In this blog I’m going to share with you one of my real estate investing mistakes, that almost cost me a couple of thousand pounds, but ended up making me just under £4,000.
Where Was I Investing My Money?
It was back in 2006, and I was buying lots of property from motivated sellers, buying cash through the same day remortgage with Mortgage Express. So I was putting no money into the deals. I found a property in Macclesfield, which was in a former Army barracks. They were lovely apartments, sandstone buildings, really fantastic.
I went the owner at the property and he was in a bit of a bad state. He wasn’t working, he had moved out of the property, and was living with his partner. The mortgage was only a few hundred pounds a month, but he couldn’t afford it. He was in arrears, and it was going to get repossessed.
He didn’t really want to put it on the market, because he didn’t want the hassle. He wanted to get a quick solution rather than trying to wait for a buyer. I agreed to step in, clear his arrears of about £1,000, and start paying his mortgage for him. This was while I was going through the process of applying for a mortgage to buy the property myself.
“This being a freehold property, many lenders didn’t like the idea of lending.”
It was probably worth about £95,000 and I’d agreed to buy it for £77,000. So a good deal for me. As time went on my mortgage broker said there was a problem. We got the property surveyed, and we found out that it was actually a freehold apartment.
Freehold Apartment Problems
Now most apartments are generally leaseholds. When you buy a leasehold property you need to see how long is left on the lease. This being a freehold property, many lenders didn’t like the idea of lending, because who’s going to fix the roof if there’s a problem? I basically couldn’t get a mortgage on this property.
I’d committed to buy this property, I had paid off the owners arrears, and I was paying the mortgage each month. I didn’t want to let him down. I decided to speak to my solicitor, and my solicitor said, “Well, you could put a Purchase Option Agreement in place”. This is what we did. I was paying his mortgage until I found someone to buy the property. I needed to find a cash buyer.
“A Purchase Option Agreement can be a fantastic tool that you can use to control a property whilst you’re finding someone else to buy it,or if there’s a structural problem, you can fix and so then increase the value.”
Luckily for me, it was a lovely location and building, and there was another property owner in the block who was buying these properties for cash. He was then renting them out as Serviced Accommodation. After putting it on the market with a local estate agent, we found a buyer who agreed to pay £85,000 for the property. Now remember, I had the right to buy it for £77,000. As I had an Option in place, the owner got the first £77k, £85k was the price that was paid to the owner. I got the difference between the two. Now I had some costs, I had to pay the Estate Agency Fee, and my legal costs, and I had already cleared the arrears.
Going from a situation where I’d committed to buy this property, but was probably going to have to pull out, which would mean that I would lose about £2,500, and upset the seller which I didn’t want to do, because I had this Purchase Option in place, I was able to change the situation. So instead of losing £2,500 after all the expenses, I made a profit of just under £4,000.
Purchase Option Agreement
A Purchase Option Agreement can be a fantastic tool that you can use to control a property whilst you’re finding someone else to buy it, or if there’s a structural problem, you can fix and so then increase the value. Many people worry about Purchase Option contracts and say, “Can I have the paperwork”? However, you don’t need the Purchase Options Agreement paperwork because you need to use solicitors to draw up the correct paperwork for you.
Heads of Terms
But there is one thing you do need, it’s called a ‘Heads of Terms Agreement’. This is a one-page document that basically summarises the deal between you and the seller. Once you’ve got the Heads of Terms agreementsigned, that is technically a legally binding contract. But to make it enforceable, you need solicitors to put the proper paperwork together for you, they do it based on the Heads of Terms.
I do hope this has been useful to demonstrate how I turned around a property investing mistake, from a potential loss into a profit using a Purchase option. Invest with knowledge, Invest with skill.
