Do your numbers stack up?

THE QUESTION

What is the best way of purchasing an auction property and then refinancing it after the refurb work has been done?

The guide price is 200k, but this property has the potential to become eight self-contained units generating £400 pm cash flow each after a bit of work (£15-25k).  I have about 25k for deposit and a partner who would potentially put in the same, but was wondering the best way to go about doing this.

Could I use a commercial mortgage for the refinance?

THE ANSWER

I have financed plenty of these types of deal, this may help you:

1. Auction purchases are realistically funded with cash or bridging finance due to the restricted timeframe the auctioneer’s terms give you to complete the purchase, usually 28 days. Trying to complete with a mortgage, particularly a commercial mortgage, will end in only one way; you’ll lose your 10% deposit for failing to complete in time
2. For the refinance, commercial lenders lend to experienced landlords only, do you have at least 12 months experience of renting out property?
3. Will you need planning permission to convert to eight self-contained units? If so, having already bought the property at auction, what is your Plan B if it gets turned down?
4. Properties rarely sell at guide price so you need to have clarity on what is the max you can bid and still make the deal stack up. This is usually calculated by working backward from the end value you will create then deducting all the costs incurred, including the profit margin you need to make. When you go to auction with this max bid figure, there is probably a 90% chance someone will outbid what you can afford to pay.
5. You need clarity on what your eight self-contained units generating £38,400 pa will be valued at; expect a commercial lender to lend 75% of that value. If you get these sums wrong you could be in the position that the commercial refinance is insufficient to fully repay the bridging loan and then you have a big problem.

Your cash seems insufficient to get this deal done.  Your £25k cash would just about cover the 10% deposit the auctioneer requires on auction day, providing you have a successful bridging arrangement; but no bridger is going to lend you 90% of purchase price paid at auction.

The best you will get is 80% and then they deduct costs from that. To get them to lend 80% you need to show that you have sufficient funds in your bank account to fully fund the conversion/refurb costs.  Most bridgers offer 70%, less costs.

To be safe, you will need roughly double the combined £50k cash you have available to get this deal to the point where you can get it refinanced on a commercial mortgage.

This could be a great deal, but you face significant barriers to make it work.  I recommend that you consider what your Plan B will be.

1. There’s a high possibility that you will be outbid at the auction so the deal falls over at the first fence.
2. Even worse, you may get carried away in the moment and secure the winning bid, but only by paying too much and thus wiping out any profit you could possibly make from the deal.
3. Even if you manage to buy at a price that makes this deal profitable, you currently don’t have enough cash available to complete the purchase.
4. You have yet to find out if you will be allowed to convert the property to eight self-contained flats.
5. Even if you are able to convert to eight flats, you don’t yet know that the end value will be high enough to enable you to fully repay the bridging loan taken out to the complete the purchase.

I suggest that you ensure you carry out due diligence to be confident that you can overcome all these barriers before taking the first step and attending the auction.

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