The Dangers of Assumptions

Friday 26th October 2018 05:17 EDT

Last week, I went to see an interesting property in Fulham. It consists of a commercial property on the ground floor, and has extremely generous heights. I estimate about 20 ft. The building is double fronted and comes with a basement. The whole site totals 3,000 sq. ft. A generous size and in a prime location. The owner is a developer too, and although he would preferably like to sell the building, he is not in a distressed position, or so I have been told.

One half of the street has been changed from commercial frontage to residential, tastefully done. It’s reasonable to assume this will be the case for this site as well. However, it always pays to confirm this via a planner, who will in turn check the planning guidelines for the borough. It is dangerous to simply assume. As the word itself declares, this can make an ass out of u and me (ass u me). This property will be coming with all the consents from the freeholder. The aim ordinarily would be to buy, develop and sell, the purchase price is circa £1m and build cost lets say £500K, being generous. This means you’re only in for £500 per sq. ft., which is cheap. Of course, a detailed appraisal needs to be carried out, which will take into account things such as stamp duty and the cost of money etc.; but on the surface of it, this seems a deal worthy of investigation.

The environment is currently not conducive for reselling. This appraisal may look good but underpinning the appraisal will be market sentiment and that too in one years’ time, when the deal is completed and ready for resell. A sale at the preferred price point in a year’s time is a dangerous assumption to make. The longer time a property takes to sell, the more the cost and the less the profit. The time value of money is a very important consideration, if not the most important. An assumption which is more realistic, is to assume the completed units will not sell at the desired price. Therefore you rent, and the model changes as well as the design and costs. It is unwise to design to sell and then opt to rent if it does not sell, as the aim is different. In order to resell an apartment you need to have it looking like a show home and ideally dressed, in order to attract a premium. When you construct a property for rental, the brief is different, you want it hard wearing, easy to clean and functional.

I’m looking at turning each unit here into six further units. Therefore, in total we would have twelve units for rental. This would now be dependent not on the resale market, but on the rental market, which is much more stable and easier to predict. The aim would be, once this has been completed, to refinance and extract all, or most, of the money from the development. And then to hold the asset long term. There does exist the possibility to resell the apartments individually, under established use, at a later stage. This is a far safer model to do the project with, and will weather the storm which may lie ahead.

Agony Agent is here to help!

Q: I own the upstairs flat of a converted house, and the roof is leaking into my flat.  Whose responsibility is it to get the roof fixed, and who will pay for the damage to my flat?

A: Unfortunately, water leaks are very common in buildings containing flats. When your upstairs neighbours use washing machines, showers and have radiators, leaks can occur; or in this case when you’re on the top floor the roof will probably be your main worry. 

You should look at this problem as you would with any other leak, first find out the cause and what action, if any, you can take to prevent further damage; or if you can even perhaps put a stop to it. In some situations, you may not be able to find the cause of the issue, as water will always travel through the building to find the lowest point before leaking into a flat, so the leak could be coming from above the flat next door but running across the roof into yours. If your apartment building has a management company, they will take over from this point and do all the leg work once you have reported the issue. However, if you as a group of leaseholders look after the building, then you will have to do the leg work yourself.

Once the source of the leak has been found, you can move on to find out who is responsible for the costs and repairs. Normally the leaseholder will be responsible for pipes in their flat, and any communal pipes or water tanks will be the responsibility of the freeholder or block managers. However, check your lease carefully, because they can vary. In this situation, your freeholder will be responsible for the repairs as it is the roof, however, it is a good idea to report the leak to your buildings and contents insurers as soon as possible in case a claim needs to be made. Also, with issues concerning a roof leak they will need to be notified right away, and will provide you with a plan of action that you will need to take.

Water leaks are commonly covered by insurance, but there is likely to be an excess payable. The excess on buildings insurance will either be recoverable from the party responsible for the leak or all leaseholders through the service charge depending on the type of claim. If you are finding yourself in a similar situation then please do get in touch for some initial free impartial advice.

Richard Bond

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