When you are taking your first steps in property development, flipping or refurbishments can seem daunting. Key elements such as securing finance, finding the refurbishment team and planning schedules, along with watching out for common pitfalls can seem tricky, the first time around but it doesn’t have to be.
In this 2 part series I’m going to be taking you through a very simple property refurbishment we are currently doing and we turned it from a tired 2 bedroom terrace to a fully modernised up and running buy-to-let investment, and showing you the exact steps so you can follow to achieve this too.
Welcome to 100 Old Liverpool Road, Warrington
2 Reception Rooms
This is a very straight forward project, probably one that you will come across time and again when building your own property portfolio.
It was a probate property that was in dated condition internally. Although classed as 3 bedrooms by the original vendor, the 3rd bedroom is very small at only around 5’4” x 4’7”. This isn’t a usable bedroom size. It could be a great cot room, storage space or even small office, but we would likely re-market the house as having 2 bedrooms.
Sourcing your property
First things first – finding the property.
My business partner and I cover this area (Warrington) regularly as part of our week to week sourcing, so we were watching the market using Zoopla and Rightmove.
I won’t go into the full techniques that we used for searches, as I’ve written about them before on the site, but have a look back at Find Local Bargain BMV Property Deals…That Are Hiding In Plain Sight to give yourself a refresher.
This particular property was listed with a local estate agent for £76k. Based on market comparisons we felt that good condition properties of this size and locations would likely be re-marketed in the local area for around £95k.
With a refurb of around £12k predicted, there wouldn’t be much margin in doing the works when you consider key things such as:
- Holding costs (utilities, insurance, council tax, finance)
- Buying & selling fees (solicitors, estate agents)
- Contingency (you should build in some contingency on all refurb projects for unexpected costs – these can and do happen)
From the outset, we knew it was a little high for our budget and the amount of refurbishment needed, but it stood out on our searches due to the marketing price compared to other local properties.
The Development Figures
To make the property work we try and target around 20% net profit on all developments, after all costs.
We tend to look at a rule of 3: some we’ll make more on, some less and some bang on. If we can average around 20% net profit per deal this will give us a good margin, income and buffer against market changes.
Ideally, if the re-sale is around £95k we’d want to be in the deal for no more than £79-80k with all costs and purchase. But as you can see at the price it was marketed – £76k – it is too tight.
In order to maximise our return on investment we initially offered £62k. This was initially rejected, but that’s okay as not all our deals are agreed on the first offer. We leave many different offers on the table over the course of the next few months before the vendors/estate agents accept.
On this particular deal, we decided to wait and leave the offer on the table as the feedback we got from the estate agent was that the vendor wasn’t looking to drop the price much anytime soon.
After watching the property on Rightmove over a course of two months, and noticing no movement, we picked up the telephone to the agents. All we were doing was seeing if the vendor had made any progress selling the house or had any other offers accepted.
During this time, the vendor had received no further offers or made any price reductions, so was in the same position as before. As time on the market increases, so does a vendor’s motivation and desire to sell, so with a little more negotiation we managed to agree an offer price of £67k.
This was at the top of what we were willing to pay, knowing we wanted to be in it for no more than £80k with all costs of the refurb, holding and selling costs. However, we were confident of the re-sale in this area so knew it could still work.
After the purchase, we estimated there would be a refurb of around 4 weeks, with a re-sale timeline of around 3-5 months. This gives us a total timeline of around 6 months for the full project.
This is typical for most of the property developments and refurbishments we do. We aim to recycle the funds to do 2 projects each year from our initial pot of funds. This can work very well as a scalable property strategy.
This is a great deal, and one I’m very pleased with. You can see recent sold comparisons that we purchased the property for approximately 37% less than the full market value of similar style properties in the area. The whole process – from our initial offer to completion of sale – took approximately 10 weeks.
This particular property would be a great buy-to-let. However, our aim was to flip the deal – otherwise known as property wholesaling or trading.
This we did using a Joint Venture property strategy. This means that we didn’t fund the deal ourselves, but purchased it with funds from an investment partner.
