This week I want to talk to you about flips. This is a popular enquiry at the moment so I thought I’d explain a bit more about what they are, why you’d use them and what to watch out for.
What’s a flip and why do one?
A flip is a term used to explain buying a property to resell it quickly. There could be many reasons as to why you would want to buy a property to sell on again; the most common is where it needs a refurbishment to get it up to a liveable or lettable standard. This could involve a lick of paint and internal refurbishment, all the way through to a large project including extensions and so on. What you would do, very much depends on what your aim is and the potential profit. You could also want to split a property up, apply for planning, extend a lease, or something else which would add value to a prospective buyer. Again, it would all depend on the project. What you need to work out is how much something would cost versus the potential added value.
Our customers tend to use flips to build up their pot of money for future projects. By selling the property, you are releasing all your capital, so it may be more appealing than retaining it with some money in the property. It may be a project that is initially profitable but doesn’t fit with your long term strategy, or offer a high enough yield long term for you. Each investor has their own parameters though, and that’s not to say it wouldn’t work for someone else.
How does it work?
Generally we would use bridging to fund a flip. You often need to buy the property quickly to secure it at a good price, it may well not be in a lettable condition and you will usually want to redeem the mortgage without costs to exit it. There are other reasons why it may not work on a standard mortgage; lenders will work with the current condition of the property so the rental may not be sufficient to allow you to maximise your borrowing as it is. They will also generally want you to let the property and provide evidence of this within a period of time and you won’t be able to do this!
We have lenders that offer bridging finance, and some that also offer the refurbishment costs. How you structure it will depend on the project, your experience and your preferences.
What to watch out for?
The first consideration has to be the cost and timescales involved with your project. You have got to be realistic with this, and factor in your finance costs to ensure that it is profitable for you. Your minimum return on investment may be different to another investors, so don’t be put off by their expectations on a deal, but it has got to work. Factor in a time and cost contingency, and ensure it offers a return on a worst case scenario. You can quickly eat into your profits by over running on your project.
Not being able to sell is something else that can quickly use up your profit. It is so important to ensure that the demand for resale is factored in to your costs. Depending on the location and type of property you may be looking at a longer resale period, so ensure your bridge is long enough.
Having a plan B is vital! We will always ensure that the rental fits on a buy to let basis if we were need to refinance, and that we have a lender who’d be happy to lend in principle. There are never any guarantees with these things, but make sure you do all you can to reduce the risks. The market can be changeable and outside factors such as politics, holiday seasons and so on, can slow the market. Be mindful of these timings where you can, when you are planning.
The lender will always work of the current planning class so if you’re intention is to change this and it won’t be in place before completion, then you need a viable plan B that the lender can work with. Your profit needs to work on this basis too. You may look at exchanging with a delayed completion subject to planning. Be aware that if planning is granted you will have to proceed or lose your deposit so ensure that the costs work before parting with your money. We can have a valuation carried out before planning is granted so that we have the potential end values and you can ensure that it all works before committing. Valuations generally last 3 months for bridging lenders so this may mean another one is required prior to completion, depending on timescales.
An example:
We have seen a number of flips working really well recently. The pictures you can see are for a property bought in late December 2019. The client finished a light refurbishment in 8 weeks and has now got it back on the market for sale. It’s a good example of how you don’t need to take on a big project to make a profit. Once this property is sold it will allow the client to move on to his next project.
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As always, if you would like to talk through any deals you have then please give us a call and we will be happy to help.
