One of my colleagues had an interesting experience in the auction last week Thursday regarding a small one bedroom ex local flat in Chelsea on the first floor. Being a good old ex local it has a low service charge, long lease and a good square footage; 527 sq. ft. to be exact.
As Indians we immediately spotted that’s too big for a one bedroom; it could be converted into a two bedroom property and the rental yield could be enhanced. The rental increase will be incidental, the real value believe it or not will be a rise in the value.
We did this a few years ago on an ex-council duplex, it was purchased for £235k and we had offers of £350k after a split costing £7k was implemented.
Our investor is a novice, this is the first time he’s dealing with us, his background is from the military. He sees the need to invest for his children and therefore London property is the obvious choice.
We ran the numbers and comparables etc., it looked good. We had agreed a top bid of £400k, secretly hoping to get it for less. It was worth £420k maximum.
However the auction room had been infiltrated by first time buyers and novice ‘want to be’ investors. This was evident from the number of couples scattered around the room, sitting on the floor in the aisles and at the rear of the room.
Coincidentally the person sitting next to my colleague was also going for the same property. He was on the phone to his partner, promising he would try and get this property.
His enthusiasm was evident, when the lot came up he started bidding franticly, as if it was a race. His hand kept reaching for the skies whilst sitting on the edge of his seat. People have different ways of bidding.
I usually wait for the dust to settle, let everyone max out and then come into the ring and start to bid, or not as the case may be. Why waste your breath if it goes past the price you are willing to pay. The property went past the £400k mark, past the £420k mark and then the deal was done at £490k. Yes, this is what an ex-council in Fulham is now ‘worth’, nearly £1,000 per sq. ft.
Ludicrous I hear you say. But the market has spoken.
There is a frenzy to purchase property especially around the £500k mark, driven in part by the stamp duty increase in April. In this scenario the search may have been instigated by this reason, but when you are dealing with these types of buyers the emotions soon take over and the crowd is whipped into a frenzy. A £12k hike in stamp duty does not account for this price.
The property is almost designed for the novice investor, it’s in a well maintained block, with low out goings. You cannot go much wrong with a one bedroom in this location.
Therefore, it is actually difficult to get a deal with this type of property given the crowd who are attending the auction houses currently.
What we need are problems, properties where there are issues, from planning injunctions, to tenants who won’t let you in, to unknown tenancies.
This will hopefully scare the others off. The other angle is to aim high, the high value stock naturally flushes out the amateurs. It will flush out the novice investor but there is a class of investor who wants to park their money and finds it actually difficult to find sizable stock to do so with.
A block of three houses in W1 has just gone under offer at over £6m, the block is worth £5m in my opinion, at the top end; it only produces £180k of rental income. However, where is the comparison? If it’s too expensive find another set of three houses next to each other at this price in W1, this probably doesn’t exist.
As expected our investor for the one bedroom was a little disappointed, however the auction was on Thursday and come Monday morning we had pulled another deal in for him. The contract is with the lawyer and he has gone to visit the lawyer for the Anti Money Laundering clearance. Yes, anyone, even if they serve the Queen and Country, could be a criminal and / or terrorist.
This is a studio which we managed to secure off market for £350k. There was some tussle over £3k over the weekend, more about egos rather than price. But why should I back down?
So come Monday we won the little tussle with which the agent supported us and won the contract. We realise the risk of an un-exchanged contract sitting at the lawyer’s office and so will look to close the deal later on this week.
Although the deal at the auction did not go through for the client, it gave him the impetus to move quickly on the deal we did manage to secure. His little flutter with the auction gave him a taste of how fast the London market moves. The increase in stamp duty in April has always been a motivating factor for this client. And hopefully by next week he will have exchanged on his first deal with Sow & Reap.
We will be taking a mortgage product with no or short term redemption penalty with a view of refinancing and taking some money out at a later date, in order to facilitate doing the whole exercise again further down the road.
