We have a couple of development projects that someone is potentially looking at buying, with one we are just getting ready to start work, with the other the paperwork is still being sorted out. The potential buyer is a developer who buys, develops and then resells. He has just finished his project and now needs another deal, to make money and to keep his builders busy.
He’s looked at both of our properties and he likes them, but we are unable to find a common price where the deal would work for him and us. To be honest there isn’t one; if we sell one of the properties to him he will be paying 10% roughly in stamp duty as it’s priced at £3m, this kills the margin for him.
He has nine flats on a freehold building in Highgate which have just been completed. A couple of months ago I went to see the development. In fact I saw it several years ago when it had been stripped to a shell. The location is superb and the development has been done to a very high standard.
He asked me if I wanted to purchase the finished product before he gave it to a local agent who was dying to get the instruction. I have been told they already have offers, which the developer is not moving on, as his preference is to sell the whole building.
I told him I need a 15% discount for me to even consider the deal, as he was getting offers at market price this didn’t work for him. He was open to giving a discount but nothing at these levels.
So we left things there as it didn’t seem like we could come to a common ground.
I was then contacted again about a month later, by the runner who made the introduction to say the developer was ready to give a full 15% discount on the deal.
This is something we can work with. However the added problem of the stamp duty when he purchases my properties still remain.
In order to get rid of this issue, I spoke to him to be sure if he was definitely intending to sell the properties on once developed and not change his mind. He confirmed this is what he does: buy, develop and resell. So I suggested we go in joint partnership where he injects the money into the deals, the property remains on title so that officially we remain the owners but the sale proceeds would be skewed so that he ends up with them all. We can just tweak the JV agreement so that the interest payment is so high we get left with nothing.
The scenario where we cannot sell and the property has to be rented should also be squared off, as a precautionary measure. It may be his intention to resell the property but things may change.
One of the main driving factors for him to be so keen in taking on these two projects is to keep his builders busy. If you have a good team and you want to keep them together, you need to have a steady stream of projects to keep them well fed and happy, otherwise they will disperse and you will have to start again. This was the main driving force rather than the profit element, and a good working team is invaluable especially if they are your team and therefore working at cost price.
So this is possible to do. I told him his lawyer cannot be too pedantic, and if he is he should change him. Sometimes lawyers in the name of acting for the client often acts for their own best interest. Rather than looking at what’s best to get the deal done for the client, they look at everything from a point of view of what’s the safest and the path of least resistance option. This means they don’t do anything too creative and like to operate in their own comfort zones. Many of them may not even have done transactions which are outside of the plain vanilla buying and selling.
If the lawyer is not the correct one, it could break the deal mid flow.
The developer has made it known to me he needs £800,000 straight away. This means I know what I have to do to make this deal work for him. The total of the nine flats without the discount comes to £7.5m, the 10% exchange money comes to £750,000 - I can release this to keep him sweet.
Then I can press for a long completion, as long as I release my two sites to him. He has the money he requires from day one in his pocket. And his builders have work, what more can a man want?
This hopefully will give me enough leeway to push for a late completion, six months is what I would like. The 15% discount can be passed to our investors, and if structured in the right way we can do the deal with only a 10% deposit in place. To purchase a Buy to Let property with only 10% in High gate is no small thing.
Nowadays you need 25% at least to put into a BTL property, at times even more. The stronger the location, the less the rental. When you take a BTL mortgage the rental normally must be 125% of the monthly mortgage payments, if the rent isn’t this amount then the loan offered gets reduced so that this criteria is met.
This means the amount of deposit a BTL property can swallow up in good locations is often much more than the 25% usually asked. The deal in Highgate will be subject to this same criteria.
Having a long completion also allows you to engage the agent and have a chance in reselling the properties prior to completion, or at least many of the units. This will allow you to get full market price and ease your cash flow.
There is a difference in price on the deals, ours combined are worth £5.4m, his is worth £6.375m (with the 15% discount). Therefore a difference of roughly £1m. Most of this will be settled on exchange and therefore ease the pressure of completion.
This is something which could work, the next step is to engage the right lawyer on both sides who will not mess the deal up between them.
Get in touch with our office if you’re interested in a 15% discounted property in Highgate!
