UK Landlord Forum / Life

Scenario:

so you're doing a redevelopement which you are sure will make you a nice profit. You've convinced a bank to give you a mortgage and have refinanced your existing property to the hilt and maxed out all your credit cards to ensure you can pay the massive mortgage and a deposit.

You only have enough funds for a redevlopment budget of 150k (built into mortgage) and your credit cards and cash from remortgages of existing property will let you make the mortgage payments for 9 months, so the whole project has to be turned round in that time.

everything goes to plan and you put your plush new property on the market rubbing your hands at the potential £100k profit. But your property doesnt sell, you drop the price... it doesnt sell. You drop it again and again it still doesnt sell. Its now been 12months and if it lasts much longer you aren't gonna make the payments on the place.

whats your exit strategy? How do you get out of this mess without really screwing yourself over financially or making a loss.

This is my worst case scenario as i think about whether i should risk going out on a limb and doing this redevelopment and the only way i can see out is renting the place out whilst waiting to sell. But what if the market rate rent in the area for such a property doesnt cover your mortgage?

Interested to hear peoples views and if anyone has any actual experience it'd be great to hear how you handled it!

Sounds like you are trying to talk yourself out of it Graham!

Sounds far too risky for my liking. Too many variable that are outside your control especially if you are mortgaging your own house and likely to max out your cards. If you plan to project manage yourself and have little experience I would recommend employing a professional for the first one. Will cost you more but they will have proper knowledge (should have) over how long things should take and when builders are taking the p***.

You need to know how long it should take to hang a set of doors and how much each costs to know when the builder is stringing out the time. You need to do a very accurate building calander and stick to it. Negotiate building over run fees with subcontractors and state that, for example, if you are building a double extension you expect the structure to be a wall plate level in 6 weeks or by x date. If it is not then he pays you £100/day till it is. Obviously the weather is a factor but again a professional project manager will do this for you.

Personally I would borrow the £150k and buy 3 or four houses with it - at least you are spreading your risk. Too many eggs in one basket. Is £100k profit going to be worth all the stress and worry of wondering how you are going to pay the mortgage if it goes wrong. You could win big but alternativly you could lose huge. Always protect the down side. The banks don't care if you fail - they will have your property (or both if you secure the mortage on it) if it goes nuts up so they will be happy. Banks are evil!

From the limited information you give I dont honestly see any exit strategy from the potential vipers nest you are entering. Only possible way is to spread the risk by going 50-50 or 33-33-33 with other developers. Your profit may be reduced but so will the risk. After all any profit is better than a loss! You don't mention any contingency fund and it looks like your profit is based on the fact that everything must happen perfectly and at a certain time. Rarely works that way. You need excellent sub contractors who dont expect huge deposits or unreasonable payment methods. You need good luck and a fair tailwind to ensure no delays due to bad weather or builder issues and some cash in reserve for those unexpected costs.

Dont mean to be negative - just playing devils advocate as asked!

Jools

Graham, that's a really "the glass is half empty" view.

If I got into that situation, I wouldn't exit, because i'm obviously not getting the prize I expect (assuming it's realistic). In fact, this has happened a lot of the times on Property Ladder. The developers just rented the property out until they were in a better position.

I would most likely let the property in that situation.

But I agree with what Jools said, to prevent yourself from getting into that situation, might be worth spreading your risk by spreading your eggs.

Hi
The best advice I can give you is to embark on a venture you can afford to lose on if it doesn't work out. I know a lot of it depends on the location of the property and whether it's in an area that sells. The bottom line (as you've pointed out) is that you will have to rent this property if it can't sell to help pay the mortgage. The key question is whether you can afford to prop up the monthly mortgages with your own cash injection if there is a shortfall every month. You need to find a REAL rental value on you property and not a bs one as you've also pointed out.

Another thing you may need to consider is the maintenance. I calculated on average, I need to set aside at least £65 per month on each and every of my properties. You may not think this applies to a new build but a lot of problems started soon after the first year of taking ownership of one myself.

So please do your sums and ask yourself seriously if the whole project is worthwhile even if, god forbid, the property value falls, and you can't sell for a few years as you wait for the values to pick up again. 

I've done the credit card thing myself and I know other investors who have taken further credit to cover mortgage payments for a few months. I strongly advise not going down this route as when things go wrong and you can't back out, you will be left with debt that will make you numb.

