A mountain out of a molehill

Wednesday 05th July 2023 07:27 EDT

We are in the midst of a deal, and the property in question has came back with a nil valuation. A strange occurrence as a property is never worth zero. Even if it did not exist the land would have value. In fact its land driven by location which has the actual value. Therefore, there is no logical reason as to why the valuation should be labelled as zero. The valuer’s reasoning was a crack on the wall, and therefore a structural engineer’s report is needed to ascertain the cause of the crack.
When you do a property deal you need to look at the weakest link, and then keep on digging into this point until it’s threadbare.
Here was a crack on the first floor, which has scuppered the valuation and potentially the deal. The concern is the crack is not simply superficial but goes through the structural walls of the building. The issue is if it’s caused by subsidence; in short were it is caused by the foundations of the building moving. Sometimes the cause of this is a nearby tree, where the extended roots cause movement in the ground.
This issue can be short circuited. The property is currently insured by the vendor, and will be insured upon exchange by the incoming buyer, the insurance of course covers subsidence.
The crack appears only on the first floor and not on the ground floor. The floor on the first floor is also curved, which indicates the wooden beams underneath have contracted, and this is likely to have caused the crack in the wall.
The valuer recommended a structural survey to be done on the building. From where I’m looking at this as long as there is continuity of buildings insurance, this apparent issue is non-existent. As long as the insurance is in place the only liability is the excess clause for which the owner is liable for.
It takes a certain level of property experience to be able to see an issue and quantify the problem, instead of making a mountain out of a molehill. The investor we have for the deal is seasoned, and has come across this issue several times in the past and so it’s not a problem for him.
The structure he will use is an interesting one. This is a building which is part residential and part commercial. Once exchanged he will look to split the lease, so the residential element sits on one lease and the commercial on the other with the freehold being held by a third company.
He will use his pension funds to purchase the commercial element, as that money has been injected tax free, and any gain made on this element of the deal will also go back into his fund tax free.
The other element will be funded in a more conventional way.
This deal comes at a very low price for a freehold building, in a location which is bursting with growth, and close to the station.

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