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Mrs Bear

Developer's Profits Questioned By Buyer's Lender

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Letter in yesterday's Telegraph (Ask the Expert):

'In April, we completed the renovation of a dilapidated property purchased for cash in January. After spending a considerable sum on it, we relisted it at £60K more than our purchase price. Our buyer's surveyor has agreed the current valuation but the lender has asked for a detailed breakdown of our costs - and, by inference, our profit - to justify the uplift in price in four months.

It has agreed to the mortgage in principle but won't release the funds until six months from the date of our purchase. Is this standard practice? If so, it could certainly restrict our ability to turn over more than two properties a year.'

Reply from David Hollingworth:

'Over the past few years, there has been significant fraudulent activity surrounding overinflated valuations, often in the newbuild sector and where there has been a quick turnover of property.

This and the current climate have made lenders toughen their criteria and be more cautious about certain business profiles. Unfortunately, this has a knock-on effect for everyone who falls into that profile.

These transactions are sometimes referred to as sub-sales and, while there is no standard definition, it usually means property is resold within six months of being bought.

Different lenders take different approaches, ranging from no minimum period to not lending against any properties that have not been owned for at least six months.

It sounds like the purchaser's lender will consider your property but wants information to show there is good reason for the uplift in value in such a short time.

It makes sense to provide supporting detail of the renovation works because as long as the lender can see that there is justification for yours and the surveyor's valuation, the transaction shoud be able to progress. Otherwise it is out of your control.

As for your future renovation projects, it might be a good idea to point out the short period of ownership upfront to avoid the purchaser putting in a mortgage application destined to be declined.'

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Can't tell from the letter whether it's someone attempting to run a legitimate business - fixing up houses that were in need of substantial works - or not. If it was four months full-time skilled work for several people, £60k could be perfectly justified.

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Talking of property flipping, there was a flat bought at auction for 320K down the road from me. They had people still working on it three months later (must have cost a reasonable amount, two people for 3 months, materials). Listed it for 400K on websites, now still available at 360K. I thought the rising London market might save their backsides, but it seems they aren't going to be making much profit!

As for this and the original post, nice to see flipping isn't as easy as it used to be.

edit bought at auction IN FEBRUARY for 320K

Edited by Fairies Wear Boots

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B&Q are diversifying into tents and other non-house stuff. An interesting fact combined with their new ads for 5 years interest free credit that scream "please get a new kitchen and spend £6k here.

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I am dumbfounded. I can't beleive the stupity of the 'developers'. If they were running a proper business they would know that land flipping fraud has been a massive problem and therefore banks are now tightening up on their lending reviews. To ask the question in the first place demonstrates they are rank amateurs and should reconsider their choice of career.

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  • 399 Brexit, House prices and Summer 2020

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