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I was chatting to someone on one of my Earn & Learn programmes the other day before the call got going in earnest. He has been trying to make an assisted sale strategy linked to high-end properties work for a couple of years now. The results have at best been mixed, with lots of hurdles or barriers to overcome.
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This reminded me of the need to have several tools available to us in our property deal-making toolbox, ready to apply on the given project as it is required. Normally, I would encourage an investor to focus on one strategy, but sometimes we do need to have a little bit of flexibility, especially if we are talking directly to vendors and potential JV partners. So, today I thought I would elaborate on what some of these tools are, giving a couple of examples of deals that I am working on right now.
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Transcription of the show
Hello, and welcome to another episode of The Property Voice podcast. My name is Richard Brown and as always, it’s a pleasure to have you join me on the show again today.
I was chatting to someone on one of my Earn & Learn programmes the other day before the call got going in earnest. He has been trying to make an assisted sale strategy linked to high-end properties work for a couple of years now. The results have at best been mixed, with lots of hurdles or barriers to overcome.
This reminded me of the need to have several tools available to us in our property deal-making toolbox, ready to apply on the given project as it is required. Normally, I would encourage an investor to focus on one strategy, but sometimes we do need to have a little bit of flexibility, especially if we are talking directly to vendors and potential JV partners. So, today I thought I would elaborate on what some of these tools are, giving a couple of examples of deals that I am working on right now.
Property Chatter
As my Earn & Learn investor has discovered, the assisted sale strategy has some potential advantages and also some potential drawbacks too. On the plus side and from his perspective, he would require less upfront capital and he should have lower costs if he can assist a current property owner to increase the value of their property, where they both share in the upside.
The downside is that it can be a complicated strategy to explain both to vendors and agents and so people often avoid complexity and so drop the deal as a result. It is also quite good in certain parts of the property cycle, for example in a flat market and more so where the vendor is in negative equity, which is soon after a price correction.
Ironically then, the last couple of years were perhaps also not the most fertile in terms of pitching an assisted sale strategy…but that might well change from this year, depending how Brexit goes…so watch this space on that.
Property Tool #1 – Exchange with Delayed Completion
This chat with my Earn & Learn investor reminded me that since I have been ‘doing property seriously’, which is around 10 years now, I have only just agreed my first exchange with delayed completion deal with a vendor!
An exchange with delayed completion deal is the equivalent of an assisted sale but with a different final exit route. The assisted sale results in a sale of the property to a third-party as its name implies. Whereas, an exchange with delayed completion project usually leads to the property investor taking ownership of that property instead of a third party. What happens in the middle is often quite similar.
So, what does happen in the middle then? Well, usually it is either adding value or fixing a problem.
And, why would an exchange with delayed completion project be more advantageous? Well to us, the investor, we won’t have to find a deposit and pay the full acquisition costs on the project until final completion. We also won’t need to arrange for expensive financing either. Then, provided we can agree ‘key access’ and permission to undertake work on the property, we can go in to add value or fix the problem between the exchange and the completion. This then allows us to arrange finance once the property has an increased value or has had the problem fixed, which often means an increased value or the property even becoming mortgageable.
I have just agreed such a deal and it was the first one in ten years! I can’t exactly say that I have been trying to agree exchange with delayed completion deals to be perfectly honest with you. But I am educated enough to know what they look like and when to pitch it as a potential solution, which on this particular occasion happened to work.
Here, the property has been converted into an HMO, but sadly there are several problems with the conversion that mean it is not fully licensable and so not sustainable to operate. For example, there is no communal space, the property does not comply with HMO regulations, there is damp in a botched extension, asbestos in the garage and it resembles a kind of squat for all intents and purposes, with wet laundry draped all over the place, excess paperwork creating fire hazards and some cheap, grotty furniture in most of the rooms. As a result, out of 6 lettable rooms, only 2 are currently tenanted and the owner needs to spend time and money they do not have in fixing these issues.
To be honest, if I were to buy this property, I would need to discount the purchase price so much that it would potentially insult the owner. He is a good person, who has been caught up in a bad situation through no real fault of his own and I want to help him out, as well as me, into a deal that would work for me commercially to create a win-win outcome for both of us.
