have a minimum of another 12 months left on the lease.  This particular commercial tenant had another food shop, so able to trade.  They were expanding and had just signed a new contract at our property, which was a problem for this lender.  In anticipation of the lender’s questions, I extensively researched the viability and quality of the incoming tenant so I could satisfy myself it was worth a ‘fight’ with underwriting.  That included websites, social media, reviews – all angles covered.

This all started before Christmas when, as you are probably aware, lenders were super busy.  The underwriter was honestly one of the best (Greg Barnard of Hampshire Trust Bank) and happily called me to discuss the detail; which can resolve things so much more quickly and easily than a long string of emails.  With some fine tuning of information, we had our offer at 75% LTV.  This gave us a super happy client and completion should be today.

I know we keep bleating on about this, but knowing your lender’s true appetite it is so important to the outcome of the case. 

The other important part is having a really good team at the solicitors (Nicola Watson, Naomi Williams and Eva Ciunkaite at Paris Smith). They can make or break transactions – opt for a ‘cheap’ option and you can really end up paying more.  They have worked tirelessly, 6 days a week and their communication is top drawer as well. Thank you, ladies.

Baya are still able to complete refinance cases in a reasonable time – lender dependent still before end of March.

Case study: Don’t be afraid of an ugly property if the yield is good

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We’re here at Friday again, nearly 3 weeks through however long this lockdown is going to last! I hope you’ve had a good week, we’ve been trying to find some happiness and laughter in each day to keep us going. We’ve also got a new American president this week, which has got to be a sign of a brighter future ahead.

This week I want to talk about ugly properties… in particular ugly blocks of flats.

I was approached by a client of ours late last year with a collection of four blocks of flats (32 units in total). The unit value is low (approximately £20,000), condition of the flats weren’t great, it had outside staircases (not balcony) and was let to tenants on housing benefit. Sounds like a great buy I hear you say!! Our client was drawn to the amazing 21% gross yield and gave us the task of finding a solution.

There were a few complications:

  • Various levels of experience and income from the 4 directors
  • A shareholder who would normally be expected to be a director and couldn’t be due to other work commitments
  • A complicated lease structure in place for the blocks of flats
  • The flats are in a variety of conditions, some have recently been renovated but some do need updating throughout
  • The majority were tenanted, but not all
  • Client wanted to avoid the bridging route

We researched the area; the client was able to provide plenty of reasons why this area was a good investment in terms of future regeneration. On cases like these, it really is important to be transparent with your broker.  To get a good outcome we really need to know the case and the applicants – warts and all… as we are the ones that need to sell it to the lender.

It is really important to know your lender’s appetite; we do work hard at our lender relationships, as that allows us direct access to the people we need, rather than putting into the system and hoping for the best.

We engaged a lender who we know are ok with low value properties and whom we trust to do what they say. They were able to look at the appearance and give us a good steer that they would be able to lend (subject to valuers comments). What we weren’t sure about was what the valuation would be and what loan to value we could get to.  Our client really wanted 75%.

The clients were happy to proceed so we instructed the valuation.  Although a purchase, we emphasised the importance of the clients meeting the surveyor on site which I think is really worth it if you can. It gives them confidence in you as an investor and you can talk them through your valuation methodology.

The valuation came back with the market value as the purchase price. The vacant possession and 180 day value were much lower though. The valuation read well and agreed with the client that it was a good investment with a good yield. We then had to wait for the lender to let us know what they could do, and they came back with an offer at 75% of the market value and on a term product. Best case scenario! The clients were very pleased.

Legals are going through now and we are hoping to complete within the next month.

So, the moral of the story… let your brain make the decision and not your heart.  An investment property is not your family home and it’s all about the numbers, so you must take the emotion out of it.

I hope this inspires you to look at some properties that perhaps are outside of your comfort zone to see what yield you could achieve.

Case study: When the wrong broker nearly kills the deal!

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Happy Friday everyone. As a friend said to me, as long as one foot is in front of the other, we will get there… with kindness, patience and tolerance.

This case study covers a few areas: the correct broker; the correct broker and the correct broker!

I was offered this case about 6 months ago, maybe a bit more, but the client decided to go with a broker that wasn’t comfortable with his own expertise this area, but the client really trusted him.

The project is a large single property, ground up build.  Exit is sale and the client is a professional in another, busy industry.

I was approached again at the beginning of November, it had been with a lender for over 4 months and it had collapsed.  The lender had declined the case.  It was problematic in that the build warranty hadn’t been started and also it could be considered as owner occupied at the end – the property was larger than his own, and in the local area. Giving the correct evidence and assurance that it wasn’t was key.

The client had also run out of money and needed a speedy completion or the contractors would walk, and that can be a nightmare even without Covid to worry about!

