Buying using equity and developing...

djentveloper

Current property value = £125-130k (two valuations this week)
Current equity = £15k

We are living in a two bed house at the moment and looking to move into a 3 bedroom property - 3 properties available around the corner. These properties vary in price and state of repair at £125k, £150k & £169k

We can afford a mortgage around the £170k mark. We have no deposit other than the equity built up in our existing home.
Whichever property we move into I would be looking to develop or improve.

My questions are:
1. How would we go about using the equity as a deposit - are there any pitfalls/hazardous areas to look out for or any paths we should take?

2. Would we be able to take out a larger mortgage to fund our development on the new property

3. After development and hopefully an increase in value of the new property how could we release the difference?
For example:
We buy the new home at £125k
We take out a mortgage for £140k (15k for development)
The property gets valued at £150k
We have £10k profit (subject to inflation/recession)

Ideally I would then like to put that £10k to one side and use it to buy another property and turn a profit.

Please forgive any errors in my above statement - as I am just a novice, please do correct any incorrect assumptions. Any further explanations required please ask away.

Many thanks

martinsurrey

1) valuations and equity are different things, An EA might value it at £125k but you may only sell for £118k or less, reducing your equity to £7k or less.

What have similar 2 beds sold for lately?

2) selling/buying costs. For a £125k purchase you will need legal fees mortgage fees, stamp duty and legal fees, agent fees so set aside £6k for these.

3) Deposit, you’re going to need a minimum for 10%, so £12.5k.

So you need a minimum of £18.5k to move, so even if you sold for the asking price you're still short.

4) a bank will not lend for development (in most cases) so you would need to fund all of these yourself, you might then be able to remortgage to a higher value after the work is done but you WILL need to fund the work upfront.

5) even after development you would still be limited by the maximum LTV of around 90%, so on your £150k house the max you would get is £135k on a mortgage.

Sorry, I don’t think you are in a financial position to do what you suggest.

djentveloper

martinsurrey wrote: »

1) valuations and equity are different things, An EA might value it at £125k but you may only sell for £118k or less, reducing your equity to £7k or less.

What have similar 2 beds sold for lately?

2) selling/buying costs. For a £125k purchase you will need legal fees mortgage fees, stamp duty and legal fees, agent fees so set aside £6k for these.

3) Deposit, you’re going to need a minimum for 10%, so £12.5k.

So you need a minimum of £18.5k to move, so even if you sold for the asking price you're still short.

4) a bank will not lend for development (in most cases) so you would need to fund all of these yourself, you might then be able to remortgage to a higher value after the work is done but you WILL need to fund the work upfront.

5) even after development you would still be limited by the maximum LTV of around 90%, so on your £150k house the max you would get is £135k on a mortgage.

Sorry, I don’t think you are in a financial position to do what you suggest.

Sorry I forgot to mention we purchased our current home 2 years ago at £130k.

1) Firstly, thanks for raising this point as I completely over-looked the fact that negative equity reduces our deposit.

We are an end terrace (row of 3) with a rear conservatory - which effectively adds a dining room onto our property and we have a garden twice the size with a block built store/shed. The mid terrace sold last year (within a month) for £120-125k. A 2 bed on our street is currently up for £125k and is apparently in bad condition.

2) If we bought the £125k property would we just get away with stamp duty as this is the threshold isn't it? The other two we would cop it big time! Legal fee's we would look to put on top of the mortgage like we did when purchasing our current home. So that would leave agents fees.

3) Agree, deposit will completely depend upon how much we get for our property.

4) I was proposing taking a larger mortgage rather than a separate loan from a bank?

5) LTV i have never heard of before and need to read around the topic to completely understand it - but again thanks very much for bringing to my attention.

Nothing is ever as easy as it seems...