Rookie Renovations

We went to see various properties and some of them were interesting to say the least. There was one that seemed to have two doors into every room, the auction one that stank – clearly had had squatters in it – and plenty that had no room for profit whatsoever. One had had some work done to it but the owners had given up half way through so there was a toilet and sink in a bedroom with only half a wall to separate it but no room for a shower if it was intended to be an en suite.

The most memorable one however, had clearly been owned by somebody with eccentric tastes. When we arrived to view the property, the agent showing it asked me, “Do you like Roman architecture?” We walked in and there was a wide archway between the two reception rooms with a hint of an ornate border but nothing too out of the ordinary. The kitchen was old but normal. Then we went upstairs. Along the upstairs landing it looked as if someone had stuck cherubs and various designs of an ornate roman nature all over the wall and then painted over the whole lot. One of the rooms was the same inside as well.

It was nothing that couldn’t be changed. However, the real gem was the sort of home-made extension. They’d added on a tiny room upstairs, but there was no room underneath it so to support it there were four tall roman looking pillars outside holding it up. Needless to say there were cracks all over the place and we wouldn’t touch it with a barge pole. It makes you wonder what else we might find!!

Em

We started with the basics – a maximum amount we were looking to spend on a property in terms of purchase value, and savings in the bank to spend on the renovation. Personally, we didn’t want to take out any loans to do the renovation, but that meant that the savings would go towards the renovation and we would be getting a 100% mortgage with no deposit.

I set up a spreadsheet early on with a basic cost analysis. As we get quotes from solicitors, surveyors and mortgage advisors all the figures go into the spreadsheet. The first thing I would say is when you’re thinking about renovating a property, do not underestimate the cost of buying and selling it as this can eat into the profit you think you’ll be making.

Example: You’re looking at a property that’s on the market for £130,000. You get it for £127,500. Based on assumptions looking at other house prices on the road, information from estate agents etc, you think you can get £160,000 for it if it’s done to the highest standard. You’re looking to spend £10,000 on the renovation so on that basis you could get a profit of £22,500.

However, there are costs to be taken into consideration in buying the property. Let’s say they’re as follows:-

Solicitors’ fees: £1000
Stamp duty: £1275 (If the property had been less than £125,000, stamp duty would be zero)*
Survey: £500
Mortgage fees: £550 valuation report
£885 arrangement fee (these vary depending on the property and the mortgage)
= £4210

Then you’ve also got to think about buildings and contents insurance, any bills or council tax to pay for the time you’re renovating and selling and paying the mortgage for the time you’re renovating and selling (say one month for renovation if you’re speedy and 2 months to sell @ £650 p/m).
Let’s say = £2200

And, not to mention the costs of selling:

Solicitors’ fees: £1000
Estate agents fee: £3200 (based on 2% commission. Remember that there’s no guarantee you’ll get the top price you’re hoping for)
Early repayment fee on mortgage: £250
= £4450

Suddenly your costs before renovation are around £11,000 (£4210 + £2200 + £ 4450 = £10, 860) and although you’ll have £22,500 at the end of it your actual profit is £11,500. And this is based on achieving the maximum sale price and keeping to your exact budget of £10,000 for renovation.

Depending on who’s doing the labour, if you’re decorating and doing a lot of the work yourself, if you were to think of the cost of your time, it doesn’t leave much at the end of it, especially if there’s more than one of you.

Based on figures I’ve received, I estimate our costs of buying, selling etc to be about £7,000. This came as a bit of a shock for Stewart and makes quite a difference to the profit margin we’re looking in terms of the sale price we’d hope to get.

We are being as realistic as possible about our first renovation in that we don’t expect to make millions. We’re looking to gain as much experience as possible. Basically we just don’t want to lose any money and any profit is welcome so £11,500 would be fine for our first venture, but it’s something to think about depending on how much you’re hoping to get.

