How to make the most of every property transaction in a tough market using a multiple exit strategy.
I have provided below my top three exit strategies and my considered approach to property purchasing (this isn’t ground breaking stuff, just a little insight).
Plan A – Added Value Approach
This is my one size fits all approach and works best for the following investments – it is nimble and speedy once you are practiced.
- Large flats (one or two beds) where the reception room and kitchen are separate (Freeholder Consent Dependant) it is possible to convert the kitchen into another bedroom and make the reception room open plan with a new kitchen. This is added value, not just based on the additional bedroom, but with the new kitchen in place you have double the added value by carrying out a singular action.
- Light refurbishment for me is tried and tested. It is not a standalone approach I take, it is normally part of the other strategies I take. Sometimes (Probate sales) will allow me to add all the value I need for a speedy turnaround, just by making the property approachable to a far wider market place.
- Rent review is something I look at primarily with regards to my commercial purchases. I do pick up some underperforming assets and can quickly revitalise them with a simple paperwork exercise and then re-sell at a higher yield.
Plan B – The Long Haul
I like to take this approach especially when I have the time and capacity to really work the asset – this normally takes a little more time, it can increase the risk vs reward ratio, but for me and most importantly, it’s fun.
The two storey maisonettes offer a great deal of potential to split into two separate flats. This requires a ready and willing Freeholder and the creation of a new lease. You’d be surprised how many Freeholders are up for this approach. It requires a lot of upfront negotiation, but the benefits are all there. This only really works on the 3-4 bed maisonettes in my experience.
The semi-detached or detached three-bedroom house offers great potential for split into self-contained flats. Depending on size and layout I would normally go for a split into either 2 x 2-bedroom flats or three studios (planning permission and works to the roof space may be required).
Planning gain on commercial property seems to be a real hot topic at the moment, but it is a valid exit strategy for me to consider. I prefer the secondary or tertiary parades, as these are normally surrounded with residential houses/ flats and are normally far more affordable (at least on a £persqft calculation). On occasion I will use this strategy in line with the rent review strategy which again can offer me a double down on added value.
Plan C – Speed and Certainty
Depending on the purchase price and the perceived discount from market value, I will normally consider the auction. It is possible that I would have instigated one of my added value strategies already and will use the auction for a quick sale to enable me to more onto the next opportunity.
- This is another one size (almost) fits all strategy. However, this is very much asset class and purchase price dependant.
- Suitable properties for me include – short lease flats, sites with potential for planning gain, rent reviews and extension/ conversions (not always doing the works, sometimes just obtaining the permissions.
- Hope value – sometimes all this entails is pointing out the angle that you were going to pursue and let someone else cost in the hope value of achieving this. Sometimes it requires actual work in order to highlight/ support the assertion of the hope value.
The Considered Approach:
Step 1 – Prepare a list of potential exit strategies (I have provided my top three at the end of the chapter)
Step 2 – Start with the primary exit in place (this can be changed at a later date, so do not worry).
Step 3 – Constantly monitor the progress of the transaction (see if any of the fundamentals have changed and adapt [or prepare to adapt])
Step 4 – Monitor the market place for real or sentiment-based changes (this may change your buyer demographic or the market value)
Step 5 – Ready plan B (start considering plan C)
Step 6 – OPTIONAL STEP – ready your three (minimum) backup exits now.
Step 7 – Do not be afraid to change the priority of your exits, this is a situational part of the process (my primary consideration is exit with greatly reduced risk).
Step 8 – Completion day (even at this stage do not be afraid to reconsider the exit).
Step 9 – Reflect and round you go again.
With regards to the above it is important to remember two things. Analyse, but not to the point you restrict yourself from action and there is plenty of time throughout the journey to measure and re-assess your exits.
This article was created by Jay Howard and Piotr Rusinek. Piotr Rusinek is the Co-Host of the National Development Summit 2019 on Saturday 19th January 2019- the event taking place in Blackfriars, London. Jay is a regular contributor to the monthly meets, and when Jay is not providing updates on the auction market, can be found at AuctionHouse London- Jay is the Manager for AuctionHouse London. We welcome to the National Development Summit, Ross Harper who will be giving the case study which resulted in him winning the award of Best Developer of the Year- December 2019- Property Investor Awards. The case study will be focused on the church conversion in Glasgow , Scotland. I will be visiting Ross on 3rd January – interviewing him about the development- so feel free to submit any questions.