Tuesday, 19 February 2013

Small house. Big complications.

Readers of my last post - The £8000 road block - will know that things have not been going entirely smoothly with the purchase of our second Doer Upper, a tiny end of terrace house in one of W8's best streets.

By 4pm yesterday, I had really begun to think it would all fall through.

Both I and the sellers had given our respective solicitors a deadline of 5pm to exchange, beyond which we would not go.

Fortunately a compromise (I paid £7000 I didn't expect to) was worked out and exchange did finally happen.

Its been a complicated and tortuous process getting this far. But that is nothing to what the next stage might hold!

This house hasn't been touched in 30 years. Water pours in through the roof. The basement is so damp its practically a swimming pool. The whole terrace end wall is coming away from the house. Big, worrying cracks are gradually widening all over the place. It's a major wreck.

Enter at your own risk.

It's a hugely desirable wreck, however.  And when it hit the market dozens of newly minted yummy mummies were queuing for their viewings side by side with dodgy developers.

The attraction was the price. It looked cheap, even with the very obvious costs of a major refurb.

Opposite, a rather bigger house had recently sold for over £7m. Down the road, you're looking at
£4m + for a classic stucco fronted terraced property. So how come this one was listed at under £1.5m?

Its size (lack of) is part of the reason, as is its state of disrepair, but mainly it's 'cheap' because it's very complicated.

A cracking opportunity.

The asking price bought you the remaining 26 years of a lease. On top of this you needed to buy the freehold from some apparently willing sellers. And then you needed to spend a great deal of money completely gutting and expanding it.

The problem was valuing that freehold. Buyers had to make an offer for the lease without a firm, agreed price for the freehold. (There's no agent representing the freeholders.)

There was also nothing in writing to say the freehold was even actually for sale.

It's hard to predict what the council will allow in terms of 'expansion'. Like much of the Royal Borough, the house is in a conservation area and part of a very small, very cute terrace. There's not much scope for obvious extensions and without an extra 300-400 square feet, it really is very, very small.

The risk, for a developer, is that you'd spend a year and a lot of money making very little profit.

Tricky. Risky. And as I have said (several times) very complicated.

Still, the potential buyers were literally queuing outside. So I didn't hold out much hope of being able to  get it at a reasonable price.

Gradually, however, over the next few weeks, many potential buyers fell out.

Overseas buyers were confused and worried by the complexity of a short lease (I don't blame them). So they were out.

That left two sorts of buyer - developers and young Notting Hill couples starting a family and desperate to move out of flatland but stay in the area.

Developers like to leverage their investments with debt. They also like a very clear idea of costs, and a fairly guaranteed ROI of 30-40% minimum.

It's hard (well nigh impossible) to arrange debt on a complicated transaction like this and, with an unknown freehold cost and question marks over planning consents, the potential profit is unpredictable. So that was another bunch of buyers out of the game.

This left a few cash rich, small-time, hobby developers and a few young couples trying to buy a house on the cheap in an area they couldn't really afford.

Once again, many of these young couples didn't really have the cash. They may have had "agreed" financing but that's very different to having cash in the bank. And agents know this only too well.

These days it can take 8-10 weeks to get even a straightforward mortgage finally agreed. On a complicated scenario like this one, it could well take a great deal longer.

So the agent had to find someone with enough cash immediately available to buy the leasehold, acquire the freehold and then refurbish the house.

With international clients sacred off, most developers put off and mortgage dependent buyers ruled out, that didn't leave so many in that queue.

Just us and two or three other contenders went forward to the so-called 'Best and Finals' offer stage.

There clearly isn't a science to these bidding situations, but there is perhaps a bit of an art.

My buying agent (or she who must be obeyed, as I think of her) believes that a buyer's relationship with the estate agent is almost as important as the price in a bidding war. And, as usual, she may well be right.

Between us, we spent an inordinate amount of time just listening to the agent, getting to understand the situation and explaining our own position.

We still didn't know how easy it would be to buy the freehold, or exactly what it would cost. But we decided to go for the lease and worry about that later. We could always pull out before exchange if the freehold became too expensive or elusive.

Along with our bid, we presented copies of bank statements showing the cash available and made clear our ability to proceed immediately.

It might have been a bit boring, but it paid off.

Our bid was accepted.

For the second time running, we won a sealed bid. (Either we're overpaying, or we're quite good at it.)

That was almost 3 months ago. And we've only just exchanged on both the lease and freehold. Because a few days later it all became even more complicated!

Sadly, the elderly owner of the leasehold died. And the dreaded state of PROBATE became a party to the negotiations.

Well, nobody said this Doer Upping lark was going to be easy. And now I know why!

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