Duplex Renovation Questions - Into 2 flats

cottlad

Hi,
We've had our 4bed duplex apartment on the market now for >3 years without luck. Our last option before handing back the keys is to get some investment and convert it into 2 decent 2bed apts. We should have no problem with the money but i'm getting overwhelmed with the logistics.

Cliff notes:
Property value as duplex £275-£290k
Property value as 2 x apts £330-£360k
Outstanding mortgage: £270k
We have floors 1 and 2 on a 99 year lease. The owner of ground floor flat is owner. He's a friendly old guy on the same street and has no problem with us converting.

So, it makes financial sense (at 1st look) to convert and sell even at the bottom end of the scale just to get rid.
I've approached various builders for ideas and estimates and it looks like we'll be paying the builder around £40k+VAT to get 2 flats ready to move into, complete with up to date building regs. We'll also have to appoint an architect who'll work alongside the builder. I estimate another £500-£1k for him.

The rest of the detail is where i need some help. Can anyone help with the following?:

1) The duplex is currently our residence that isn't selling. We'll be moving into another property owned by me whilst the work is done. When the work's completed we want to sell both flats in order to pay back investors and the mortgage. Will we have to pay tax as they wouldn't at that time be our main residence? Even though it is at mo and we are doing work in order to sell? We would also have proof that the property has been on the market for over 3 yrs.

2) Is there any way of getting round the VAT that's to be added to to the estimates. Looks like we'll be spending approx £40k so quite a chunk

3) Will we be alright not letting the mortgage company know about the renovation until it's completed. It's in their interests as total value should increase by £55k+. Or should we tell them 1st?

4) Once they know will they split the mortgage somehow or just leave as 1 lump sum to be paid off on completion of sales. Will they be ok with it?

5) Who do i need to speak to in order to split our current 99 year lease on the duplex 4 bed into 2 x leases (1 for each flat.) Is this done by a solicitor with help and input from owner?

6) The deeds will need altering into 2 apts. Will this be done along with the lease?

7) Is there anything else i need to consider?

I know the above sounds a little fractured but i'm trying to get my head around the complete job before we commit to spending a lot of money. Any help/advice would be really appreciated.

Thank you

Fire_Fox

If your duplex apartment has not sold after three years then it is significantly overpriced, regardless of how much you have dropped the price by. Throwing tens of thousands of pounds at the problem will not solve anything if you don't understand the property market - you could then end up with two overpriced units. Have you looked at land registry sold prices for the street and area or just for sale prices? Do you have project management experience? Have you ever done a renovation or conversion before?

Are you confident you don't need planning permission to convert into two flats - the building may need a fire escape installing for example? Have you got the written permission of the freeholder and agreed in writing how you are going to sort out the new leases and what changes there will be to how service charges are calculated? What do you mean by "The deeds will need altering into 2 apts. Will this be done along with the lease?" What do you think the difference between your long lease and the deeds are?

I am not convinced you need to TELL you lender I think you need to ASK your lender way before you start work - you cannot divide the lease or create new underleases without their consent as this affects their ability to repossess. They may well say no, if you make a mistake on the design or any of the permissions or fail to complete the apartments could be unmortgageable! Have you read the terms and conditions of your mortgage and the covenants in your long lease?

If you are overwhelmed by the logistics before you have even started DO NOT go into this conversion. This is a completely unnecessary major project and you haven't even mentioned a contingency fund, nor have you contemplated how much all the legals will cost. Once you also add in VAT surely you are going to make a loss? £40K split between two flats is no way enough to do a quality job, this is a buyers market and you need the wow factor.

Richard_Webster

You will need:

1. Planning permission
2. Building Regulation approval
3. Freeholder's consent to alterations in flat
4. The freeholder's consent to you granting underleases of the two flats perhaps for a few days shorter than the lease term that you have at the moment.
5. Your lender's consent to the grant of at least the first underlease unless you will sell it for enough to pay off the mortgage completely. Otherwise you wil have to negotiate with the lender as the Land Registry will not register the underlease without a consent from your mortgage lender who may require that a substantial proportion of the mortgage loan is paid off.

If I were the freeholder I would want you to surrender your lease back to him once the second flat had been sold because nobody (particularly the underlessees of the two new flats) would want a situation where their immediate landlord (i.e you, OP) went missing. This could happen if you retained your present lease. You would have no further interest in acting as a middle man between the underlesses and the freeholder but you would be left in that position unless your lease was surrendered and the underlessees then became immediate lessees of the freeholder.

You can see all this gets quite technical and you really do need to contact a solicitor to be advised as to the best way forward.

cottlad

Thanks both.
The duplex is currently underpriced at £280k and we can't drop it further as we'd be getting into stamp duty territory of 250k which would put buyers off further.
I don't have any project management experience other than what i'm finding out at the moment..... i don't want to be hiring teams of plumbers/builders etc.... i just want to give someone the whole job and say 'get on with it.'
I want the contractors architect to handle the planning and building regs.

