21:30 PM, 16th August 2012, About 9 years ago 14
I spent most of yesterday with a lovely couple from Luton who emailed me asking for some guidance. After exchanging several emails we decided to meet and they came over to Norfolk. They have six buy to let properties at the moment, a decent liquidity fund and plenty of equity in properties. They wanted advice on how to get into property refurbishment.
The day started with a trip to my accountants in Norwich where we discussed the difference between property investment and property trading. It is important to have a very good idea of whether you intend to sell for a profit or to hold as an investment before you do any deal as investment and trade are taxed and financed very differently.
I’ve written this article for my new friends but I’m publishing it as I’m certain it will be helpful to others. Please feel free to post questions in the comments below.
Once we had cleared up the tax and accounting issues we went for lunch and discussed property sourcing. I explained that probate lawyers and independent estate agents are well worth building relationships with. WHY and HOW were the inevitable questions.
The ideal properties to refurbish for a newbie are habitable but very tired. Ideally you need to find those properties which don’t look like they’ve been decorated for 30+ years. Most people are put off buying these as they don’t look pretty and people often lack vision, refurbishing a property isn’t most peoples ambition in life and most people want to buy a property to live in. If a property needs to be gutted the purchasers will need to live elsewhere whilst the work is done. Most buyers can’t afford to do this so these properties tend to stay on the market for a long time. First time buyers almost certainly can’t buy such properties as their mortgage is usually a very high percentage of the purchase price and they struggle to raise a deposit, never mind another £20,000 or so to refurbish the place.
Properties fitting this description often come onto the market when somebody has died. The family usually just want the money, they can’t be doing with the hassle of a refurbishment project to maximise the value of the property. Added to this, they often just want to get rid as emotions are involved too.
People die in every town pretty much every day so there’s a plentiful supply of these properties. Trawling around the estate agents just doesn’t cut it though. What you really want to know is who’s likely to accept a very low offer for a quick sale. That’s why it’s good to build relationships with probate lawyers and local estate agents. Some guru’s will tell you that leafleting works. Not for probate sales it doesn’t I can assure you. When the family eventually go into the property all they are looking for is bills and everything else goes straight into the bin.
My advice to Mr and Mrs Luton, who had no such professional contacts, was to get some business cards printed up. There is no need to go to the expense of setting up a company, just some simple business cards with name, contact details and a strapline such as “we buy tired properties” is enough.
During conversations it transpired that Mr & Mrs Luton hadn’t updated their Wills for years. This is obviously the perfect opportunity for them to talk to a lawyer in an estate planning department. The lawyer will obviously need details of assets and liabilities to provide the necessary estate planning advice. In the process of providing this information Mr & Mrs Luton will have an opportunity to let the lawyer know what their business plans are and the lawyer will see that they have the ability to follow through on their plans. For the lawyer Mr & Mrs Luton will be excellent contacts when other clients talk to him and/or his colleagues about disposing of an inherited property quickly. The lawyer probably attends networking events too and is likely to be able to introduce other lawyers and estate agents.
Most professional networking events (not property networks) are interested in finding interesting new speakers and Mr & Mrs Luton have an interesting story to share. Not only do they want to buy properties but they are a new business and may be a source of work or referrals for many of the attendees and their connections at the networking events. What better way to find useful contacts with testimonials than through a professional networking organisation?
I could easily write a book on this subject but I will keep the article short in the hope that you will ask lot’s of questions.
One thing I will touch on just quickly is whether or not to buy and whether to sell or hold following refurbishment.
The simplest way is to check is on websites such as Rightmove to see what similar properties are selling for in the area and then go and look at a few. Also look at what similar properties have sold for recently. More useful tips on this HERE. To break even, the property you are looking to buy should work out cheaper than buying a freshly refurbished alternative AFTER you have factored in the costs of refurbishment. There’s no point dealing with all the hassle of refurbishment unless you can make a profit and remember to factor in the cost of your own time. Typically I look for a 20% to 30% profit margin. Deals like this aren’t easy to find, too many TV shows have had their effects on that so expect to have to walk away from a lot of deals but always explain to the person who introduced the deal why it’s not for you. If you simply keep saying no the referrals will stop. If you explain why a deal isn’t for you then you are one step closer to them finding you a deal that does fit. When you do eventually find a good deal it is VERY important to act quickly and make a real fuss of the person who referred it. Do not make the mistake of offering solicitors or estate agents finders fees – they are not allowed to take them. By all means buy the introducer and their partner a nice meal or a small gift after a deal has been done though as a token of your friendship and gratitude. I also try to refer business back to people who refer to me so if I meet somebody who is selling a property I refer them to the estate agents who have become my “friends”.
To read my strategy on whether to sell or hold a property following refurbishment click HERE.
If you buy with a mortgage and intend to sell watch out for early repayment charges. If you buy without a mortgage remember that it is difficult to get one for at least 6 months following a purchase. If a property isn’t habitable you may well decide to buy for cash or use bridging finance and refinance later. What you might also consider is a deferred completion. In simple terms, this is where you exchange contracts now and agree a completion date in say three months time. You then make your offer subject to these terms and on the basis that you want to be able to refurbish the property between exchange of contracts and completion. Solicitors standard advice to vendors is do not agree to these terms. The risk to the vendor is that the purchaser could destroy the property and significantly reduce its value and then fail to complete. A compromise to reduce the risk to vendors is to pay a 50% deposit on exchange of contracts. Obviously you would have to have cash to do this as a solicitor would never advise a vendor to allow a charge to be taken over the property by a lender or bridging finance company. Such deferred completion arrangements can be the difference between doing one deal at a time or doing two if liquidity is tight.
Please ask questions by leaving comments below. There is no such thing as a silly question.
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