Pimlico Estate Agent Douglas Gordon has sparked controversy, and gone viral with a controversial video about estate agents which has featured in the Daily Mail. It is a grossly unflattering film that shows estate agents as their many detractors would imagine them – as obnoxious, sleazy, unprincipled louts.
Douglas Gordon are one of the top agents in London, so the film is unlikely to damage their reputation, nevertheless the reaction to the film hasn’t been to recognise it’s intention – as a spoof – but to recognise the stereotyped characteristics as being a genuine documentary. Who knows how this will play? Nevertheless the Property Industry should be alarmed at the number of people who look at what is intended to be a spoof & say “that’s just like my agent!”.
I’ve known about this pair of large three-bed maisonettes for months but ignored them as too expensive. They belong to a housing association and have been on sale for nearly a year. They are on a single title, immediately limiting their market to investors, but have separate utility connections. They received an early offer of £165K which fell through on valuation (some people underestimate renovation and other costs and pay far too much!) They then languished for a while before £145K was agreed. This buyer wanted to convert to four one-bed flats using development finance. But there was no planning permission… Er, no permission to develop means no development finance – obviously! So when the second sale fell through the agent phoned me, and thinking a much lower offer might be accepted I went to view.
It’s not worth converting to four smaller flats. The uplift isn’t sufficient to justify the expense. There is the cost, delay and risk of a planning application. And a surprising number of people still don’t realise the cost of converting to flats is much higher nowadays. With change of use you must upgrade insulation in roofs, windows, walls and floors to meet current standards. You must also build independent ceilings and separating walls, packed with acoustic insulation, which must be expensively tested for compliance with current standards. This could easily add £20 – £30K to the budget of a small conversion like this. So renovation was what I intended.
There was quite a bit of damage, the wiring and C/H systems had been stolen. Windows were broken and some ceilings were down due to water damage. Both flats also needed the usual new kitchens, bathrooms, floor coverings and décor. About £30K of work for the two flats. So the figures:
The agent reckoned they’d be worth £100K each when finished. They might be to the right buyer, but I wouldn’t feel confident of achieving more than £95K for the top and £90K for the bottom, a GDV of £185K.
Subtract £30K for the work, giving a present value to me of £155K. I want minimum 30% discount, or a max spend of 70% x value = £108.5K.
Splitting titles would cost another £1K which has to be subtracted, giving maximum offer of £107.5K.
I then ran the calculations for a development. The renovation would take some time so there is slight justification for this, but not on the timescale of a true development so this was more to satisfy my curiosity.
Currently I’m looking for 25% profit on GDV. 75% of £185K = £138.75K.
Minus £30K for the work = £108.75K.
Minus £1K to split titles = £107.75K.
Minus £3K to the estate agent to sell, and £1.5K legal and other fees = £103.25K.
Minus cost of investor finance at a notional 3% of the amount we’d be spending (£138.75K, see above), circa £4K = £99.25K maximum offer as a development.
Note there are no utility connections or S106 contributions needing paying for in this case, which can be very expensive, other things amateur developers often overlook.
I sent an offer in with my justifications. If they languish unsold for long enough they might just come back to me.
I Was Totally Wrong About Flat Prices – there, I said it. I’m always Mr. Doom & Gloom predicting disaster & Flat price crash, I’ve been out of step for 2 years now, arguing against the crowd that now isn’t the time to buy, that the crash wasn’t the real one, that the worst is yet to come. So now is the time to hold my hands up & say I was wrong.
I was wrong that it doesn’t matter
I’ve often said that Flat Prices don’t really matter:
If you are a home owner it really doesn’t matter what value your home has unless you are either a first time buyer, or you are dead. The rest of the time you just swap one home for another at whatever the the going price is.
If you are Property Investor the what, where and how of what you buy are far more important than the when. I have demonstrated time and again that that investing in the wrong part of the country (recently Scotland), or the wrong type of property (recently non-London city centre flats), has far more effect on the price that you pay than whether you time the market.
The reason that I am wrong about it not mattering is a simple word – insolvency. If you lose your job you can’t pay the mortgage. If you have a Property Portfolio which relies on the rent to pay the mortgage interest, and your tenant loses their job, and you have to sell at below the mortgage price ……..
These are unusual financial circumstances, but we are entering unusual financial times.
I was wrong that you can’t predict the Market
I’ve always had the view that media articles and predictions look at the past. I based this view on the fact that I always know which direction rents are going to go – I am fairly unique in having a large number of similar flats in one location, this gives me a unique view of the Central London Rental Market and prices movements that I see often get reported in the media 2 months later. Consequently I have learned to value my own opinion above what I read in the media. However the RICS survey is also that kind of view writ large. It’s a Nationwide report of the “gut feel” of Estate Agents. Frankly I’ve always ignored it as something that is opinion not fact, however Moneyweek have completely changed my attitude on the basis of this graph:
RICS & Nationwide House Prices
Clearly the RICS survey has value, and most importantly it has predictive value. Anyone can tell you what Flat prices have done, what we all need to know is what are they going to do? This graph gives us all a very clear picture as to where House Prices will be in 6 months time.
I was wrong. Flat Prices DO matter and we CAN tell what they are going to be.