There is a definite romance to the idea of rescuing a wreck of a home – and in the right market conditions a fixer upper can make a smart financial investment for both buy to let investors and owner occupiers.
The advantages of buying a run down home are obvious – you buy at a discount, get the chance to put your own stamp on a property, and pay less tax.
But while runaway inflation continues to hike building costs you will also need to do your sums very carefully or you could end up wishing you’d selected something a little more expensive but in turnkey condition.
Design savvy buyers may well have strong views about how they want their new home to look, and it is unlikely they will find a home which precisely matches their specifications. A fixer upper is a blank canvas for them to create the perfect property.
Many London homes, even in the grandest locations, come to market a little rough around the edges, particularly those which have been in the same ownership for decades.
Ruling them out of your property search cuts down your choice in a market which has been marked by an extreme shortage of stock since the start of the pandemic.
If a house in a particularly fabulous address comes up it may be – literally – your only chance to acquire something similar for years.
And if it is a period house it may well have unspoiled period features you can make the most of, as well as mature gardens.
And if you can agree a good price then your Stamp Duty costs will be cut too.
Black Brick recently acted for a young family keen to trade in a flat in Hammersmith for a family house – their search area included some of London’s most popular leafy suburbs, St John’s Wood, Putney, Barnes and Wimbledon, and their budget was £10m.
Homes in these neighbourhoods are in very short supply but as experienced renovators – the couple ran a property development business in Australia – our clients were happy to take on a project.
We found them a brilliant house near Wimbledon Village with lots of scope for renovation and extension. And by negotiating a 7.8 per cent discount on the £5.75m asking price we also saved them £450,000 to put towards the work.
It would be easy to assume that run down homes are priced to reflect the full cost of renovations, but this is not always the case.
Often the price differential between a home which needs everything doing to it and one which is in a basically sound state can be surprisingly narrow.
Recent research by estate agent Benham & Reeves suggested that the price differential between a modernised and unmodernised property in London was just 4.5 per cent.
“There is a perceived view from owner-occupiers that taking on an unmodernised property will be more financially viable, but this is not always the case,” warned Caspar Harvard-Walls, partner at Black Brick. “Unmodernised properties can sometimes be
sold for almost the same price per sq ft as modernised.”
Basic renovation maths is simple. How much will the property cost to buy and renovate? And how much will it rent for or sell for once completed?
Buyers need to be careful they don’t overspend – particularly at times in the housing cycle when they can’t rely on rising prices to cover the cost of renovation work – if resale value or rental yield is an immediate concern.
Of course some owner occupiers looking for a forever home will take the view that they are happy to spend the money and let the market catch up in the longer term.
This is a real how long is a piece of string question.
The average cost of bringing an unmodernised property up to modern standards requires an average budget equal to 15.8 per cent of the property’s original value, according to the Benham & Reeves research.
But much will depend on the individual property’s structural issues, and the kind of finish you are after – a modern plywood kitchen can be chic in a rental flat but out of place in a grand Knightsbridge townhouse.
This means that working out an accurate forecast of the cost of work can be tricky – particularly since the cost of home improvements rose 23.5 per cent in the last year alone according to online tradesperson directory Checkatrade’s latest figures.
Sheer unpredictability also makes building projects notoriously hard to accurately cost – it is not until lumpy walls have been ripped out and wonky roofs taken down that the full extent of the problem becomes clear and at that point it is too late.
You should always err on the side of caution when assessing house renovation costs – get three quotes from trusted builders and add a solid contingency fund of ten to 20 per cent. But even then, if your builders discover extra problems you could find even a conservative budget being rapidly shattered.
If you are considering a listed building renovation, then you need to add on more again. The extra cost of getting Listed Building Consent for the work and of having to use traditional materials and techniques, will make it a lot more costly than modernising a typical Victorian house.
Don’t forget to add VAT (20 per cent) to the cost of the work, and professional fees, which usually add another 20 per cent. These professionals can include architects, surveyors, planning consultants and project managers – only experienced investors or renovators or those with plenty of time on their hands (and a real interest in learning about building) should attempt to project manage a build themselves.
Whatever the style of the building work also tends to take longer than anticipated – time during which you will not be earning any money from the property or may be stuck in a rented home waiting for it to complete – and do not underestimate the stress of the endless decision making required if you decided to take on a house renovation.
The surest route to capital growth is to add floor space.
“Loft extensions, side returns and basements are the most popular ways to add square footage, and are likely to add value if done well,” said Harvard-Walls.
Before deciding what you want to do to a property do your research on the kind of homes in most demand from renters and buyers – adding too many extra bedrooms and not enough bathrooms to an apartment may not play in a location popular with young professionals, whilst eating too far into a suburban garden may alienate the family market.
“The demand must be there for that type of property in order to add value,” agreed Harvard-Walls. “A house in Kensington with three basement levels dropped in value by 35 per cent and was eventually repossessed because although the price per sq ft value made sense for the location, there simply wasn’t the demand for such a large property there.”
And, as with all property purchases, the better the address the more sought after the property will be to renters or future buyers. “It’s incredibly important to have an understanding of the local market, the type of property that sells well, the most highly rated streets, and so forth,” said Harvard Walls.
We would be delighted to hear from you to discuss your own property requirements. For a non-obligatory consultation, please contact us.