Recent News

I was so busy updating my budgets yesterday I didn't realise the impact of the momentous news on Wall Street / Washington until I saw Newsnight last night.

Does it make a difference?

I think it must. This can only add further downward pressure on property prices meaning that any hope of this project making a profit based on stable prices has gone so it can only work by adding sufficient value.

I think it will also mean that the correct strategy is more likely to be to refurbish the house and re-sell it. If property prices continue to fall what is the point of buying an asset you think will depreciate further over the short term? Surely you are better of waiting a little and trying to buy something else for investment closer to the bottom.

I need to run a few more sensitivities through my budgets to see what happens if there is further fall in prices between now and project completion. Completion in this case is house sold or rented out.

I am begining to think like a bank in these troubled times. Hang on to your cash!

Decisions Decisions

I have been reviewing all of my calculations and looking at all the quotes I have got so far to consider what to do about the delay and the increased costs. Here is the full spreadsheet with all the calculations in it in full. It is fairly straight forward but basically column1 titled “Initial Estimate” is the initial estimate posted before, the next column is revised to reflect the actual figures so far and any additional estimates or revisions and the next column is the same with a revised purchase price (more later).

When I set out on this project my aim was to make a 20% return before tax and assumed that we would sell the property on. I have tried to take everything into account including figures for agents and solicitors fees on the sale and the cost of money (or lost interest) for three months. It is very easy to ignore or forget these figures and then claim a higher profit! In any event CGT has to be paid on the gain so while you want the profit to be as high as possible there is nothing to be gained by under stating it. My apologies for the way this table is formatted . Blogger is excellent in many things but getting tables and pictures to format properly requires the patience of a saint. I am sure you will get the idea. If I ever work out I why I'll fix it!

	Initial Estimate	Quotes / Updates I	Quotes / Updates II
Total Purchase Price	£185,000	£185,000	£174,900
Legal Fees	£1,050	£1,050	£1,050
Stamp Duty	£1,850	£1,850	£0
Survey	£470	£470	£470
Electrics / Re-Wriring	£3,000	£2,776	£2,776
Clearance House and Garden	£2,000	£2,000	£2,000
Central Heating	£4,000	£6,200	£6,200
Bathroom	£1,000	£1,000	£1,000
Windows and Doors	£3,500	£3,731	£3,731
Upstairs Bathroom	£2,000	£2,000	£2,000
Flooring and Tiling	£2,500	£2,500	£2,500
Plastering and Making Good	£2,000	£2,000	£2,000
Re-Decoration	£2,500	£2,500	£2,500
Kitchen	£1,500	£1,500	£1,500
Contingency	£3,000	£3,000	£3,000
Items Added After Initial Estimate
Re-Rendering		£2,500	£2,500
Re-Pointing		£1,500	£1,500
DPC and Associated Rendering		£4,700	£4,700
Wet rot repairs		£1,250	£1,250
Total Expenditure	£30,370	£42,527	£40,677
Total Price Completed Property	£215,370	£227,527	£215,577
Cost of Money 3 Months @ 5.49%	£2,956	£3,123	£2,959
Project Cost	£218,326	£230,650	£218,536
Resale Price	£249,950	£249,950	£249,950
Agents Fees on Sale	£2,500	£2,500	£2,500
Legal Fees on Sale	£750	£750	£750
Net Proceeds	£246,701	£246,701	£246,701
Gross Profit	£31,624	£19,300	£31,414
% Return on Capital (Gross)	14.5%	8.4%	14.4%
CGT	£5,692	£3,474	£5,655
Profit after CGT	£25,932	£15,826	£25,760
% Return on Capital (Net)	11.9%	6.9%	11.8%

I still feel that there is flexibility in these numbers and I would hope that some of the expenditure figures would be lower than stated and that not all of the contingency will be required but in order to get to a 20% return before tax I need to shave near enough £10,000 of the initial estimates and £22,000 off the revised figures. On the prudent assumption that the difference is not going to be made up with an increased property price I think that this will be impossible. As a result, and taking advice from comments received on the blog and elsewhere, I feel that this project is only going to work with a reduced offer for the property of £174,900 obviously specifically selected to come under the stamp duty threshold. It still won’t be easy to get to 20% but I think that it will be possible to make 15% and that would not be a disaster.