Ambition and risk taking is a great thing but you must be really attentive to the detail to make it a success.

appreciate everyones responses to this.

Its not something i am going to take lightly for sure and if i do go ahead you can be sure that i will be negotiating the vendor down as low as possible and doing some very careful sums.

i went to see the property on saturday and have to say that i LOVE it. But it needs a LOT of work. New roof, new damp course, new ceilings, new floors, rewire, replumbing and basically ripping out all existing fixtures and fittings and redecorating throughout as well as landscaping in the garden and repairing the garage, demolishing a lean to and possible building a new conservatory. Essentially it needs to be knocked back to a shell and restored from scratch.

Despite all this it is a gorgeous property with a tonne of potential. I realise my original post may have been a little defeatist but you gotta consider the worst case havent you!! speaking to the agent it seems the people selling it are developers themselves who are going to take at least a £100k loss on it. Its been empty 2 years and they bought it a year ago. I guess the extent of work required is offputting in current climate but i just have a good feeling about it for some reason.

lots to think about................

cheers guys.

Graham - are you intending to buy it to live in it or develop and move on?

It's just that when you say "I love it" it seems to me it is a heart as opposed to head deal. A property for development can be in 'excellent condition', 'superb location' etc but to love it means to me you are going to spend tens of thousands more on it than you need to because you will be doing it upto your own tastes and not for marketing it and making money.

If you are serious about property development you MUST take all personal feelings out of it. I would wonder why the current developers are willing to sell at a loss? Do they know something they are not letting on to. If it's that good a deal why have they not done it in the last year? The financial issues have only been really bad of late and most lending institutions will still lend on buildings with potential and equity. Not on top of a toxic waste dump is it?

Irrespective of Damp Proof course guarantees and whatever the professionals say to the contrary, damp proof courses do fail more commonly than advertised. My own home was tanked 2 years ago and needs re-doing now irrespective of the 15 year guarantee offered when it went in. Luckily the firm that did it are highly reputable and are coming back with no issues. Are you planning on doing the plastering, new floors, new roof, new ceilings yourself because, and bear with me on this as I have no idea of the size of the property or labour costs where you are, but even at £100k your budget looks a bit optimistic. I put a 2 storey extension on a house recently that eat up best part of £50k and most of that was the small stuff like carpets, flooring, kitchen etc and it's still not finished. That was with doing most of the work myself.

Please don't take this the wrong way - again I don't know your circumstances or life plans but if you want to make money take all the emotion out, be realistic in your aims and objectives and don't get yourself into something you can't get out of. The hint is in the fact that the property has been on the market for two years and the current owners are getting out at a loss - ever watched the film The Money Pit? Again, I would take the borrowed money and buy 2 or maybe 3 properties - much more sensible especially if you have to do accurate sums because I can assure you things very rarely go to plan.

If you are looking at top class bathroom stuff (ideal standard etc) then it's going to cost you an absolute fortune when good quality trade white ware is just as good and will save you a ton.

Tip: dont take existing ceilings down - cross batten and plasterboard  or if uneven use a metal ceiling system. Much easier, cleaner and cheaper in the long run. Why do you want to build a conservatory? Let the new owners do it and save yourself £££££. Sell them the idea of it and how nice it would be to have a conservatory and let them have the build cost. Does the entire roof need replacing? Why new ceilings? Why new floors? Is it a barn conversion you are considering? If so be very careful as the planning rules are VERY oppressive. Does the garden NEED to be landscaped or will just tidying and planting a few plants do. Landscaping is horrendously expensive especially if the  ground needs levelling or top soil adding.

There is a company called Quantiquote that will give you a fairly realistic quantity estimate if you send them the details of your project. Very reasonably priced.

From what I have read there is no way I would mortgage myself upto the hilt for this project. It's going to take at least 6 months if not more to complete even with sensible workers and even more if you intend doing it on your own or part time. If part time I would not even consider it without using a professional project manager (which will cost approx 10% of budjet minimum).

Hope this helps - bet you wish you'd never asked now!!!

Jools

Yeah, it sounds like you're getting a bit attached to the property for the wrong reasons. Well, not "wrong" per'se; I just get the impression you're not concentrating on the main issue- will the figures stack up?

definitely not taking this the wrong way. it is all good advice:

the property is here:

http://www.foxgrant.com/regionalauctions.asp

click on link for july 9th auction, then click lot 10 and look at links to location map and also catalogue entry for house plans.

