Two Maisonettes Needing Renovation, Calculations For Offer.
I’ve known about this pair of large three-bed maisonettes for months but ignored them as too expensive. They belong to a housing association and have been on sale for nearly a year. They are on a single title, immediately limiting their market to investors, but have separate utility connections. They received an early offer of £165K which fell through on valuation (some people underestimate renovation and other costs and pay far too much!) They then languished for a while before £145K was agreed. This buyer wanted to convert to four one-bed flats using development finance. But there was no planning permission… Er, no permission to develop means no development finance – obviously! So when the second sale fell through the agent phoned me, and thinking a much lower offer might be accepted I went to view.
It’s not worth converting to four smaller flats. The uplift isn’t sufficient to justify the expense. There is the cost, delay and risk of a planning application. And a surprising number of people still don’t realise the cost of converting to flats is much higher nowadays. With change of use you must upgrade insulation in roofs, windows, walls and floors to meet current standards. You must also build independent ceilings and separating walls, packed with acoustic insulation, which must be expensively tested for compliance with current standards. This could easily add £20 – £30K to the budget of a small conversion like this. So renovation was what I intended.
There was quite a bit of damage, the wiring and C/H systems had been stolen. Windows were broken and some ceilings were down due to water damage. Both flats also needed the usual new kitchens, bathrooms, floor coverings and décor. About £30K of work for the two flats. So the figures:
The agent reckoned they’d be worth £100K each when finished. They might be to the right buyer, but I wouldn’t feel confident of achieving more than £95K for the top and £90K for the bottom, a GDV of £185K.
Subtract £30K for the work, giving a present value to me of £155K. I want minimum 30% discount, or a max spend of 70% x value = £108.5K.
Splitting titles would cost another £1K which has to be subtracted, giving maximum offer of £107.5K.
I then ran the calculations for a development. The renovation would take some time so there is slight justification for this, but not on the timescale of a true development so this was more to satisfy my curiosity.
Currently I’m looking for 25% profit on GDV. 75% of £185K = £138.75K.
Minus £30K for the work = £108.75K.
Minus £1K to split titles = £107.75K.
Minus £3K to the estate agent to sell, and £1.5K legal and other fees = £103.25K.
Minus cost of investor finance at a notional 3% of the amount we’d be spending (£138.75K, see above), circa £4K = £99.25K maximum offer as a development.
Note there are no utility connections or S106 contributions needing paying for in this case, which can be very expensive, other things amateur developers often overlook.
I sent an offer in with my justifications. If they languish unsold for long enough they might just come back to me.