An exchange with delayed completion was mooted as an idea. I believed this could potentially work here, as the property owner is commercially aware himself and could grasp the concept quite quickly, if not immediately in fact.
We quickly agreed a deal where I would have a 7-8-month gap between exchange and completion. In between, I would have access to the property to be able to address the issues, then re-tenant the property and finally get a finance valuation it prior to final completion into my name.
I won’t have to buy the property initially and nor will I have to stump up expensive short-term finance costs. Equally, I can defer some of the other costs and even enjoy some of the income from the current tenants as I work around them.
The vendor gets the assurance of a guaranteed sale, where my deposit is at stake if I fail to deliver and let’s face it, I am also adding value to their property along the way as well. I can then afford to pay a better price for the property, which also means less pain for the vendor too.
There are some things to consider and document, such as permissions, access rights, ownership/payment of the improvement works, responsibilities, insurance and so on. But with decent commercial awareness and a good solicitor, these issues can be worked through relatively straightforwardly.
Property Tool #2 – Option Agreements
Lease and land options are another tool that we can have in our property deal toolbox. An option is a one-way right to buy a property subject to certain things happening, which may be specified or may not be.
For example, with a lease option agreement, you may agree to lease or rent a property for a set rental for a number of years with the option to buy it for a certain price at the end of the term. We might exercise the option to buy or we might not. We would probably not if the value had fallen, the mortgage market had deteriorated or if you could not raise the funds for the deposit for whatever reason. Ironically, these are all reasons why it could put a vendor off as well!
With a land option, you may agree to buy a plot of land or a property subject to you receiving planning permission to build or convert the property into a more profitable scheme.
In both cases, the option mostly benefits the person with the option perhaps more than the person granting the option, so you can see why it might not always be popular.
Situations where it may be of benefit to a vendor could include, where they do not have the time, knowhow or knowledge to secure the very thing that could increase the property’s value. Alternatively, where they have their problem resolved, such as an empty property being 100% rented for several years with no voids, maintenance, tenants or toilets to worry about, for example.
I recently had such a situation…
Ironically, I agreed a purchase option deal with a property vendor 9 months ago, which seemed to go nowhere. To be honest, I think the owner did not fully understand the arrangement and equally the fact that it was an option and not a definite sale also put him off.
Nonetheless, I followed up, which if you do not do anything else as a result of today’s episode is the ONE THING you should ALWAYS do! Always follow up on your offers and negotiations, even if they are declined.
Despite a dented ego, some wasted time and a lost opportunity I decided to check in with this vendor…just in case. They had undertaken some work to develop according to the planning approval they had secured on the property. However, reading between the lines, they had run out of funds and were at risk of losing a grant they had been awarded on the condition the project is completed before the end of March. Now they were truly motivated, some 9 months later!
OK, so I tried my option agreement again, which would allow me to buy the property subject to a revised planning application. Don’t tell the vendor but his planning approval is not the most profitable one for that particular property. So, I wanted to improve the outcome, but without the risk or owning the property and all that entails in case planning was refused.
The owner was not exactly biting my hand off though…again! So, I tried to better understand his position and why he was reluctant to proceed. It seems he was torn. If he could complete the project somehow, he could not only have a property that was then capable of earning him money instead of costing him money. But he could also qualify for the grant, which after all is free money isn’t it? But he had to spend money he did not have and fast to realise that outcome.
The risk to him with an option agreement was a lack of certainty, therefore. Of course, he did not say these actual words, often people don’t say what they really want, so we have to read between the lines, which is a skill.
Mmm…OK, so the option was not doing it for him I pondered. OK, I thought, what about an exchange with delayed completion instead then? That would give him certainty now wouldn’t it?
Nope…happier but not exactly happy with that. It could have worked and arguably should have worked, I mean nobody else was sniffing around his not-so-glam property and it strikes me that he has lost the will and possibly also the funds to see his project through. Note, both the emotional and financial reasons here.
However, just by going through these steps with the vendor and crucially whilst also maintaining a good rapport and relationship throughout, it set the scene for my final tool to be applied in this situation.
That final tool was…discount!
OK, so that’s not exactly a sophisticated tool now is it…offering low is not exactly the most imaginative or advanced technique I appreciate that. However, it was the most APPROPRIATE tool to be used at this PARTICULAR point in time.