There is only one thing stopping me. I haven’t made this proposal to the agent yet. That is tomorrow’s task although as I have sent them a link to this blog they may already know!

One month on

I am getting a bit fed up with how long it is taking to exchange contracts and complete on this deal. Looking back over my records we made an offer on August 22nd and agreed a price on August 27th. That is one month ago today. Great play was made of the fact that the vendor wanted to sell fast and we had our offer accepted on the grounds that we did not need to get a mortgage on the new house. We were told that the vendor had already received the grant of probate so there was no need for any delay. It turns out that this was not the case and an application had not been made. We are told that they subsequently applied but as of yesterday (Friday) it had still not been granted. So why does this delay matter? There are several reasons.

• We have spent money on surveyors fees and legal fees. We would have avoided commissioning any work had we known that the vendor wasn't ready to sell straight away. It only took two days between ordering the survey and receiving the report so it would not have caused any additional delay. Similarly the additional searches and enquires our solicitors have made could have waited.


• House prices have fallen again since the deal was struck. This is not the vendors fault however we should have been well in to the refurbishment project by now.


• After our offer had been accepted the Government made their announcement about increasing the stamp duty threshold to £175,000. This house is slightly over that figure and it sits firmly in the dead spot between £175,000 and £200,000. Again this is not the vendors fault however it seems to me that by increasing the rate, the Government effectively caused all house prices that were just over the threshold to fall to just below it. As a point of principle I did not try and re-negotiate the price after the announcement but I assumed we would be getting on with it.


• We had always hoped to have the refurbishment finished by Christmas with the house re let or put back on the market. Bearing in mind completion is a minimum of two weeks away now it will not be possible to complete the work by Christmas and some of the jobs will take longer during the Winter months.


• As a final (and not really related point) we offered to purchase the house on the basis that it was structurally sound. It is true that we have found more work to do than we were expecting and I was naive about the DPC but the need to re-render and re-point the outside walls is disappointing.

So there you are. I have gone from being very positive to a bit flat over the course of two days. I have approached the agent with my concerns and at the moment I think the chances of this deal happening are only 50/50 from 90/10 in favour a couple of days ago. We shall see what Monday brings.

Deja Vu

I spoke with a friend yesterday who is following this blog. He (you know who you are) has redeveloped many many properties including one that I bought with a friend about 20 years ago which he did up for us.

Interestingly he reminded me that some of the problems that I have already highlighted in this blog were exactly the same difficulties that he had all those years ago. It is also interesting because I have almost no recollection of what work was required for that project. In hindsight maybe I should have taken more notice, it might have come in handy now.

By coincidence, that house was remarkably similar to this project in other ways. They are both two up two down cottages with front doors leading directly onto the living room with single story kitchens. If I remember rightly the earlier cottage did not have a bathroom at all, just an outside toilet. We (or at least he) put a bathroom between the two bedrooms which worked very well. Something we are going to try and do with this house.

He thought that the budget for the redevelopment was tight. I was pleased to be able to tell him that verbal quotes given to me on the replacement doors and the re-wire were below the initial guess which I was quite pleased about. His view was that those were the two areas where he thought we over estimated and that most of the other items were too low!

I got the first quote for the plumbing work last night and that is substantially over the guess so he may have a point. I will publish a guess v quote reconciliation when the written estimates have arrived.

The whole point of publishing my figures in such a public way on a blog was so that I couldn’t subsequently change history by claiming that I thought the refurbishment was going to be more money in the first place and therefore claim that I was right all along! It is clear that delivering this project within budget will be difficult but I still think achievable. We are not going to use a main contractor and will be employing the appropriate trades as needed so that will give us the flexibility to spend our money wisely by picking the best prices.

Sara Beeny will be proud.