Why did we do this if we were working on the model we discussed above? Well, the main motivation was to recycle the investment – so this one property deal leads to another. As you can see, by lining up additional projects we’ve created a job replacement strategy. And this leads to sustaining a good income for you to take home today. It’s not a deal where you’re building a pension plan.
It’s worth saying though that for this property a buy-refurbish-refinance strategy would have been just as successful.
Property Development Project Snags
During the sales process we came across two potential issues.
The first was
- Unknown concrete covered item in the garden
This was very unusual. In 10+ years of buying houses, I had never seen anything similar.
It’s a possible problem that could have killed the deal before we’d even begun. Sometimes it’s better to walk away from a property than purchase what could be a real issue in terms of cost or resale.
As Warrington has a history of mining, there was a very slim risk it could have been a mine-shaft. On the searches, done during the conveyancing process, our solicitor didn’t find any connection to a mine shaft, so we needed to do a little more digging… literally!
You can see in these pictures:
The vendor also had no idea what it was. We agreed with both them and the estate agents that we could go and investigate further. So with a screwdriver (always handy for most things!) and some tools, we went to have a look.
The concrete plinth was cracked in parts and as you can see on the pictures was raised with bricks either side. After some playing around, we cracked open the top to reveal a drain.
Thankfully it wasn’t a shallow mine or anything more problematic, but a raised manhole cover. Luckily our refurb team will have no problem dropping this raised section, levelling it to the ground with a new cover.
Believe me – this is fairly unusual! It’s a good lesson in expecting the unexpected, and of course, planning in a contingency fund.
The second problem, which is typical with most refurbishment projects, is:
- The timeframe and who you sell the property on to
Many mortgage lenders have in their mortgage handbook from the CML a 6 month guideline. Some lenders enforce this strictly. Essentially this means that you cannot buy a property with a mortgage if the current owner has owned it for less than 6 months.
Whilst this isn’t an issue if you’re buying and selling for cash, if you are looking to flip and the incoming buyer is using a mortgage, it can slow things down.
Now, there are lenders out there that don’t have this guideline. This is where speaking to a qualified mortgage broker will help you get the most out of your development projects, as planning your exit from any project is key.
Among the options we had was to ensure that we found a buyer who could choose a mortgage without these guidelines. This could be a first-time buyer, as there are residential mortgage lenders who fit the bill. But the length of time to find a buyer and complete the sale after a period of refurbishment can often exceed 6 months anyway.
For our project, the aim is all about speed. The quicker we can enter and exit a deal the better. This is why we decided to sacrifice a little on the resale price to ensure we had a quick sale with a speedy buyer turnaround.
We found a buyer to complete quickly at a purchase price of £92,000 once the refurbishment has been completed. They, in turn, will benefit from purchasing a tenanted property that is an up and running financial concern.
This works great for us, our Joint Venture partner and the incoming investor buyer.
How You Can Copy This Deal For Your Next Development Project
If you’re starting out from scratch, it’s possible you’re feeling rather daunted at the task of sourcing the property or finding what is quite a large sum of money. Of course you can use the tips above or, for more detailed step-by-step training, check out our property investments online course.
You can source funds using the more mainstream methods of:
- Using Savings
- Bridging Finance
- Commercial mortgages
Again I’ve covered this before – in my article Get Started In Property Development With No Money – and this is exactly the technique we used for this property.
Providing the funds for the purchase of this property was a Joint Venture Partner. My business partner and I provided our expertise in sourcing the property, project managing the refurbishment and handling the sale. Together with our Joint Venture partner who funded the deal, we will split the profits from the project 50:50.
Finalising the deal – and starting the refurbishment project
In part 2 of this series, I’ll show you the refurbishment process – warts and all! This will include lots of take-home lessons you can learn on the process.
Along with the end result and outcome…
Did we sell it the buyer original buyer we had lined up?
Did we make a profit?
Did the refurb go as planned?
We’ll answer all these questions for you and more in the next part of this property development case study.
P.s – I hope you’ve found this anatomy of our Warrington Development Project helpful.
Now there’s a lot of content we’ve linked back to with other articles. I’d recommend having a read through these too as they go into a lot more detail than we could fit in here without making this an epic read!