Buying a property to renovate
Posted: May 2017
Q: I want to buy a property to renovate and sell on. What are the key considerations?
A: Buying a property to do up and sell, also known as ‘flipping’, is tough in this market. In a rising market, you can buy a property, refurbish it and enjoy price growth whilst you do the works, plus the capital appreciation from value added through the works. However, in the current market, prices are fairly flat and expected to remain for the next two years, so you can’t count on general market capital growth. Therefore, you need to be absolutely sure that you are buying a property that gives you enough margin to do the works, cover your costs, and provide a good profit margin to make it worthwhile.
Doing your sums correctly and realistically is absolutely essential. You need to factor in your purchase costs (legal, survey and mortgage fees, plus stamp duty cost), and the mortgage costs while the works are being carried out, plus your exit costs (legal fees and estate agent fees). These add up very quickly, so make sure you’re realistic and prepared to walk away from a property if you can’t get the sums to work. On top of the cost of the works themselves, it is sensible to make provisions for the works going over budget and time, in case there are planning issues, delivery of materials being late, or bad weather which might delay works.
Once you’ve done your sums and assuming you believe they comfortably stack up, you then need to consider the logistics of the works and permissions. Depending on the scope of works, you may need to obtain permission from the local council or from your freeholder or managing agent if you’re buying a flat. The council will have a clear application process and this should be outlined on their website. Their planning departments can often be helpful answering certain questions, so do call them if you’re unsure about the forms and what’s required.
If you’re buying a flat and the scope of works you’re planning require permission, it is unlikely that the managing agent or freeholder will give this to you before you legally own the property. The best they will do is potentially give an indication of their attitude to the works you’re proposing, but it will mean you need to take a view. We are in the process of buying a flat in Chelsea for a client who wants to completely reconfigure the layout. Whilst the building manager won’t grant him permission for the works before he owns the property, we have checked any restrictions in his lease and also managed to obtain the floor plans for all of the other properties in the building. As a result, we are able to show that there is already precedent for the changes he wants to make as other flats have done the same. This gave him the comfort he needed to proceed.
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