I do really like it, and honestly if i could afford i would buy it to do up and live in. i have kids and would love for them all to grow up in a house like this. But i am not taking this lightly and am not the sort of person that lets my heart rule my head when it comes to money.

The fact it is developers selling at a loss got alarm bells ringing for myself and my missus when we looked at it. but we could just see the potential of the place. As a redvelopment investment, especially for first time developers, it probably is too risky.

With regards to the kitchen / bathroom etc... i wouldnt plan on top top spec. Just enough to make it decent. When i say landscaping garden, it was a slight "over egging" as it actually just needs cutting back as is very overgrown. It doesnt NEED a conservatory but there is space for one once the lean to is demolished. As for roof, it leaks and so needs retiling/felting etc... doesnt need a new roof structure i dont think! the ceilings need repair as a consequence of the leaky roof!

I have a LOT of trade contacts, friends who are town planners, builders, kitchen fitters and my dad's an electrician ... as the worlds worst DIY'er i wouldnt dream of taking on any of this work myself, but i would call in favours to get the job done if i was to take it on. But the more i think about it the more i think it is just too big a risk as a first time project when i would be financially stretched to undertake it.

Jools... where do you live to be able to buy 3 properties for £150k!! LOL. It obviously aint salisbury, could barely buy a garage for that here

Perhaps it's Moss side? 

Graham, you had any experience at auctions before? I'm planning to go to a few in the coming month.

no mate not at all. I drive past the house everyday as its 3 mins away from where i live so thats the only reason i knew it was on for auction. However the vendor is happy to sell this outside of the auction...they just want rid. As you can see from the site i linked in my previous post, it didnt sell when auctioned at £385k in july. I understand it is being re-auctioned again in october and the guide price will be reduced to £285k. I think they would go even lower to be honest. that's why i was so tempted in the first place as a property on the same street that is in good repair is on for £485k and when prices were booming properties on that roadwhere selling for around the £5/600k mark!!!!

you can see from the plans the place is MASSIVE. the entrance hall is about as big as the whole ground floor of where i live at the moment!! 

Hi Graham,

the £150000 forms  the basis of the deposits for the properties. I look at properties at around the £175000 ~ £250000 price range and look to place a 15% deposit which is usually the minimum required by the mortgage lender.

15% of £175000 = £26250.00
15% of £250000 = £37500.00

Therefore I could buy 4 £250k houses by putting down the 4 x £37500 deposits or 5 £175k houses.
Above not taken into account the stamp duty etc - its only an example.

In theory if each 5 room let then its 5 x monthly rents x 4(or 5) properties  (25 incomes) - mortgage costs and expenses. Plus you get the capital growth on 5 properties over say 5 to 10 years. It's called leverage and  you use other peoples money to build your investment portfolio. Admittedly not for everyone but this way I am spreading my risk across 4 or 5 properties which means that if someone does not pay its annoying but offset by the other income streams.

Will have a look at your project and write more later! As a matter of interest I buy in Cardiff.

Jools

Hells Teeth!

That is a tricky one!

My question is why are the existing owners bailing after only 10 months. They bought it for £365000 in Nov 2007 (check out link below for details) and now want out.

If you want my opinion I would buy it and then either get planning permission to build a second property in the rear garden or get planning permission to demolish and rebuild 2 or 3 properties in its place. Now I dont know Sarum but the figures for me just dont stack up. Did you include stamp duty in your calculations cos that will be another £7300! Another option would be to divive into two luxury apartments but again you have serious building regs to contend wit then including fitting acoutic and fire rated ceilings etc.

Lovely property but massivly overpriced given the amount of work required and in my opinion a HUGE project for a first one. Very risky given the current market. £285k slightly better but still a big risk if you are considering securing on your existing property given you have kids as well. Is it in a conservation area in SAlisbury? If so the planning could be a nightmare. I certainly would not buy if your first auction. You need at least 10% deposit on the day with the balance within 30 days. Even I would baulk at this one.

Jools

Sorry forgot the link

http://www.nethouseprices.com/index.php?con=sold_prices_street_detail&street=CASTLE+ROAD&locality=SALISBURY&town=SALISBURY&cCode=EW&year=All&house_style=All&house_age=All&search_radius=&outcode=SP1&incode=3RH