Adding value to your property: Planning

This week we’re exploring some more ideas on how to add value to your property. I’ve chosen to talk about planning as it is something that can be used in many different ways.

Planning gain

This is one way which I think is under used, and can be such a great way to add value quickly. Especially in the current market when investors are looking for opportunities and build costs are so high it can be a great alternative to completing the works yourself – it may be just as profitable. It allows you to sell on the asset quicker than if you were completing the works too, meaning that you can move on to your next project.

Finance has to be thought about carefully in this instance, as there always needs to be a back up option which the lender will base their decision on, but as you aren’t completing the works you don’t need to worry about the refurbishment costs. This means you are borrowing less, and the GDV on various options are less important at this stage. When you are completing the works and borrowing the refurbishment costs the lender will always work back from the GDV, and if the option is funding without planning,  there may not be enough profit in the deal to make it work.

This works well for extensions, change of use, commercial to residential (where it falls outside of PD) and conversions to houses and flats.

The added advantage is that you don’t need so much experience as you are not carrying out the works yourself.

Planning to carry out the works yourself…

There always is the opportunity to carry out the works yourself of course.

With a shortage of homes, a relaxation in permitted development rights and a booming housing market, there are always opportunities in this area of the market!

What to watch out for?

  • Land with property to give you options with additional houses or extensions
  • Blocks of flats – looking for options to add units or extend
  • Development of existing dwellings – this could be to knock it down to make better use of the space, extending or splitting into multiple dwellings
  • Floor plans are key to looking at your opportunities!

What experience do you need?

Lenders are becoming more flexible with what they need, and even with ground up sites we have options if you haven’t done one before. You do need some experience with a project that requires planning but it probably isn’t as much as you think, and you can use your residential properties as experience too.

we have had some examples recently of lenders who are happy with quite a jump up from a small renovation to something much bigger.  It does mean that more due diligence will be carried out on the contractor, and a JCT contract will need to be in place but this does open up potential opportunities.

JV or teaming up with other investors to increase the overall experience of the team is a very good idea too. It shares the risk and the rewards

It’s always worth a conversion to see what’s needed and how it could work.

What can you do if you don’t have planning?

I hope you’ve all had a lovely week enjoying our new freedoms, I know I have! It is tiring though!

This week I want to talk about what to do when a property doesn’t have the right planning for your plans. This covers a number of areas, and some are easier to overcome than others. There are a few solutions though.

Create a back up option 

This is probably the easiest solution to the issue. It works particularly well with conversions to large HMOs (when you’re not in an Article 4 area).  Large is classed as everything 7 bedrooms or more and requires a separate planning class.  Also semi commercial property that you want to convert to residential and can’t under permitted development. What it means is that you have an ideal scenario (if planning is approved), but also an alternative that could work without any change of planning class.

With the example of an HMO it could work as either a large HMO but also as a 6 bedroom. You will need to asses the refurbishment costs and the rental for both options and ensure that it works either way.  Some clients will do the works assuming they will get planning, and then use the extra space for a study or additional communal space if they don’t. Others convert it to a 6 bedroom and then wait for planning to be approved to do an additional extension or garage conversion for example. What you do will very much depend on the layout of the property and the timescales needed for either option.

With commercial property, this can mean keeping the existing commercial if you don’t get planning to convert it to residential. The rental again would need to work either way and you need to be comfortable with either option. Vacant commercial buildings can be difficult, so there needs to be a good demand for the commercial unit for the bridging to work, and then let out before we move it to a term mortgage.  We have had other examples of when this scenario works; converting semi detached properties back to a single dwelling, houses to flats and licensed HMOs in Article 4 areas looking to extend to larger properties.

A favourable pre-planning application 

There are instances where a back up option just doesn’t work. This could be where the costs or rental potential just don’t work financially for the back up option, or when there isn’t a back up option! This is usually for vacant commercial buildings but there are some other examples too.