There’s a ‘Cost list’ document from the BBC web pages which is a useful starting point for the basic fees – www.bbc.co.uk/homes/property/buying_moneymatterschecklist.shtml

*See stamp duty calculator on Taxcentral.co.uk

Em

When a property comes up that might be worth a look, the first thing I do is check against other prices on the road on www.houseprices.co.uk to see if I can get an idea of the ceiling price for the road. The more data there is for a street, the more chance you have of getting a good comparison, but if there are only a couple of properties that have been sold recently you probably won’t be able to tell.

For example, if you’re looking at a terraced house for £100,000, you can see on the house prices website that 6 terraced houses have gone in the last year, you can tell that they pretty much span the length of the road and their prices have been between £90,000 - £110,000, so you can bet that there’s not much profit to be made. If, on the other hand, you’re looking at a semi-detached for £85,000 and you can only see that two terraced houses at the other end of the road have gone for £85,000 – £90,000 then you’ll have to go and look at the property. It may be worth it as semis are generally worth more than terraces, or it may be that one end of the road is very different from the other and there’s no profit to be made – You just have to go and have a look, find out as much as possible and do the sums.

As we’ve viewed more properties, we’ve learned to look out for things and get more information. We always have a good look around at everything inside and outside. There’s a Viewing Checklist document from the BBC web pages – www.bbc.co.uk/homes/property/buying_viewingchecklist.shtml
which is quite useful to take with you.

Inside: moving curtains to check for damp around windows, and if it looks like there is damp, feeling the walls to see if it’s just condensation and a bit of mould or actual damp; looking for cracks in plasterwork; whether it has central heating and how many radiators would be needed if not; quality of pipe-work, wiring, etc; whether there are any gas heaters that would need removing; what type of boiler there is and how old; how many power-points are around the house (especially in the kitchen); whether the cooker is gas or electric; what redecoration is needed, etc.

Outside: looking for cracks in brickwork and whether any re-pointing needs doing; looking for evidence of a damp-proofing course; looking at the quality of chimneys, guttering, roof; looking at windows and doors and whether they need double-glazing; looking at the garden, garage, fencing, any out-buildings etc and whether any work needs doing on any of them.

We always take a digital camera or mobile phone with a camera and take plenty of pictures. That way, if one of us can’t go we can get an idea of the place, but more generally, we’ll have something to refer to when thinking about prices and what’s needed. We always take a notebook and a tape measure with us too and write down all the details of the property and any measurements that we might need – the address and price of the property, any information we’re told while we’re there, window measurements for double-glazing quotes, number of power points needed, etc

Ask the person doing the viewing as much as possible. Sometimes it’ll just be a person who’s on a contract with the estate agent who can give you an un-biased view and tell you the ceiling price for the property done up to a high standard, but don’t believe everything they tell you. Sometimes, somebody will still be living there so you can get more information about the neighbours and general area – schools, shops, why they’re moving etc. Sometimes it’ll be a bulk viewing with various people turning up to have a look. It’s worth paying attention to the sorts of people viewing, what they’re looking at and anything they say.

Other tips:
Don’t be afraid to ask the neighbours – we had a cup of tea with the neighbour of one place we were looking at and he was able to tell us the amount of a previous offer put in, who lived in half the street, who used to live in the property, that the property had had ‘a red ash survey’ done (which is apparently something they recommend checking for if a property has concrete floors) and had come back clear (which is good) so if we’d bought it, we wouldn’t have had to pay for that!

Have a drive/walk around and check out local amenities – where the nearest shops are etc. Also look and see if there are any developments going on in the area or any areas of land where they might be due to happen. One property we looked at looked out over a huge expanse of land at the back with relatively new offices and warehouses in the distance. The land definitely wasn’t fields for farming and had development written all over it. The question would then be whether the development would bring value in the future so that people would be happy to buy or whether they’d take one look and think ‘I don’t want to put up with 12 months of building’.

Em

One of the things I find hard to get my head around is all the different mortgages out there. To make it even more complicated, mortgage lenders seem to change their rates and products all the time, so I got a mortgage in principle on one product but will probably have to get a different mortgage. www.moneymadeclear.fsa.gov.uk is a website run by the Financial Services Authority which has a lot of helpful information.