Some Pictures

I have promised some pictures and here they are. It has taken ages to post them up here but I think it is worth it. My hope is you won't recognise the place by the time we have finished.

This is the front room looking at the front door. You can see how much plaster has already come of the wall. Shame we can't just paint over it really.

Panning the camera round facing the other direction from the front door. All the existing woodwork will have to come out as will the rather fetching polystyrene covering on the wall.

Moving to the left a little more you can see the glass door leading to the other reception room. One of the many things I have learnt recently is that you cannot put plaster onto painted brick as it won't hold. It either has to be sandblasted or have a wire mesh attached for the plaster to bond.

Going through the glass door you turn sharp right up the steep stairs. All very quaint but you wouldn't get permission to have stairs this steep in a new house.

This is the second reception room looking towards a broken door which leads outside to the garden.

Turning the camera to the right reveals the under stairs cupboard where the services are. It is shame we have to re-wire. The two way fuse box looks perfectly adequate to me! The floor here is solid concrete that will need to have a waterproof membrane laid on it and then a sold floor covering.

A modern kitchen

And a luxury bathroom suite.

What more could you want?

This is the larger of the two bedrooms upstairs. We plan to build a small shower room in this room so we have an upstairs bathroom. There is room to fit the shower itself behind the wall at the top of the stairs. In a future blog entry I'll post up the plans so you can see it.

The smaller of the bedrooms is still a good size. You cannot see it from this picture but this is likely to be the only room that will require all or some of the ceiling to be replaced.

The downstairs window from the outside is typical of the state of all of the windows in the house.

All this and a wasps nest in the roof. No extra charge was made for this!

I hope you can make sense of these pictures and it gives you an idea of the scale of the project. There is lots to do.

Damp and other nasties

I had a meeting with another damp proofing and preservation company yesterday. I am not sure I enjoyed everything he told me but at least we met (unlike the last firm, see earlier entries) and we discussed what was required, or rather he told me what was needed. He was an interesting guy to meet because away from damp proofing he was / is Tim Brabant’s coach who won gold and bronze in K1 1000m and 500m canoeing at the Beijing Olympics. It isn’t just the athletes that give up a lot of time for Olympic glory, much of it unpaid.

It appears that the rising damp on the ground floor has risen sufficiently high up the walls that we might as well take off all the plaster on the ground floor and redo it. This is not as bad as it sounds as we knew that there was a lot of re-plastering to be done anyway. It looks like the small extension on the back of the house that has the kitchen and the downstairs bathroom does have a form of dpc and we think that the damp in these walls is just caused by the house being empty for some time. We will only discover this when we start stripping out the kitchen and bathroom.

The current owner gave permission to take up some of the floorboards which was nice of them as whilst the floorboards could (and would) be put back the current hardboard covering was almost certainly going to get damaged in the process. This turned out to be the case.

Whilst it is not possible to comment on the state of all of the downstairs flooring based on two inspection holes the general news was good. The joists and beams that we exposed had some evidence of worm and weevils however it was not too bad and had not affected the integrity of the structure. That does not mean that there might not be other areas that have been infected and we will only know this when we get stuck in. There was certainly some evidence of too much give in some areas of the floor.

We also found limited worm infestation on some of the stair treads so these will have to be repaired / replaced as necessary but again the damage appears to be limited.

So this is what has been proposed.

1. Remove all of the plaster from the downstairs walls
2. Inject a chemical dpc to all outside walls
3. Treat all the wood in the property including the roof for worm and fungus.
4. Improve the under floor ventilation by putting in air bricks.
5. Re-render the left outside wall.
   

This last point is disappointing as whilst we knew some repairs were required we had hoped to avoid re-rendering the whole thing. We now have to wait for a quotation for the work.

I confess to being a little nervous at the moment. I know that this is a good opportunity and I am keen to seize it with both hands but the amount of work required is quite daunting.

I took the chance to take plenty of good quality photographs which I will upload later.

Our first (and probably not last) mistake

The survey has arrived and whilst in most things it is as expected there is one big shock and it helps to emphasise the “amateur” in amateur property developer.