In this instance, buying yourself some time to get planning is the ideal solution. This can be done through a conditional exchange or an agreement with the vendor. Where this isn’t possible, achieving a favourable pre application can really help. It really does depend on the overall case and it’s not necessarily a guarantee but it can be enough to complete on your bridging loan. Where a precedent has been set, or there’s been a previous application that has expired then it really does help.

Take advantage of  permitted development rights

There are plenty of areas where permitted development rights exist, and the rules have relaxed considerably recently.  Knowing what you can and can’t do is so important and can give you an edge over other investors.  We can complete without the full approval, as long as we know that is falls under PD rights.

Use alternative funds

The final option is to avoid mortgage finance entirely. This is not something that will work for everyone, but when you have the cash to purchase the property and are willing to take the risk, then this can help. Once planning is granted then we can look at refurbishment finance and can take advantage of the uplift in value that planning has created. There are clearly risks involved with this, so ensure that you have carried out your due diligence, and we are happy to talk about the potential exit routes before you purchase the property.

It’s really important not to get emotionally involved… you are in for a return in investment, keeping your eye on the prize can mean saying No!!

As always, we are happy to chat through any specific deals that you have and talk about your options.

Jackie is always talking the talk – now she’s walking the walk with her first development!

Happy Friday everyone.  I hope you are all digging deep; however we think everyone is better off than us… they probably aren’t.

This week the blog is on my live case.  As most of you will know, I have been a property investor for about 20 years, but only with vanilla properties with a small refurb thrown in.  I have always wanted to do a development and with so many of our clients going that route, it was really making me envious.

Although I had savings, I don’t have enough experience in this area, so needed someone to work with.

When you chat as much as I do, it doesn’t take long to find out who’s got the appetite for this. I teamed up with someone I have known and worked with for a number of years, as well as his business partners.   After talking about what we could do, we started looking for suitable properties.  It’s important to have a team that can cover all areas; so we were able to delegate the roles of sourcing, development, finance and renting, a solid skill group.

Having not done a lot of sourcing, I really did underestimate its importance; It was time consuming enough just to look at the properties John found.  We looked at all sorts, from converting churches all the way through to large HMOs. We finally decided on an ugly property in Upminster, Essex which had plenty of development opportunities.

The property is a 4 bed house with a 1 bed annex on a good sized plot.  It was originally on the market for £750k, which was too high.  We waited and it dropped to £650k, at which point we put in a cheeky offer of £550k. It was accepted, but they would not allow an option agreement so if we were to proceed we would have to take a chance on the planning.

We intend to build 5 or 6 flats, which will be COVID friendly and eco friendly.  We will try and keep an existing wall, to avoid CIL, which again, reduces costs.

As we couldn’t get the option subject to planning, it was important to see what has happened to the immediate area.  The road has a lot of new builds, both flats and houses, so we can see that the precedent has been set.

We will be getting planning after completion, so I sourced a no ERC product, which will allow us to rent it out for the short term.  Any cash in will help towards costs.  We also insisted on a 2 week gap between exchange and completion so we could start the works required before we rent it out.  The property is a 60s house that had very elderly owners; it was really dated.

It is so important to check exactly what is needed to do to get it rented out, it needed to make financial sense, as it would all be knocked down. Just the painting of a large house is time consuming; it also needed some work to the electrics as they were definitely not tenant safe. As the owner removed all white goods, we sourced good second hand ones off Facebook market place.  They will all be PAT tested to make sure they conform.

We chose this route to avoid bridging; due to the time scales involved in applying for planning. Bridging, as we know, is an important route in a lot of cases but during COVID, this can lengthen the timescales. When you don’t know your timescales it’s worth looking at a longer term and lower cost option.  It really does depend on the property, thankfully this property is tired, but very habitable.

In the 3 months it’s taken to exchange, we have not been idle.  We have instructed the Architect and progressing the drawings and planning.

We complete on the 19th February and it’s definitely given me something away from work and lack of social diary dates to get excited about.

We have benefitted from the maximum SDLT discount, but there are still plenty of deals to be done out there.