This week, again we are presented with an opportunity to purchase a load of short lease properties in prime central London. We have bought several properties already from the agent, most recently our client completed on a property which was in a contract race. After having a failed sale, the seller wanted to be sure the next buyer will perform, so, he decided to put two horses in the race. This only made me more keen, and it often sharpens the lawyers when there is a race. From the outset we knew our lawyer could perform as it was a cash purchase.
We did win the race and the other party ended up with only legal bills.
On the current deal the variables are simple really - on the surface at least. One is the purchase price, and the other is the cost of the lease extension. Negotiating the purchase price is relativity easy.
Some buyers even assess the desperation of the seller, and when this is ascertained they try to chip the price just before the exchange. A desperate seller will be forced to accept. However, this is not good practice, as word travels fast, and if you hope to do more deals this is perhaps not the best reputation to have in the market place.
So, in ascertaining the purchase price, it’s a question of bargaining. The lease extension costs on the other hand, is where another angle opens up. This is a negotiation which is based on facts and formula, but ultimately comes down to negotiation. The premium payable to the landlord is, keeping it simple, half of the gain in value by extending the lease.
What’s bizarre is the amount someone pays for a short lease is hugely variable. The biggest reason for this is psychology. Humans are more prone to fear, and therefore when there are any variables involved they are likely to be irrationally pessimistic. Short leases involve variables, and most investors don’t like this. In a market where there is too much information flow, finding angles to exploit get smaller and smaller. However, this is one, a comparable short lease was sold recently for nearly double the price of what we are getting the deal for.
This could be just a freak occurrence, but this kind of variation doesn’t happen in the property market, 10-20% is an acceptable variation. Therefore, this could mean we are purchasing extremely well, conversely, it could mean the other buyer has over paid.
Currently, the environment is a good one for lease extensions, due to the uncertainty of what affect the Brexit negotiations will have on the property market. Uncertainty is good, it gives astute investors an opportunity to exploit the market, a rarity given there are no entry barriers for agents and entrants alike.
The market gets over crowded with buyers at the bottom of the pyramid. The only saving grace is now due to price restraints it’s not as open as it once was. Actually, this is not a reflection of price but one of credit. Credit was abundant, and based on nothing but clean credit and the valuation. Note, it was valuation this was based on and not the purchase price, on occasion no deposit was even required.
If you like the flavour of this deal, call the office now and we’ll tell you more.
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Agony Agent Is Here To Help!
Q: My tenant has signed a tenancy agreement and is due to move in next week. However, he has not passed referencing. What should I do?
A: What a great question.
There are generally two methods of practice in the industry for referencing and contracts; most agents will wait for tenants to pass references before any contracts have been drawn up and signed; whereas landlords who do the admin works themselves often end up signing a tenancy before references are back (not recommended).
If you have an agent working for you, then now is the time to apply the pressure and give them a call, as they should be keeping you up to date with the progress. If you are handling the referencing yourself then the first step would be to put the onus on the tenants and explain that they cannot have access to the property until such time that they achieve a pass, inform them of what documents they need to provide or indeed who’s response you are awaiting. Get them on the case as well as you, this could be the difference between still waiting and a pass that you need.
If this is still not working, for example due to their referee being on holiday, then possible solutions you could choose are:
1. allow them to move in without the reference (not recommended);
2. tell the tenant they are not starting the contract on the agreed date and you will have to redraft another agreement (you may face an angry tenant even though it is not your fault);
3. you may even have the possibility of the tenant pulling out and having to start the process all over again; or
4. this option is less likely to work - you could explain to the tenant that you are still happy for them to take the tenancy, however, they would only be allowed access and keys to the property once there has been a pass on the references. The catch (which you MUST explain) would be that the start date on the agreement stays and the rent is back dated to this day, and not from the day they move in. For this to work, you have to be on either good terms with the tenant or hope they have no other property lined up.
More often than not a tenant may offer to pay two or three months in advance; however, don’t bite their hands off at this time, as this might be the last payment you see from them once the money has run out!
There are plenty of other routes you could go down, such as six months advance payment, guarantors, higher deposit and so on; however, without the references you have no idea who you are letting in and what type of tenant they will be!
If you have found yourself in this situation before then I would love to hear from you to find out what you did; or, if you are currently in this situation then please feel free to give me a call in the office.
Richard Bond
Lettings Manager
Sow & Reap