Basically i want to pay someone X amount for me to come back in Y weeks to a finished project, all up to spec and in a saleable condition. This figure is going to be £40-£50k+vat and the timescale looks like around 12 weeks.

The estate agent agrees this is by far the best route to follow as 2 bed apartments are selling well here but 4 bed duplexes are rare and in an extremely niche bracket.

I'm sure the sums add up as long as we don't get spanked for cap gains tax?????. We've been told in order for the flats to sell immediately they could be sold at £165k each. If they had a good finish they could sell for £185k each maybe more. So that's £330k - £370k depending on time restrictions and finish.

Our main aim here is NOT to make money. It's to get rid of a flat we can ill afford when interest rates inevitabley rise. If we make something along the way it's a bonus. If we only get the minimum it will give us £60k over the current mortgage amount to cover building, architect/planning, solicitors, selling costs and anything else (which is what i'm trying to establish) that needs doing. With quotes coming in around £40-£50k i thought this was very viable.

A main worry is the lender. One developer has told us not to mention it until the works almost done. He said there's nothing much they can do and they'll have an additional £50k+ equity to fall back on. Here i'm being told to ask them immediately. Would they really disagree to this if the costs were covered by me? Or they run the risk of the interest rates going up and me handing them back the keys. I obv don't want them to say no which is why i contemplated just cracking on. The flat's in my wifes name only as it's a property formerly jointly owned by her and an ex partner. What i'm tryin to do is avoid her going bankrupt.

As for the lease.... i apologize if my OP came across as ignorant or dumb. I'm just trying to get general info in laymans speak as to the best way to do the job. Yes the underlease comments make sense and yes, i would hope the solicitor could handle all the lease details. I haven't factored in a price yet for this which is where i need to look next i think. Any ball park figures you can throw at me? I'm trying to fully price the job up without spending money before i commit so was wary about appointing/asking solicitors just yet.

Yes the freeholder has agreed to the work. He's friendly with us and there would be no aggrevation from that side.

So, the timeline and work needed i have in mind is as follows:
1) Get quotes/choose best overall option - make sure financially viable
2) Letter of consent from freeholder
3) Get architect in for planning/building regs
4) Solicitors to discuss new leases/legals
5) Commence renovation
6) finalize new leases
7) Sell properties

Somewhere in the above timeline i need to speak to the current lenders. Any advice on that? Also, is there anything else i need to add?

Once again, any comments appreciated.

Richard_Webster

You should ask your lender. In practice if you do the work and the sale of the first flat provides enough money to pay off the mortgage they may never know about it.

If one flat doesn't provide enough money to pay off the mortgage then you are going to have to get their consent to grant the first lease, unless you manage to stall things so that both complete at the same time and provide the money then to pay off the mortgage. If you will have to get their consent to the grant of the first lease because you won't have enough money from it to pay off the mortgage then I suppose they could decide to be difficult if you don't tell them in advance what you propose.

In short you need to do the sums.

puddy

it cant be underpriced otherwise it would have sold at that price

whats the outstanding mortgage left

i feel its really all fantasy to be honest, i know little about converting but enough to know that budgets and timescales go to pot when these things are done and good relationships go sour.

have you got a right move link

cottlad

It's priced below similar 3 bed apts and has more space. Estate agents and developers say it would be madness to reduce further. It's difficult selling as it's neither a house (up stairs and no garden) nor an apartment (too big.)
It's property-23545735.html at rightmove (i can't post links.)

There's 270k on the mortgage due to wifes ex partner creaming off all the equity and landing her in this mess..... there are other circumstances too that aren't really relevant to current problem but which left her pretty financially screwed.

So Richard.... you said 'you should ask your lender. In practice.............etc'
Does this mean you think it's not wholly necessary/advisable?

If we sell flats for say £170k each we could only pay back around £165k after the 1st sale leaving a balance of £105k to be paid on sale of 2nd flat. What i don't want to do is call the mortgage company and deal with a jobsworth robot who causes a problem just because it would take work/foresight/imagination etc to agree with the renovation. It's far easier for them just to say 'no' and forget about it.

The rightmove link doesnt do the place justice. The rooms are really big and there's ample room for 2 x 2bed flats both with 1 ensuite bedroom and main bathroom along with full double bedrooms and very large living room and kitchens (compared to most flats.)

Still also unsure about the tax issue and whether we'd have to pay CGT if we moved out in order for builders to move in (wouldn't then be our primary place of residence.)

Fire_Fox

cottlad wrote: »

Thanks both.
The duplex is currently underpriced at £280k and we can't drop it further as we'd be getting into stamp duty territory of 250k which would put buyers off further.

The estate agent agrees this is by far the best route to follow as 2 bed apartments are selling well here but 4 bed duplexes are rare and in an extremely niche bracket.

