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.