Profit by Death

Suresh Vagjiani Sow & Reap A Property Investment Company Tuesday 29th September 2015 16:34 EDT

I thought I had seen it all in the property game, but there was a scenario which I had not seen as yet; and that was a profit by death. There was a deal offered to me which would earn a great return on investment, about £2m, but it was contingent on someone dying.

The quicker she dies the higher the internal rate of return, as this is based on two things: one is the amount of money used and the second is the time it is used for. So the quicker the death the higher the return. The property in question is a six bedroom, 2,500 sq. ft. flat with a fresh lease of 125 years.

The owner is currently under 24 hour around the clock care, the estimation is she will only survive for two more years. The medical records were made available for inspection as part of the deal, as a consequence the property is coming £2m cheaper.

There exist investors who specialise in these types of investments. They go for life tenancies and they purchase hundreds of them. When death occurs they cash in. These tend to be spread across a wider geographical area and generally smaller units where holding on to them doesn’t cause too much pain.

So on average there is always a stream of income coming in. There is one group called Grainger who had the foresight to purchase numerous units like this many years ago when they were being missed. They now sit in the enviable position of owning many prime units in the hot spots of London. As they get vacated they sell each one in the auction and cash in. 

This scenario requires a large lump of money and several problems exist. Firstly tying up £4m in cash is a lot of money to tie up, you can do at least a £10m transaction with this level of funds, to make £2m within two years from 10m is not farfetched. Therefore the buying power is a lot higher.

Another is she may survive, I’m no doctor but I know the doctor is not the maker, so there may be a chance she outlives the predictions of the medical analysis.

This is nonetheless an interesting deal. They are asking for £4.2m but given the nature and variables involved I think it is worth putting a low ball offer, I doubt there are many who have the stomach for this kind of deal.

The way it is set up at the moment just doesn’t make commercial sense for an investor. There are only two types of buyers in the market, one is the investor the other the end user. For the investor it doesn’t make much sense as there is too much money being tied up in the deal. The end user would pay the price and in cash. However the issue would be a psychological one. The Chinese for example would simply not purchase a property were someone has just died in it.

Therefore one way to do this is via an option agreement, where you pay a premium to have the right to purchase the property at a price which goes down as time goes on.  The seller needs to get around this.

This is one reason why they like new build flats. They would like to know how many people have died in a property prior to purchasing it.

The other major issue you need to be aware of is who is acting for the seller as clearly she is in not in the right state of mind to transact even a simple sale of a property let alone an option agreement.

This reminds me of a deal we did which was in the aftermath of a storm. The property was in Charles Lane, St Johns Wood, it was sold to an agent for £1m which was nearly half its value, and then resold on for £1.3m - this is what I had heard from the grapevine anyhow.

The owner was an 88 year old war pensioner who had served in the merchant navy. The agent had used his brother in law to act as the buyer for this Mews house, they had driven the pensioner to the lawyer’s office to exchange contracts. The sale was halted post exchange when the owner’s neighbours intervened – but by this time the pensioner, who had felt ‘humiliated’ and ‘distressed’ after discovering how he had been duped, had died before the case was resolved. The contracts were later rescinded which is a rarity. Once contracts have been exchanged both parties are bound by it. Legal fees of £100,000 were also reclaimed from the agent’s insurer.

Even after this debacle we still managed to make a turn on this property, we purchased the property for £1.81m and sold it on before completion for £1.925m in two months. So from an investment of £180k we made £110k. The bad publicity surrounding this deal was not around at this time. Furthermore our purchase was not from the 88 year old pensioner, it was from the trustee who was acting by the time we got involved. The margin made was only 5% of the property value and therefore it was justifiable, not exploitative.

This issue and story highlights the problems when engaging in this type of deal, it is not a case of simply purchasing as if it is found the seller was not of the right mind the contracts could be rescinded.

We actually have a few properties we are negotiating on at the moment in Notting Hill, the properties start from £625k, they are very good deals in a prime location. They require some work, but this is more than reflected in the purchase price, which we estimate is about 40% below the market value.

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