A property is only worth what a buyer is willing and able to pay, your duplex has not sold in three years therefore it is not underpriced. Why are you taking advice from the estate agents who have failed to sell your duplex?? If the property is not selling at £280K then as you already know it's worth £250K plus f&f due to the stamp duty threshold.

cottlad wrote: »

I don't have any project management experience other than what i'm finding out at the moment..... i don't want to be hiring teams of plumbers/builders etc.... i just want to give someone the whole job and say 'get on with it.'
I want the contractors architect to handle the planning and building regs.

Basically i want to pay someone X amount for me to come back in Y weeks to a finished project, all up to spec and in a saleable condition. This figure is going to be £40-£50k+vat and the timescale looks like around 12 weeks.

You need a project manager otherwise you will find a six month build becomes a twelve month build while all the trades work half days on your job, claiming they are waiting for another trade. If you do not wish to project manage yourself you can pay the architect to do it but that will cost. Seriously you cannot hand this over and expect to get high quality at a knockdown price - you are going to have to invest time sourcing top of the range ex-display/ bankrupt stock fixtures and fittings to make this work financially.

cottlad wrote: »

I'm sure the sums add up as long as we don't get spanked for cap gains tax?????. We've been told in order for the flats to sell immediately they could be sold at £165k each. If they had a good finish they could sell for £185k each maybe more. So that's £330k - £370k depending on time restrictions and finish.

Our main aim here is NOT to make money. It's to get rid of a flat we can ill afford when interest rates inevitabley rise. If we make something along the way it's a bonus. If we only get the minimum it will give us £60k over the current mortgage amount to cover building, architect/planning, solicitors, selling costs and anything else (which is what i'm trying to establish) that needs doing. With quotes coming in around £40-£50k i thought this was very viable.

A good finish means a £10K kitchen (including appliances) - how on earth are you going to do the rest of the conversion for £10K per flat?? Your figures simply do not add up. Capital gains tax assumes a profit, IMO you are going to make a whacking loss. Please run a search on Doozergirl's many posts as she is a successful developer.

As I have already said you haven't factored in all the legal costs, you haven't factored in the extra mortgage repayments whilst you seek planning permission and the conversion goes ahead, you haven't got any money for a contingency. An estimate is not a quote, you may uncover all sorts of horrors when you strip the flat back. What are you going to do if interest rates rise or the market carries on falling throughout the build?

cottlad wrote: »

A main worry is the lender. One developer has told us not to mention it until the works almost done. He said there's nothing much they can do and they'll have an additional £50k+ equity to fall back on. Here i'm being told to ask them immediately. Would they really disagree to this if the costs were covered by me? Or they run the risk of the interest rates going up and me handing them back the keys. I obv don't want them to say no which is why i contemplated just cracking on. The flat's in my wifes name only as it's a property formerly jointly owned by her and an ex partner. What i'm tryin to do is avoid her going bankrupt.

Then why are you embarking on a project you are not interested in managing, which is going to cost you and your wife tens of thousands of pounds?? You don't understand the market, you don't appear to have any experience, everyone makes costly mistakes on their first development but there is no leeway to absorb the extra costs! Why not get written consent from the freeholder, architects drawings, planning permission and then sell the duplex to a developer?

puddy

FF is harsh but correct, I pick up my 'expertice' from grand designs and basically laughing at others' misfortunes on the comfort of my sofa. it never fails to amaze me how people really enter into this stuff without the slightest clue of what could go wrong, what they could find that changes all their plans, what isnt allowed which then causes them to revise plans and costs and then out of nowhere 'oh, im PREGNANT'

please just drop the flaming price and get rid of it

what were you going to use for the money to pay for the conversion anyway out of interest?

puddy

cant you rent it out for a while until you work out that you need to drop the price, at least then the mortgage is covered

Fire_Fox

cottlad wrote: »

It's priced below similar 3 bed apts and has more space. Estate agents and developers say it would be madness to reduce further. It's difficult selling as it's neither a house (up stairs and no garden) nor an apartment (too big.)
It's property-23545735.html at rightmove (i can't post links.)

The rightmove link doesnt do the place justice. The rooms are really big and there's ample room for 2 x 2bed flats both with 1 ensuite bedroom and main bathroom along with full double bedrooms and very large living room and kitchens (compared to most flats.)

So it's a gorgeous building in a great location:
http://www.rightmove.co.uk/property-for-sale/property-23545735.html

You really need to sack the estate agent IMO - it's listed as a four bedroom house then later a duplex apartment, not at all clear what is being sold. Where is the floor plan? Is the layout good or rubbish, how many square metres am I buying in total? Your photographs are rubbish - buyers not want to see a picture of a desk and chair! Why is there only a photograph of one bedroom?? Is it four bedrooms but you are using one as a dining room and one as an office? In which case an unimaginative buyer will see that as two bedroom. Sorry but the apricot colour scheme is very eighties, I would get rid of that. Like the pale blue in the bedroom, but the bathroom is rather eighties.