Freehold-leaseholdWhen you use it to patch up a property deal …. I have been working with a mentee for the last 3 months or so, on a complex but potentially very lucrative property deal. He is planning to buy a large property already converted into three flats. You may recognise this a the ‘freehold-leasehold strategy’. Briefly the deal is as follows …You buy the large freehold house through a limited company, while in the background you create seperate leases for the actual flats. Then on the day of purchase you resell the flats to yourself, partners or clients as individual leasehold flats (while retaining the freehold). If you are getting lost – it is because this is a complex strategy.

Financially this is a gem because if your numbers and negotiations are right then you can use the mortgages (70% or so of the value of each of the flats) to buy the large house out right and even cover your costs in some cases. It is a perfect example of where the sum of the parts is worth more than the whole (or asset stripping).

Since January 2010 and the heightening or tightening of the six month rule – the strategy has become more challenging … now you need to find a number of separate lenders who will lend on properties that have effectly just been bought (ie not held by the vendor for 6 months because your limited company bought the freehold lump in the morning of the sale !). You also need a number of lenders because most lenders will not want to lend and take the risk on one property – so they are looking to limit their liability.

So when working through this deal, my mentee faced lots of challenges finding the right number or lenders who were happy to lend on flats and on new leases ….. as time dragged on and surveyors were super-cautious with valuations we re-ran the numbers and the deal still worked, just but it worked …. but the vendor was pushing for a rapid sale (he wanted to complete before the budget !).

A suggestion was made to use bridging finance – here comes the sticking plaster – this would enable completion within the week and make the vendor happy. Avoid all issues with lenders as it would then be possible to simply mortgage in six-eight months time into a wider and more preferential lender pool.  WAIT ……

Just because a deal makes sense one way – does not mean that it will work full stop. Think about the strategy – here the aim is to buy using none of your own money, benefit from cash flow (always a priority) and then maybe hold or sell after the initial period. If the deal and the numbers are now run using bridging finance, which seems like a solution, what would the impact be on the cashflow. Would the deal still result in you using none of your own money?

In this case the (interest) cost of borrowing from a bridging company, including fees, could not be covered under the original figures, in that case you need to start again and look at the new costs involved, then calculate the future funds available through the remortgage in approximately 6-8 months (maybe longer – beware) and then renegotiate the purchase price.

You can’t use sticking plasters to make deals work – if they do not work on the planned strategy – stop – completely recalculate the deal and make sure the numbers stack up under the new strategy in the way you want. I have made this same mistake – twice!! It just means you leave more cash in a deal that was meant to be “none of your money left in” or worse in my opinion – you do not get any cashflow for months (which can be very costly when dealing with a number of flats !!)

Happy hunting, and avoid those plasters :)

To our mutual success, wealth and happiness
Vicki – The Property Mermaid

 

1. Ways to Wealth – Make Money from Property – http://www.waystowealth.co.uk/wtw-events/

2. Reading and resources – http://Bit.ly/OPM

3. Where you can find me next    http://thepropertymermaid.com/blog/events

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