Now, I could be telling you about a purchase option agreement, a conditional planning agreement or even another exchange with delayed completion deal that I had agreed, when all I am saying is that I got a discount off the vendor’s asking price instead!
But that is completely missing the point! Without the tools that I applied previously and without the step-by-step process and interpersonal skills deployed in the previous 9 months, along with bags of patience, persistence and frankly a system, I am not sure that I would even be able to pitch a discounted offer, let alone have it agreed.
You see, it was having these tools available that set up this purchase.
Having just watched Novak Djokovic beat Rafa Nadal in the Australian Open, Novak did not win all his points with aces and return winners, did he? Instead, he set the point up by mixing up his shots, also responding to his opponent and just hanging in the point at times to be fair. Until, he was ready to play a winner or force an error in his opponent instead.
Don’t get me wrong, I don’t see myself as an opponent in any property transaction. However, I still employ a variety of shot selections to test what will work and what won’t in any given situation. I wish I could tell you this is something you can instantly learn and apply. But, just as Novak and Rafa have put in the time with their coaches and on the practice courts, it is often the result of years of disciplined learning, testing, failing and finally a correct application that leads to a game, a set and eventually a match for us property investors I can tell you.
I wanted to tell you more…for example, the latest Grade II listed property that I managed to secure from under the nose of a local developer, who had offered on a property and had even taken his builder on a second viewing, when I had barely seen the sketchy report back from my Viewber proxy viewer that I paid £50 to see the property for me…but time also is short. Suffice to say, it was all about positioning!
I will therefore leave it there for now, for you to ponder what tools you have in your toolbox. I will just add, that I am planning to run an Earn & Learn programme on one, two or even all three of these projects that I referred to today. So, if you want to hear more about my shot selection and the tools that I have in my particular toolbox, then get in touch and we can talk!
Now, some people that are hearing about some of these tools fairly regularly are my Apprentices, who are around 70 days into their 100-day programme at the time I recorded this brief update. So, let’s hear a little from them and how they are getting on now then shall we?
Insert TPV Apprentices Report Back
I am so proud of these guys, for their approach, commitment and results. They are a dream to work with, even though it has not all been plain sailing. We are a tight little community and the guys are even designing what follows on from the Apprenticeship themselves, which I have no idea what that even looks like…so we shall see!
I have now filled 3 seats on my next TPV Apprenticeship, which starts in March. That’s actually enough for in all honesty, as I do live and breathe my Apprentices throughout the programme, I can tell you and so it takes a lot of my energy and focus to give them my best.
Call to action
However, I may have room for just one more on the next intake, and so, if you have been sitting there on the
I am particularly interesting if you are a woman, as we simply need more women in property! But guys, don’t be shy in coming forward either. Of the 3 Apprentices confirmed for the next programme, we have a twenty-something, a thirty-something and a forty-something and in the current programme a fifty-something too, so age is no barrier. We have 2 guys and one gal, we have some with a little money and/or experience behind them and some without any at all to speak of.
My apprenticeship is different, whilst there is a price to pay to have some genuine ‘skin in the game’, it does not necessarily have to be a through formal fee. It can be through bartering or what I call a ‘value-exchange’ instead. I want my programme to be accessible you see.
Equally, you might just hear about some of my apprentices becoming members of my extended team or even partners of mine eventually too…this is more than a learning experience, it is an opportunity to genuinely make a step-change in your property journey with me as your guiding hand and a supportive peer group around you as do. I am not Lord sugar, but I hope in my own small way, I am helping ordinary people like you and me to realise their dream in property in a realistic and sustainable way.
I am not looking to scale this in a big way, as I prefer to see big changes in a small group of people I know by name. If you like the sound of that…then we really should talk!
OK, so that’s me done for another week. Don’t forget the show notes are available on our website www.thepropertyvoice.net, including how you can reach me by telephone. Or, if you want to talk about anything from today’s show, or just talk property investing more generally, email me at podcast@thepropertyvoice.net, I would be happy to hear from you!
All that is left to say, is thank you very much for listening once again this week and until next time on The Property Voice Podcast…it’s ciao-ciao.