Andy, Thanks for starting this blog. I think this idea is great!

Besides detailing Do's and Don't on property refurbishment (which can be somehow found on PS development ebook), it would be more interesting (for me at least) if you would giving details of recent projects of yours. (i.e.no later than one year old, preferably).

I would be nice if you could detail.

a) Location
b) Mortgage details
c) Financing of building cost
d) time line spent
e) profits
f) different development angles explored (ie. out of the box thinking)
g) when the property was bought?

Cheers
Erico

I agree with everything Erico has suggested. I am also very interested in this subject and any detail you are prepared to share Andy would be gratefully received.

Mortgage issues are very relevant as Application fees and Penalty ties make short term projects more expensive now.

One tip that has just worked for me, if you find property on the market (and worth) around the £275k mark that has been there for a while, go in with £250k offer to keep under the stamp duty and if you know enough about the project you could assure the vendor you won't carry out a survey so won't come back with a reduced offer later - the Vendor I dealt with had already refused an offer of £255k but I knew there was asbestos in the property (1960's) and the Vendor knew it would come up in a survey so accepted my offer, particularly as I didn't have anything to sell and had already got a mortgage in principal before putting my offer in writing. Also you will be surprised how many people offer £249500 as they think £250k hits the 3% - it doesn't.


It is my belief that we may see the Stamp duty system change in this year's budget to release the pressure at the £250k sticking point that many properties are hung up at - otherwise the bottleneck will continue to grow and when the cork is let out of the bottle these properties should increase quicker than most as it is a high demand value for most families and first time buyers, let alone Investors. So if you get a property at £250k that is worth a bit more now, then you may be in for a bigger bonus if/when the stamp duty system is remodelled - IMHO.

Jo

Hello Erico and Jo,
I agree that looking at some figures of actual projects will be helpful.
I also agree with the article that finding the properties is one of the toughest parts of the whole process. I guess we looked at somewhere approaching 100 properties before buying the first one. Fortunately once you have gone through this learning curve finding the next ones becomes faster.
I have pasted a real example of a project I did and sold early last year.


PURCHASE ANALYSIS

Cost of Property £ £119,995
Stamp Duty £ £-
Solicitors Costs £ £882
Valuation Costs/arrangement fees £1,160
Structural Survey & Drainage Survey £411
Re-furb Costs £31,774
Insurance costs £500
Finance costs £3,500
Purchase total £ £158,222

SALE ANALYSIS

Sale Gross £ £187,000
Agents Fees £ £2,805
Solicitors Costs £ £500

Sale total (net) £ £183,695

Profit on Sale £ £25,473

The property was an Edwardian semi and had been lived in by the same family since it was built. We got a bargain because there were significant cracks in several of the rooms. We had these checked out by our local structural engineer who confirmed that they were old and movement had stopped many years previously.
A word of warning. Tread very carefully with structural problems but don't discount all properties.
The house next door, in identical condition, sold to a renovator/occupier for £140k just 2 months after we bought ours. It's a true adage that you make money when you buy!
I like to buy in areas that have a lot of similar properties of a type that are popular. Three bed semi's in this example. That way it is easier to judge re-sale prices, time to sell etc.

Peter

Very helpful info Peter, good idea to work in areas where there are similar properties so you can guage resales.

Jo,

Just to emphasise the point about buying where there are sinilar properties. Bought and refurbed a bungalow in an area where there were very few similar properties. Couldn't sell it so we ended up renting it out instead. I guess we'll probably never sell this one but at least it can sit in the portfolio generating a modest cash flow.

Peter

Great post Peter! I like the level of detail, if you could stick one or two pictures of the before and after it would be even greater.

A picture speaks more than 1000 words.

As you know I have started investing in London since one year. Until now I have just bought BMV, did a quick simple refurb and them rented as a HMO.

Yesterday though I was faced with a different deal:

* 3 bed Victorian terraced
* Similar properties on the road are on estate agents at 320K
* Vendor is willing to sell at £230K for a quick sale, BUT…

… I went to see the property and the ceilings in the most of the rooms are on a really bad condition (sometimes it is uneven sometime I could se the timber on it).

It gave me the impression that the solution for the property is to take all the walls and ceilings and rebuild internally from scratch. (Making the layout as multi-let friendly as possible)

I have yet not dealt with a project that looks so big. As I know you are an experienced developer could you give me a "feeling" of how much a job from this size can cost?
(Finishes should be very basic as the property will have to multi-let to young professional/students)


It would be additionally helful if you could write me a list of the major things I should include in my due diligence.


Thanks,

Erico

A very useful post from Andy, though I can't say that I've had the same problems finding suitable properties as he and others. Perhaps that's because I'm in South Wales. not London. I've never been in competition with another developer and right now there are plenty of possibles. Others may find that in their areas identifying the right properties is fairly simple.

Andy is very right to warn, though, that this needs nerve and the ability to make quick decisions. It's not for the faint-hearted.

To answer Erico's questions: Yes, you had probably best gut a place like that and start from scratch internally. But there are other things to consider: if the ceilings are that bad, what are the rafters like and the roof timbers too? Before you buy have those checked out - and costed if necessary. Furthermore, you must be aware of the Building Regulations for sound insulation and fire precautions in flats and IMO's. They can be one of the most expensive items in such a refurbishment, believe me - and when it's done the sound reductions have to be tested (cost about £1,000) with no guarantee they will pass.

If you gut the place you will also need to re-wire and you may need to bring in extra power and water and gas connections. They are not cheap either, nor are they quick so get those arranged early. All your electrics will need an NIEEC certificate. Talk to buildng control at the local authority.

Make sure that your estimated increase in value leaves you a wide margin of error so that unexpected costs can be covered and still make it worthwhile.

Be aware, too, that IMO's can be a lot of ongoing work and difficult to offload to an agent, whereas that shouldn't be true of conversion to flats.

Will you get planning permission for an IMO - or even a flats conversion? What is the likely end value for an IMO?

I wish you all the best with this, as I said it's not for the faint-hearted. (I'm loving it, but then I've always been a glutton for punishment. The odd thing is that my very unadventurous wife has backed me all the way and even urged me on to bigger projects).

Just a word of warning about getting planning permission to convert/extend or alter a family house to accomodate students/sharers - in Exeter, the council have just issued guidance to control the number of homes being converted for this type of use, they are recommending that Planners refuse permission when Planning Permission is required, in the areas that are heavily populated by students/sharers in the city - they are taking other measures too. So best to talk to Planners before you buy incase there are any restrictions in your target area.

As a rough calculation, when we carry out complete internal gutting and renovating we estimate costs like this:-

New Build would be approx 33% of sales price, we calculate internal gutting and renovating at 50% of New Build cost, if using contractors and 25% if doing the work ourselves as Labour and Materials are usually 50:50. As already mentioned there are increased costs for HMO regs and I would normally draw up a detailed budget for this type of property as it doesn't fall into the 'norm'.

For a normal family home selling for £240k, I would estimate a 'new build' cost of £80k + VAT, so internal gutting and Renovation I would allow £40k + VAT, if doing work ourselves I would budget £20k for materials. But if Fire regs, additional sanitary facilities, increased communal areas involved (HMO's) I would allow an additional 50% of that. Also, if internal is that bad, are you sure the external shell is sound. If roof/damp proofing/insulation/services/brickwork(pointing & repairing), windows and doors need renovation then I would use the complete New Build budget and probably walk away!!!

Every project is different and usually includes a few surprises. Always keep at least 10% contingency.

Jo