Stewart is temping at the moment and doesn’t have a fixed income but if we applied for a mortgage jointly, his student loan and any other loans would be deducted from the amount we could borrow. He could self-certify the amount he earns, but it complicates matters. Therefore, we opted to get a mortgage just on my salary. This may well work in our favour in the future as we’re both first time buyers. If Stewart gets a steady job for the next property we could apply jointly but with him as the first applicant and me as the second. That way we’d still be able to get the first time buyer mortgage on a second property.

When we looked at the various mortgages we could get, we initially decided to go for 100%. There is actually a product to get 120% - part of which is the secure mortgage and another part is an ‘unsecured loan’. The mortgage I’m looking to get also has a borrow-back facility. I can actually get 120% on the maximum amount based on my salary and immediately pay back the extra amount on the mortgage. This seems a little pointless. However, the borrow back facility means that I can draw down money from the mortgage which means that should we run out of money for the development costs we can get some extra cash through the mortgage. We would have to draw down a minimum amount (£700 on the product we were looking at) and obviously the monthly mortgage repayments would go up, but it’s there if we ever need it.

One of the things I’ve looked into is capital gains tax. As long as the property is your main or only residence you won’t incur capital gains tax. However, you have to tread carefully as if you’re self-employed as a tradesperson of some sort – plumber, builder or whatever – it might be seen as trading and then you’ll have to pay income tax. If you do more than one property development and start to do a couple or more a year, they’ll also see it as trading whether it’s your main occupation or not and you’ll get taxed accordingly depending on your overall income with the profit included.

If the property is your second property and you’re liable for capital gains tax, there are a few things to consider. You have a capital gains allowance for the tax year – in 2006/07 it is £8800. This is per person so if you’re buying with a partner it will be £17600. Also, and money you put into the property for development can be off-set against your profit (this doesn’t include costs of buying and selling), so you need to keep all your receipts and paperwork for everything so you can prove your actual net profit. Therefore, if two of you buy a house for £125,000, spend £12,000 on renovating, and sell it for £155,000, the taxman will see that your profit is £30,000. If you can prove that you spent £12,000 on the development, this will be deducted, leaving you with £18,000. Together you have an allowance of £17,600 so you’ll only get taxed on £400 or £200 each.

For Stewart and me, we’ll have to prove it’s our main residence (through bills, postal address, council tax etc) and capital gains tax then won’t apply. However, if it was our second residence and capital gains tax did apply, then we would consider having a joint application for the mortgage in order to get the joint capital gains allowance when we’d sold.

Lots to think about – for tax issues, if you’re not sure where you stand, speak to an accountant. I rang up my father’s accountant and asked him where we stood and he basically confirmed the above.

Em

When it comes to getting the finances and legal work set up, use your contacts. Ask anyone and everyone – friends, neighbours, estate agents - if they have any personal recommendations. And don’t just take the first one. Talk to various solicitors, mortgage advisers and surveyors and get quotes. Don’t necessarily go for the cheapest one either – go for the one who you believe is going to give you the best service and get the job done most quickly and efficiently. A cheap solicitor who takes their time could cost you money elsewhere.

The solicitor we’re using for the conveyancing is a friend of a friend and when I called up I specifically asked for the name my friend had given to me and told them they had been recommended by my friend – they gave me a special rate. Even with the reduced rate, his actually wasn’t the cheapest quote I got but I believed that I would definitely be getting value for money.

The surveyor we’re using is a friend of my mother’s and we’re getting a special rate.

We used a little Independent Financial Adviser recommended to us by another friend for mortgage advice, and all their advice was free as they take their fee from the mortgage lender as a commission. They were also very friendly and helpful.

If you’re going to need a mortgage, when you’re ready to really get searching for a property, get a mortgage in principle sorted out for the maximum amount you could borrow and get everyone lined up ready to go. This way everything should go as smoothly as possible when you find a place to buy. Find out early on what paperwork is likely to be needed for any checks the solicitors and mortgage lender do and get it prepared – ID, payslips, proof of current address etc.