The surveyor confirmed that the house was structurally sound and that the roof had been replaced at some point. Interestingly the current roof is made from interlocking concrete whereas the original roof would have been slate. It would have been nice if the people who carried out the replacement had used slate but that would have been prohibitively expensive and we are not going to change it now.

The problem with a concrete roof is that it weighs three times as much as slate and the weight of it has put added pressure on the outside walls and pushed them out; a bit like being sat on by an elephant as opposed to a cat (there may be some differences of scale with this analogy!) Luckily the surveyor is of the opinion that any movement is historical and is no cause for concern now.

The survey goes on to say that the electrics and plumbing need complete replacement (no problem there) and mentions a handful of other items that we were aware of with brickwork, rendering and so on.

Then the bombshell hits!

The house has rising damp and does not have a damp course. This is a blow. We knew the house was damp but foolishly assumed it was because it had been empty for a long time, we didn’t even think about the possibility of no damp proof course.

In addition the survey showed that the floor sloped down from right to left as you look at the house and whilst this might not be serious it could be that due to a lack of under floor ventilation that some or all of the joists holding the floor up may have perished. It is not possible to gain access to look under the floorboards as they are covered with hardboard which is fitted in such a way that it won’t go back down again. The best case is that some may need to be repaired but the worst is that all of the downstairs floor joists will need to be replaced. This last option is unlikely as jumping up and down on the floor produces no movement so we should be ok. The problem is that we won’t really know until we lift the floorboards.

A bit of research (how did we do this before the internet) indicates that installing a DPC is not that bad in itself but it is the repairs afterwards that prove expensive (re-plastering and so on). Luckily we need to re-plaster anyway so hopefully this won’t add too much to the overall expense of the project.

We have asked a couple of damp specialist to go and have a look and provide a quote and whilst waiting for that I have asked the estate agent to ask the seller if we can take up some of the floor (hopefully this Monday) to see what is underneath. However bad it is I don’t think it will stop us wanting to complete the purchase as replacing the floors would stretch but not kill the budget. The hope is that we will know the costs of nearly all the work required by the time we complete so the budget is as accurate as possible.

We have already had window companies, electricians and plumbers round to the house to quote and should have their figures very soon. It will be interesting to see how close our estimates are.

No more surprises please!

Limited Title Guarantee

When I got home from work last night we had received a letter from our solicitor with a copy of a letter they had received from the sellers solicitors.

The letter is all about the fact the they will only be offering a "Limited Title Guarantee" as it appears the house we are buying was left to somebody in a will who subsequently died as well, leaving their assets to somebody else.

That all seems quite sad to me. The person who was supposed to get the house never got a chance to enjoy their inheritance, I am sure this would not have been what the original owner would have wanted.

The letter goes on to confirm that they will not be able to exchange until they have probate. That's OK. It will give us more time to work on budgets etc.

Whilst I shouldn't really criticise the use of English I am struck by the grammatical and other errors in the letter from the sellers lawyers. I will resist the temptation to scan a copy of the letter in but the highlight has to be the phrase:-

"..... selling in that capacity. and so the title"

When I was at school (a long time ago) sentences started with a capital letter and not the word "and". Perhaps they don't proof read letters any more.

Looking up what a "Limited Title Guarantee" is I am finding lots of definitions similar to the one below.

"This is the title guarantee given by a seller where because of their limited knowledge of the property the full title guarantee cannot be given (e.g. a personal representative of a deceased owner or a mortgagee in possession)"

I guess this is OK but I'll will know better when our solicitors gives me a report on title prior to exchange.

Initial Estimates

We had a long discussion the other night over a couple of bottles of wine about how much this house will cost to do up and could we do it and where would we get the money and so on. Instead of trying to agree on costs we thought we would both write down on a separate piece of paper the work we thought was required and how much each job would cost. Here is what we came up with. Where the figures were different (which was most of the time) the highest is listed.

