How To Invest In Property: Local Knowledge is King!

Today I got wind of a top floor, 2 bed flat (65 sqm) for sale in London for just £87k – yes we’re talking a pocket money purchase in the Capital!  With over 120 years left to run on the lease, a predicted rental of £750-800pcm, and similar properties advertised on the market for £130k it sounded too good to be true…

And so I sat down with the legals to see what the issue was – there had to be some reason why this was so cheap!

I discovered it was an ex-council property which had been bought under the Right To Buy Scheme in 2007. I saw the price paid by the buyer in 2007 was £120,500 and that was with a £16k discount under the scheme.  Given the sale was happening within 5 years of the purchase, the council were looking to clawback some of the discount which had been given at that time of purchase. The legals showed that in 2007 the buyer had taken a mortgage to buy the property, but had since defaulted and now the bank had taken possession of the property and this was a repossession sale.

Like many flats which are sold in these circumstances, there were years of unpaid service charge bills – however, for a mortgagee to sell the property these outstanding bills will usually have to be cleared on sale completion (although you would always have to check the legals to make sure this was the case).  What did not appear clear though was the payment of a Section 20 major works bill which had been outstanding since 2009.  This major works bill meant that the owner of the flat had to pay £10k towards the works. Where it got confusing was who was paying the bill – it was unclear if/ and what works had been undertaken and if and what works had been invoiced. The legals showed that the mortgage company selling the property would only be liable to pay for the works which had actually been invoiced.  Given the works were estimated and billed on the service charge in 2009, it then became unclear if this actually counted as an invoice for the work, or if this was classified as an estimate. If the mortgage company decided that they were not liable to pay for the major works then it would be you as the new owner who would be picking up the £10k bill.

So I called the council, who started out pretty helpful, but who then decided that I was asking too many prying questions and given I was “just a third party” they felt they could not answer the key question – which was – have these major works been invoiced?

It was a key issue – it meant that the £87k price you thought you were paying, could in fact be £97k by the time you had added on the major works bill of £10k.  The issue got further involved when it transpired some of the major works had been undertaken (e.g. the double glazing) but it was unclear if these works had been invoiced. You would logically think that works carried out 2 years ago should be paid for by the seller rather than the new buyer – but as the council informed me, it is usual to do works and then not bill the leaseholder for another 2-3 years.  Although, they did then state that they bill leaseholders on receiving and accepting an estimate from a contractor for major works and that money becomes due and payable then –  although that could be 2 years prior to the work starting!  It was this lack of clarity and ambiguity which was the sticking point with the property and why it was a problem to sell.

Of course, all of these issues, with time, could be ironed out – the issue was I had 3 hours to make my decision whether or not I wanted to buy the flat at £87k because another buyer was also looking to buy the property and 1pm was the deadline.  At 1pm I had to say whether or not I was giving my bank details for the 10% deposit and exchange contracts on the property – or otherwise the other buyer would purchase it.

And so I decided the best way to approach this deal would be to say the purchase price is £97k – that way I could protect my downside should the worst happen and the council end up billing me for the whole £10k major works sum.

£97k for a 2 bed flat of that size in London still seems a pretty good price to me  – but I don’t really know the area that well – it’s much further out than my usual patch. So I called local agents and decided the actual resale price of this property was more in the region of £120k…but given the current market instability I wondered if it was more like £115k.  Hmm not sounding as interesting now when we’re anticipating the purchase price is £97k.

Then I remembered that I know a couple of property friends who are very active in this local area. So I called and asked their opinion. With the postcode and google maps in front of them they could locate my anticipated purchase.  The local area was seen to be a good residential area, but one which was far from train links (although there was a bus stop on the same road as the flat). I could tell that while they wanted to give me information they didn’t want to tell me too much that would influence my judgement either way (this sounds odd, but when you know another property investor is about to make a purchase decision based upon your comments you give only the facts rather than a personal opinion).

I could tell that I was only getting half the story. And given time was getting on and I had to make my decision soon I still felt that this was all a bit too objective and I wasn’t getting the real nitty gritty as to whether this was a bargain property or not.

So I just asked the question direct:

“Would you buy it for £87k?”.

The answer – a resounding “No!”

This is where local knowledge is everything: both of them pointed out yes it’s a good area BUT the end resale was not such a bargain in the local market, that an ex-council flat in that particular local area had a stigma, that on a map it looked miles away from anything and unless you already knew the area you wouldn’t bother to look, the person who moved to the flat would probably need a car which is unlikely in that income bracket and so on. And so the end user of the flat became a narrower and narrower target – which affects future saleability and the value.

And then my property investor friend summed it up neatly for me “The property is not a bargain, the price is a reflection of the product that it is, in the location that it is”. That’s it – clear cut and to the point.

I decided not to buy!