We were able to utilise as much from the previous lender as possible – valuation report and QS updates, which eased some of the costs.  I put the client in touch with a very short term investor to cover a cash gap and then got to work on smoothing out the rough edges.  The build warranty should be started at the beginning, it’s not impossible to get it late, but it does increase the cost.  The lender, LendWell, were as always, fantastic.  They keep things in a sensible straight line. If there are any bumps then they are there to have a sensible conversation, and are always working towards completing the case. With other lenders it can feel like they are trying to find a problem.

We were able to agree a facility which got to client 25% of the GDV for 12 months. His build time had only got 4 left so this leaves plenty of time for any hiccups and sale.

Having a broker that is not transactional meant I, the Director, got totally involved. Managing the build warranty; warranty for a swimming pool and even working with the contractor. Keeping things smooth and transparent.

We completed on the 18th December.  The investor was paid from the drawdown funds and everyone could breathe again.

It really wasn’t a straightforward case – part built properties can be problematic, so you really need to know what you are up against.

The client learned a few lessons as well.  Every day is a school day, they say.

I can’t emphasise enough the importance of the right person for the job.  It is coming up time and time again and your time and stress never seems to be in the equation.  Someone said buy cheap, buy twice.

Case study: When your simple HMO refinance doesn’t go to plan

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Happy New Year to your all! I know it feels like 2021 has been around for far longer than just 8 days.. but here we are on week one of the blog.

For January we are focusing on case studies; as we are often asked what sort of properties we look at and what the benefits are of a specialist broker.  So here are some examples which show the sorts of things we can help with.

This week we are looking at an HMO refinance. Might seem like an easy one on paper but this one wasn’t! The client called me up just before Christmas in a bit of a panic. She had bought a property in summer the of last year with the plan of converting it into an HMO from a commercial building.  Planning was granted and the conversion started all on target but by October she had completed the works and was starting to look for a refinance options.

The broker she was using at this point went back to the lender that was used for the bridge to arrange the refinance, but they gave the property a ‘nil value’.  Now this doesn’t mean the property is worth nothing, but that it doesn’t fit with the criteria of that lender,  therefore is not suitable security. App fee and val fee wasted! The broker then tried another lender and had exactly the same outcome. Both lenders are those which we could call the ‘vanilla side of specialist’ and although they do lend on HMOs, they are strict within this area.  So the client has paid for 2 app fees, 2 valuation fees and no end in sight for the bridge.

The client didn’t know what the problem was, but reading the reports it could be any one or a combination of the following:

  • insufficient demand for that sort of property in that area. For example a property designed for professionals in an area which typically doesn’t see that.
  • Rent which is significantly higher than the market rent you would expect. Even if you can fill the property quickly, and it still fits (for a mortgage stress test) on market rent
  • The property would struggle to be converted back into a family home if the lender did have to do this to sell it on. This can be where we have 5-6 bedroom HMOs with all en suites. It may also include kitchenettes or second kitchens.

The frustrating part is that we have no recourse to challenge the surveyor, or find out why it doesn’t fit with that lender as quite often the lender themselves don’t know!

So what did we do differently? 

After a long chat with the client to find out what she was looking for, we decided to try a more specialised lender. The rates are slightly higher, but we have so much more control over the process. We can choose from some available surveyors and we can speak to the underwriters if there are any issues. This particular property had a great yield even as a single let, so I knew that if a lender saw this they would be fine – as long as I could have that conversation!

The client was so frustrated, worried that her bridge would run out without a solution and frantically trying to find a cash buyer in case we couldn’t find a solution.

We spoke about how much she had spent on the property and some comparables to see what we would be looking at for a value. She had over estimated her original value, and the broker had not given her the original bridge valuation which was frustrating. We got three valuation quotes, as we are able to with this lender, and the client made a decision as to who to go with. Again we talked about the options, our previous experiences with these valuers and the balance between cost and availability.

The application was submitted and we waited cautiously for the valuation. It came in higher than we expected, roughly the total cost of the purchase and cost of works which is what we would normally see for a hybrid valuation. I wasn’t really expecting to see a hybrid valuation given the comments around a lack of demand for HMO room rentals on the previous valuations, so that was a pleasant surprise!

The client was over the moon, she had invested so much time and money into this project. It meant she can not only keep the property,  but also pull some money out to move to another project. She was able to borrow 75% of the open market value.

The offer came through on Xmas Eve – we don’t often get tears over a formal offer, but it really made her Xmas.

The important phrase that we keep mentioning is The Route of Least Resistance.  Investors are not charities, so unnecessarily spending, particularly on small properties, is painful and difficult to recover.  Be realistic about your investment and try to steer away from only focussing on the annual rate.