Lastly, get your finances ready. We cleared out our joint account and put money in it that is specifically just for the property. The intention is that this is all we will use the account for over the next few months so that we can easily keep an eye on what we’re spending for the project.

Em

We’re based just outside Stoke where property is comparatively cheap, even though in the last few years prices have shot up. The city isn’t the prettiest but has plenty of potential for regeneration and development in the future so there seems to be a lot of buy-to-let going on. There are also two universities in the area so plenty of students to rent to. However, we’re looking to make a quick profit rather than a long-term investment.

To begin with, we searched on the web and talked to our friends. We found a number of really useful websites. These included www.renovatealerts.com which we signed up to for £20 a month – you get email updates every four days of properties needing development in your area listed by price, and they link through to the estate agents websites. This means that you quickly get to know who the main local estate agents are in the area, particularly for renovation properties. It was a useful starting point as it can take hours to search through the various estate agents’ websites. There are more general websites where you can do property searches as well, but again you have to sift through them to look for the ones that need renovating.

To be honest, though if we were actually based in Stoke, and not outside it, I would go directly to the estate agents in person as you can’t be sure how quickly they update their websites compared with their shop windows and development properties can go really quickly. Also, you can get talking to the agents and tell them what you’re looking for – some of them will then give you a call whenever anything new comes on the market. I did this when setting up viewings over the phone.

If you’ve got a bit more cash to play with and don’t mind taking a risk, you could try an auction. They’re on about every month in Stoke and most auction properties in this area go through one of two main estate agents. We decided against it for our first property because you have to pay 10% deposit then and there at the auction, and due to all the mining in this area there’s a good chance that the auction properties might be at risk of subsidence or other structural issues which might mean that we couldn’t get a mortgage and would lose our 10%. However, if we had more cash, we would definitely consider it. Guide prices for auction properties around here start at around £40,000+. We don’t have £40k in cash sitting about but if you can buy with cash, you avoid that worry around the mortgage and deposit. The best thing in that scenario would be to take a builder along to the viewing to see what needs doing. Depending on how much work needs doing to the property, I would recommend this anyway. We haven’t taken a builder along because we’re not looking to do a big project for our initial property.

The only way you’re going to get a real feel for what’s about is to get out there and view properties around the area. You’ve got to think about the types of people who live in different areas too and your target market. If you have in mind that you’re looking to do a renovation to a high standard, then you need to look in areas where people have more money. We have been quite open-minded about our search, looking in various places, as people still have to live in bad areas, but buying a house in a bad area would mean looking more at security issues and keeping the renovation to a basic standard so you don’t make the house unaffordable, or more likely over-spend so you don’t get any profit. There is always a ceiling price on an area.

Having an A-Z is useful to see what is in the area in terms of schools, universities, hospitals, etc so you get a better feel for which are better areas. We also have a 30 year old A-Z of the area which is very useful for Stoke because it shows up where all the old collieries were, and therefore areas which might be prone to subsidence because of all the mining underground.

An incredibly useful website is www.upmystreet.com. If you’re having a general look at an area, you can type in the name of the town/city and get info on anything and everything in the area from schools’ exam results to crime statistics to property prices. If you type in the postcode of a particular property you’re looking at, you can see where the nearest schools /transport links /pubs /restaurants /doctors are, and even the type of people who live in that postcode under ‘neighbourhood profile’. It also has a specific ‘Find my nearest’ section so you can look up local tradesmen if you’re going to need them for the renovation.

Em

I actually recommend starting with the BBC webpages: www.bbc.co.uk/homes. They have loads of really useful information about everything from researching the market, renovation, finding and employing tradesmen, viewing properties (including a checklist you can print off), etc and if you’re going for a bigger project they have information on conversion, building regulations etc. 

I also bought a couple of books online including ‘Property Ladder – The Developer’s Bible’ by Sarah Beeny which has lots of ideas and pointers on what to do and what not to do. 

Start to get information on anything you’re not sure about. In our case that was quite a lot from finances, to the actual  process of buying – what solicitors have to do and look for, getting a mortgage sorted out, surveys and what order everything happens in - to things to look for when viewing, etc.

Em