My Dream Home: after the morning afterPosted: 2016-11-07
In my last post in this occasional series about my tribulations buying my Dream Home, I left my story at 9am on Friday 24 June – The Morning After – having just received an offer for £100k less than the ‘actual’ value of my old house. I asked for views on what I should have done next. And I got some wonderful comments with real wisdom – a real testament to the amazing insights in the UK’s FIRE community.
The first comment came from RIT, suggesting I should have taken the money and run:
“Looks like either a very illiquid market or the price was to high to me. From where I sit I would have had their arm off and pushed for an exchange very quickly.” Retirement Investment Today
My approach wasn’t what RIT advocated, even though I think it is a very sensible perspective. I had several people giving me the same advice at the time. In fairness to RIT, as LondonRob commented, the ‘right’ answer “partly depends on how much [I] really need the cash. It would also be good to know what the rental value could achieve.” LondonRob said he felt a 10% discount to the asking price was too much, and so provided cash wasn’t an immediate issue he recommended turning the offer down. This is indeed what I did.
What I hadn’t explained in my last blog is that yes I would like the cash from my old house, but no I am not desperate for it. I have emotional ties to the property and do not want to sell it ‘under duress’. I am pretty confident I will get a reasonable price for it at some point and can afford to wait. I also was wondering about its potential as a rental property, and felt pretty sure I could rent it out – albeit possibly at a low rental yield. Had the rest of the market tanked between January and June I may well have been feeling more desperate for cash. But in fact I had already made almost £1m in paper gains this year and this had boosted my resilience, so I was not in much of a mood to compromise.
The next comment came from Mark:
“I would be sorely tempted to hold my bollocks and put the price up. Reason? A good proportion of the buyers might hold assets, and perhaps also receive income, in currencies other than Sterling. And whatever your view of the EU vote, it was clear that a decision to leave the Union would drive down the value of Sterling and hence make your property markedly cheaper for inbound American and German investment bankers.” Mark
Mark hit my nail on the head. What I did over the weekend Sat/Sun 25/26 June was tell both my agents that I had an offer in roughly the right zone and they had both move pretty quickly. Specifically I said that given that the pound had just fallen by 10% this meant the house was effectively ‘on sale’ and I would expect a better, winning offer within a week. The agent who had found the buyer was to make it clear to the (British) buyer he would need to raise his price, and the other agent was to go to any non-UK buyers who had been sniffing and tell them that they would need to put in an offer quickly or else they would lose the property.
What happened next was that my British buyer came back on Monday and upped his offer by £100k to X. Hooray! As RIT pointed out, it wasn’t clear from my last post that X is the right value of the property, but it is a marker – and X was a price which I was up for selling the property at. Especially given the shock/awe from the referendum result.
What I did next was accept the offer of X. Subject to exchanging within two weeks’ time. Interestingly I wasn’t asked to take the property off the market, so I didn’t.
I remember the next few days well. And how I wish I had had GreekTaxPayer’s advice in advance of that period. What he/she said is repeated below in full:
“If exchange/completion were instant, I would have sold it. But given the timing of the offer (the very morning after the referendum!) and that it’s always “subject to contract” I would be hesitant. The timing indicates lowballing, at least in their view. They presumably considered fair value much higher, say 1.05x and never showed a bid before in anticipation of the referendum result. The only reason to rush with a bid at that time would be if they thought they were getting a bargain. Presumably they wouldn’t be alone in that thinking, which is probably the reason for the absence of bids before, as opposed to overvaluation. Hitting that bid would set a ceiling to the final price. If they thought at some point later, prior to exchange, that they weren’t getting a bargain after all, I would expect gazundering or walking away. Which means that I wouldn’t have access to the sale proceeds (or even knowing whether there would be any) until much later, which means I would effectively be short an option, at a period of increased volatility, i.e. when options are more valuable.” – GreekTaxPayer
After a week there was no sign of activity at all on the part of the buyer. No surveyor appointed, no lawyer appointed, no extra visits. Nothing. I started to become suspicious.
Worse than no activity on the part of my buyer, there was no activity on the part of my agents. The reality quickly dawned on me: both my agents had taken their eye fully off my ball. In their heads, my property was now a sure thing – a deal that was going to close, at a price which had been agreed. They had bigger fish to fry – in fact they had a pretty stressful few weeks in the aftermath of the referendum vote.
I pestered my agent about the buyer. He said that while the buyer wasn’t in a chain, he did need to sell some (commercial) property assets before he could ‘comfortably’ complete. When is a chain not a chain, I wondered? Commercial property was making headlines everywhere I looked, with the leading funds all imposing redemption ‘gates’ on their investors amidst a general panic reaction to the referendum. I didn’t want to be selling commercial property assets in July and I was pretty sure my buyer wasn’t going to want to either.
Gradually it dawned on me that my buyer had basically bought himself a free option. Exactly as GreekTaxPayer said, I had sold it to him (for nothing, grrr), so I was short of optionality when the market as a whole was more volatile. Doh.
With hindsight I should have asked for a £5k-£20k non-refundable deposit before accepting the offer. But, given that I wasn’t giving a running commentary with my blog, I lacked the wisdom of my wonderful readers. There is a lesson in there somewhere for our Prime Minister and her government, but that is another topic.
As July rolled on, it was clear that I needed a plan B. I wasn’t getting more buyer enquiries and I didn’t have a credible alternative to present to the buyer. But July is a useful time of year because it is just a few weeks before the peak rental season, the Back to School period. So I decided to pursue a rental tenant as my alternative to selling the property.
I pretty quickly appointed a rental agent. I used a different agent from the two selling agents. And I told them all that I would sign the first reasonable contract they could put in front of me. The selling agents duly rustled up a couple more buyers. The original Buyer remained nowhere to be seen. But lo and behold I immediately had a few rental enquiries who came to check the property out.
Very quickly we got a good offer for a rental, and I ended up concluding a tenancy with them. Relocating (North) Americans. They wanted a one year lease, renewable. In other words they want a giant option over the house. But they are paying for it – a rental income of just under 3.0% of X (and around 3.5% of my equity in the house). This certainly isn’t an amazing investment income for me but it turns a cost centre into a (taxable) profit and it means I retain ultimate flexibility over the property. As the weeks have gone by, and the pound has fallen further, and the Tory government looks ever less likely to propose anything radical regarding housing/planning, the more confident I become that there will be some serious property price inflation in the next few years. I am pretty sure I will get 1.20X+ for the house when I eventually come to sell it most likely some time after 2020. I will be liable for a little bit of Capital Gains on the property but that only kicks in from late next year and then only slowly.
I have become a reluctant landlord of my previous home. I still haven’t seen a penny of positive cashflow from the property, due to the letting fees, the regulations around deposits and the horrendous cashflow profile associated with a new tenancy. Hopefully I will get something by Christmas.