Who’s afraid of a vacant commercial property…?

Hi everyone. And it’s Friday again and so close to lock down ending (fingers crossed).

If you’ve been reading our blogs over the past few months, you will know that I have got involved in a couple of properties for development.  I’d like to talk about the commercial one for this blog.

I’d known about this property for a while, as the buyers are clients of mine.  The property is a D2 usage large building in Salford.  D2 is leisure, as it was a crown bowling social club.  It was also run down and vacant.  As you can imagine this can cause challenges in getting funding.

The property had a 15 month option from February 2020 in order to get planning for residential.  You’d think that 15 months is enough time to get things sorted, which in normal times it would be.  The property stands on an acre of land, the building itself has a footprint of around 320 sq/m – so there are many options for an exit, it was the purchase that was proving challenging!

I got involved end of last year, just to find funding.  This proved rather difficult.  The commercial market has really taken a hit with lenders during COVID.  For a while it simply wasn’t available, then when it did return it was specific to certain professions and whether they had been trading during lockdown.  This fell into neither camp.

The week before exchange I put my hat in the ring to be a part of this.  Thankfully the investors were happy to do that; it spread their cashflow, which is important at the moment.  If you know and trust the investors you get in bed with, then it’s better to share a number of projects than be responsible for it all.

When a property has a lot of options, although it should be a positive it can prove a negative with lenders as it causes uncertainty.  We could go full on development of 36 or so apartments; a mixture of houses and apartments; renovate the house and split off the land; keep the property commercial and split off the land… and the list goes on.

We now had a deadline to exchange by May 10th, but due to planning having been changed (a housing association wanted to buy it with planning) so we still have no planning.  As most of you will have experienced, COVID has caused such bottle necks in so many areas and this is clearly one of those areas! The application went in for an AIP on 7th May and I looked at it as an auction buy.

I approached Shawbrook to see if they would consider it – at the time we wanted to convert the house into 7 flats under permitted development, but could not get it on PD due to D2 usage not allowing it.  We could also not apply to change the commercial usage as planning was already in.  It was all really frustrating.  We decided just to buy as is and landbank it until planning was through.  I can’t praise Shawbrook, particularly Mark Whitburn and Kieran Route enough, for really getting on with this knowing the completion date of 18th June.  They have agreed 60% ltv on Vacant Market Value, which was the purchase price (£500,000) – very reasonable indeed.

The property is a good buy. There is no way that a piece of land of this size in Salford can lose you money, but having to react quickly at the moment can be a challenge.  Sometimes you really need to go with your gut, as properties are in low supply and you can lose out.  Of course there are risks here, but aren’t there in all walks of life? You could argue that doing nothing is the biggest risk of all.

All is set for completion on 18th.  I know I bleat on about the power team – IT IS THE MOST IMPORTANT THING – we couldn’t achieve this without our amazing solicitor (Phillip Adam) and the safe hands of Shawbrook and Laura Nicholl at Pure Law.  They are worth their weight in gold for the stress they alleviate.  Particularly when the completions side of things is really boiling over at the moment.

What have I learnt from this? 

The educational part of this is the change in lender appetite towards properties like this as we have progressed with it.  There has been a realisation from lenders that there are some properties that are worth funding; there is a still a massive shortage of residential properties and the Government is pushing for smaller builders to step up.  I would ask you to consider these when you are looking at your next investment.  If you don’t have enough experience, then bolt onto someone who does; spreading the risk/cash and progressing up the development ladder as well.

As always, we are happy to run through the figures and see what options are available to you.

Thinking outside the box: where can your deposit come from?

In this current market, we really have a big split in the situation of our clients. On one hand we seem to have plenty with cash available to purchase property and then refinance once works are completed. On the other, however, we have so many people trying to get into the property market but struggling to find the deposit funds.

Before I get to the options, one thing that comes up often is how much money you need to prove and whether credit cards can be used.

You need to be able to show the lender where the deposit is coming from (and it needs to be in your bank account!), as well as any refurbishment costs. This will need to match your schedule of works, and a valuer needs to agree that they schedule and cost match the works needed in the property. For example, if there’s clear evidence of damp then the solution needs to be covered off in your schedule.

How can you use credit cards within this? 

I hear property mentors often speak about using credit cards to pay for refurbishments so that you can refinance and pay it back without putting your own money in but to be honest it doesn’t always work that way! Lenders will want to know that you have the funds to carry out the refurbishment – if you’re not able to finish it then they will be the ones left with it and that’s not what they want!

As with lots of things though, it does come down to experience. If you’ve done it a few times before and got off your bridge successfully then they are more likely to be more flexible with where your money is coming from and we may be able to agree it.

Here’s some ideas for where your funds can come from 

Savings 

This is the easiest one, but often the one that gets used up first! If you’re serious about getting into property then you really do need to think about how you can save money from your day to day expenses to creat funds for it. Especially for your first project when the lender wants to see you’re using your own funds. Look at a budget planner, find a savings account that encourages monthly savings and go from there. There may be some sacrifices that need to be made!!

Refinance of your residential or other property

Refinancing your residential property can be seen as risky by some, but you are moving the equity from one property to another. With residential mortgages back up to higher loan to values and lenders now using bonus and commission again this may be a good time to look at this option.