Item	Our Guess
New Kitchen	£1500.00
New Downstairs Bathroom	£1000.00
Plumbing and Heating	£4000.00
New upstairs shower room	£2000.00
Re-Wiring and Electrical Work	£3000.00
Clearing House	£1000.00
Clearing Garden	£1000.00
Flooring including carpets and tiling	£2500.00
Replacement Doors and Windows	£3500.00
Plastering and making good	£2000.00
Re-Decoration	£2500.00
Contingency	£3000.00
Total	£27,000.00

This list doesn’t include the cost of borrowing or the estimates for legal fees. We know what these are and are based on the purchase price what with the associated stamp duty but I won’t tempt fate by telling everyone how much the house will cost before exchange.

It would be all too easy to change these figures but I want to record them here so I am forced to be honest with myself on what we estimated it would all cost before we start to find out the truth.

The survey may tell us about things we have overlooked but let’s hope not.

Survey

As mentioned before we have asked a surveyor to visit the new house and give us a report. There is not much point in getting a standard survey as we don’t need to be told about what we already know. Unfortunately many surveyors only offer the standard style of reports. The local firm we used to survey our current house were more accommodating and after a discussion they are going to answer the following:-

1. Are we likely to have to replace the roof?
2. Do we have rising damp, dry rot etc?
3. Is the overall structure of the building sound or is it in danger of subsidence or collapse?
4. What are the drains like and are they sound?
   

He said he would report on these items for £400.00 + VAT and test for damp etc. as well as tell us anything else he thought we ought to know.

We should get the report shortly. This should help us to understand more about how much this is going to cost.

I am a bit nervous about this bit to be honest. I know we can pull out of buying this house but I will be annoyed with myself if I have missed anything significant. We shall see.

Starting Out

I never set out to be a property developer. In fact until the middle of August I hadn’t given much thought to the subject at all.

I had always had a niggling thought at the back of my mind along the lines of “I wish I had kept my last flat instead of selling it to buy a house” but thoughts like that are as valid as saying “I wish I could go back in time and buy four or five houses in my street when they were built in the 1930s”. They were so cheap then. None the less there does seem to be a lot of people who own more than one house and at the moment I am not one of them.

So why the change of heart? Very simply, our neighbours. They decided to put their house on the market. They claim that it had nothing to do with the fact that we had just applied for planning permission to build a large extension on our house but you can never be sure.

Shortly after they told us they were selling the agents board went up and within five minutes we were on the internet looking up the price. It still seems slightly obscene to ask your neighbour how much they are selling their house for but perfect reasonable to go and look it up.

After looking at the price of their house I took the opportunity to see what else the agent had to sell and there it was. A 1900’s two up two down detached house requiring complete modernisation. Without really thinking it through I phoned up the estate agent and arranged to go around and view the house with the rest of the family that afternoon.

So what was it like?

The house, which is painted white, is on a reasonably busy road without it’s own parking but there is plenty of parking on the street. There is a tiny front garden and the front door opens directly onto the front room which leads to the back room which leads to the kitchen which leads to the bathroom. Splitting the front and back rooms is a staircase that would give a mountaineer difficulties. At the top of the stairs there are doors left and right leading to two decent sized bedrooms. Allegedly there is 70ft garden however it was so over grown I didn’t make it further than about 6 ft before being turned back by some vicious thorn trees. I think we’ll take the agents word for the length of the garden!

To the untrained eye (mine) the house looks structurally sound however it needs at a minimum a complete re-wire, replacement central heating and plumbing, new windows, a new kitchen and bathroom, a lot of re-plastering (much of it has come away from the wall), complete redecoration, some new flooring and maybe some new ceilings. It seems amazing to me that somebody was living here until recently but I guess it would look a little better with furniture in the house as that would cover up a multitude of sins.

We have put an offer in, which has been accepted, by making a load of guesses and assumptions on the work required and now we need to do some detailed assessments on what it will cost to complete the refurbishment.

Solicitors and surveyors have been instructed and we should get a chance to see if more work is required over and above the original assumptions.

Incidentally, at the time of this blog entry we have had our offer accepted but haven’t exchanged contracts so this could end up being the shortest blog in history.