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  1. #1

    Valuation questions and

    Hello All... newbie here so please be forgiving!

    ( apologies if my post is a bit long ... hopefully some will read until the end )

    I am looking at some BTL opportunities and found a 3bed house all refurbished to high standards that looks interesting in an area that I think will gain in value.

    After doing some research I believe that the developers bought the property last year for about 90k.
    There were a few sales last year at that level actually in the same area.
    The highest sale achieved in this street was 105k back in 2005 ... so I would guess pre-crisis... admittedly I could be comparing apples and pears .

    Now that they have refurbished completely the property they are asking for 210k.

    This is definitely higher than what this area is worth in my opinion ... for example there is a non-refurbished similar house for sale at around 105k I think (I need to call the agent to investigate... but the are closed now)

    I am doing the following math... which probably make not much sense... please let me know :

    (a) Fair Value of the house:
    They bought the house of 90k
    They have probably spent 15k on refurbishment.... but let's say 25k to be on the safe side
    Let's assume the area has gone up in value by 10% since they bought, again to be safe
    so I think a fair value for the house is 110% x 90 + 25 = 124k

    (b) Looking on internet, I believe that if they rent the bedrooms separately (and manage to have 100% occupancy) a toppish yearly gross rent would be around 14k to 15k

    As I don't know any builders/architect etc. so I am looking for a ready made investment... hence I was thinking about offering 150k as a cash buyer.

    That gives them a 21% bonus to what I think the fair value of the house is and a 30% return on their 115k investment.

    But this is a 30% discount on the value they are asking for with the agent... which sounds massive.

    So here are my questions:
    1/ Is my reasoning flawed and/or too simplistic ?

    2/ Their 210k asking price is an 82% return. Are they really hoping to make that type of money ? Is that the sort of return people are looking to make when refurbishing/flipping properties?

    3/ Does my 150k offer sound reasonable?

    Any remarks welcome

    Thanks to anyone that will be willing to help.

    Have a good evening.

  2. #2
    Sorry I realise that my topic above may be better suited to critique my deal

    would be be great if an admin could transfer it ?

    thanks

  3. #3
    Based on the gross yield alone, 15k / 210k = 7.1%, which is actually quite high, depending on the location (no offence but high for London, low for County Durham).

    A property is worth as much as a willing buyer will pay for it...and if using finance what a lender thinks it's worth too

    The most reliable way to value it is based on recent, nearby, like-for-like sales. If none exist, expand the search area / time and also look at properties on the market.

    The developer's margin is slightly irrelevant and in truth none of your business really. However, understanding this, along with an appreciation of what they can realistically achieve for the property and their motivation for selling can certainly help in positioning your offer. Whether they accept or not is up to them. Some people say that if you are not embarrassed when making an offer, then it is too high!

    At the end of the day, your offer should be based on what it is worth to you and how likely it would be for you to acquire an alternative for a similar price.

    Hope that helps.
    Richard

  4. #4
    Thanks Richard your input is indeed helpful and I will keep in mind the saying "if I am not embarrassed when making an offer, then it is too high!"

    The property is in around Birmingham where I am not quite sure rental yields should be.

    For example I see large HMOs in Selly Oak offered at around 11/12% implied gross yield, and I have a feeling that it is too good to be true.... or is it ?
    Would you say that there may be some underlying issues with these ? Or is it that large HMOs gross yield are generally much higher but the net return will be in par with more conventional BTLs ?

    Cheers

  5. #5
    Large HMOs around Birmingham should achieve a gross yield of 11% to 13% and this will be significantly higher than a standard let yes.

    If the property you are talking about an HMO, this could explain the increase valuation based on the 'investment income method of valuation'. Rule of thumb os 6-10 times gross annual income, with 10x being for top-HMOs with en suites in Article 4 locations...7x being shared houses with maybe a single or 2 bathrooms in lower yield locations (the Co Durhams). Birmingham should be somewhere in the mid-range of that, but it's not an exact science either!

    Best
    Richard

 

 

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