Remember that your home may be at risk if you do not keep up repayments on it, so look at the overall picture. It’s an idea to explore though.

Gifts

Often when investors are looking for investor funds, family and friends are first on the list. It’s an easier sell, but comes with more pressure! Gifts from family are easier to use for your first few projects (before you build up some experience) and it counts as your own money!

Joint ventures 

This is an alternative where you are relying on the experience of someone else. It means your JV partner has more security over their funds and equally you have more support on the project. You are able to split the shareholding to reflect the funds and experience of all applicants too, so it’s flexible.

One thing to remember is that generally all applicants to the mortgage will need to sign a personal guarantee to be jointly and severally responsible for the loan, so ensure that your JV partner is happy with that set up.

Company loans 

Something we are seeing more of, is where clients have a (non- property) company which is profitable and they want to use these funds to put into property. It is a tax efficient way of doing things, but ensure to check with your accountant. You may have utilised a BBL in the company too, so you will be able to use that. Most lenders will allow you to use company loans as long as they are interest bearing.

Angel investments

Once you’ve built up a track record of projects – usually one or two similar sized projects – you can move on to using other people’s funds!

Loans are an option where you run out of your own money, when you factor in the overall costs. Most lenders will now be able to use investor loans where there is a loan agreement in place and no charge on the security property. There needs to be a clear replacement method and any interest payments need to be taken into account so bear that in mind.

With the right strategy you will be able to recycle some of your funds, so you’re not starting from scratch with each project – although ‘no money left’ deals are hard to come across at the moment!

As always, let us know if you want to run anything past us!

 

 

The Avon Road purchase story continues……

As some of you may remember, I bought a property in February to develop into flats.

My previous blog took you to completion, this is the continuation of the project.

The property was a 5 bed detached house with a 1 bed single storey annex attached on a great corner plot.  We We able to negotiate a 2 week delay between exchange and completion so we could get a head start on the very sparse refurbishment on both parts of the property.

By the time we completed on 19th February the Annex was finished.  Some of the house was started, but would need another 2/3 weeks to get that ready for letting out.

The priority was to get tenants in as quick as possible.  We need to add funds to the pot to cover the mortgage as well as planning fees and associated costs.  We used Open Rent as 3 company Directors are local so we could manage the process ourselves.  We put the property on before completion to minimise the time the property would sit empty; it really worked as the annex tenants moved in on the Sunday after completion – we also rented them the garage, so £850 per month on a standard AST.

The main house was a problem though as the drive was in front of the garage so has no parking at all.  Again, we advertised on Open Rent, but although we had plenty of interest at both £1500 and £1750 pm none of them passed the references.  That causes problems for our insurance so we couldn’t proceed.

Then a lady whose house had burnt down a few weeks earlier approached us.  She was currently staying in a hotel with their 2 children and sick mother, which was not ideal.  She had been asked by her insurance company to fins somewhere for 3-6 months while her home was renovated.  We pursued this, and were particularly interested as under COVID rules tenants can be difficult to move on.  This could potentially cause delays when we are ready to start the development so a tenant with a clear exit route was a winner.

We got in contact with the insurance company and negotiated a fully furnished price BUT that obviously meant it needed to be fully furnished – we only had 4 days (including a weekend)! The rent offered was £3650 per month for a minimum of 3 months.  Ideally we need more than 3 months, but it was important not to lose sight of the development prize and we were aware of the clear benefits this provided.  Any income towards the costs and mortgage are a bonus.  We have a mortgage with no ERCs so as soon as planning is approved and the tenants have moved out we can get on with the next stage.

My vlog, previously published, gives a bit more excitement than the written word – that said it was a manic few days.  The tenant was a dream as she really wanted as much upcycled goods as possible. I gained a lot of trust from how she dealt with the situation; we gave her a £200 budget for all bedding, kitchen utensils and soft stuff – she came in at £235.  Total spend, including 4 new mattresses, was £2168.

They moved in on the Monday evening.  As the monthly amount was under a serviced standard price, we insisted on 3 months up front; as they are totally incompetent, they tenant moved out of their hotel by 10am and the payment came through at 5.30pm. I can’t think of anything so stressful for the family .  The whole process wouldn’t have been achieved without the 4 Directors working so well together, and this really has shown me that I am business with a great group of people.

Food for thought…. Loss adjustors are always in need of accommodation.  As long as your mortgage provider is happy, it can be a lucrative income.  It would be worth finding contacts in the areas you invest to see if the timing works.  It is important to check the figures though, they want fully furnished and bills included, so it may not be worth it over a year’s contract.

Your partnership, work ethic and values are key to a profitable and stress free working partnership.  Everyone will have something to bring to the party and it is important to be mindful of that.  All of us have busy full time jobs, so effective and smart working is paramount.

The last few days of this property were genuinely hard work. I was able to build up such an open relationship with the tenant and found out she was a very community based person.  My close friend had lost her Mum days before they were due to move and whilst helping her pack (on the Saturday before the tenant moved in), I noticed a lot of disability equipment that was no longer needed. I spoke with the tenant and she was able to give all of it to her local elderly charity, which they desperately needed.  So a really positive end to it all.

A bit of excitement for the closing straights of lockdown.  Now to get the planning in next week and I will update you on that as we progress.

Enjoy your weekend.

 

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.

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

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.