PEOPLE IN PROPERTY
By Ken Sunter
Flips, finance & how to get it right
Investing your money for a fast, safe and regular return
Flipping properties is a different game to standard buy-to-lets. Knowing your market inside out, selecting the right area, or pockets of an area, and having the right financial products in place can be the key to success when buying to sell. Ken Sunter from Panacea Property in Scotland knows this only too well. With 10 years experience in the industry, Ken has a plethora of experience that we can all learn from. We caught up with Ken to pick his brains about his processes, organisational structure, business model and bespoke financial products that help him and his investors to continually make a whole load of money together. Here’s what happened…
Hi Ken, how did you get into property and what was life before property like for you?
“For more than a decade I was in banking and finance, both for UK and US companies. I was always interested in property, and whilst working full time I managed to dip my toe into the buy-to-let market a little by earmarking some money every month or two, putting it aside as a deposit to buy a property. At that point there was no development - I was just buying and renting, building up a nice local portfolio. I got the bug from that really. Then later when the finance company I was working for was taken over and I was offered a severance package, I decided to go into property full time.”
How did you decide where to begin?
“At that point, I felt that I’d built up a good knowledge, I knew my market, I knew my area and thought ‘Now I’m going to take the leap’ and start flipping properties. I started small and simple to start with - refurbishing a bathroom, kitchen and adding a lick of paint then putting the property back on the market. I cut my teeth on flats and small terraced houses and built up my knowledge from there. Everything developed as I went along.
“I went from running one project a month to doing two or three at the same time. It was almost like a conveyor belt of properties, through which I built my confidence and knowledge, and began to start reducing costs, by buying leaner and getting better trade deals. I built up a team of great trades people as well, which meant I was confident in what they were doing, they knew the spec I wanted and we worked well together.
After a few years I added extensions into the mix and started getting involved with purchasing derelict buildings. It was a natural progression that just came with the confidence of knowing what I was doing.”
When you moved from buy-to-let into buy-to-sell did it change the way you looked at properties?
“Yes, it’s a completely different approach and we look at totally different products. We look more at commercial buildings that are sitting idle, such as hotels or old offices, which we wouldn’t have looked at before. We convert them into residential. Due to the large shortage of houses in Scotland (and pretty much throughout the UK) planning departments are looking very favourably on commercial applications to change to residential use and as long as you’re doing it sympathetically and you’ve done it properly you will more than likely get through planning. It’s also quite cheap stock to pick up. There’s a lot of work involved but it’s a good market. You certainly look at it with a different set of eyes.”
Can you tell us a little bit about your target location?
“Our offices are based on the banks of the Clyde, in Glasgow harbour. Our area of development will stretch from Edinburgh through the central belt to Glasgow in the west, up to Stirling area. That’s really it, you can draw a line on a map quite easily around the whole area we stick to. We do that purposely because we know the area and we know the re-sale market. We don’t venture outside of that because this is where our knowledge is. Our large bank of property suppliers, whether it’s disposal companies or auction contacts, are all based there too and they will bring us excellent development potential properties on a regular basis.”
Where is your area in the current property cycle? Is it an area that is soaring again or are there pockets that are still stuck in the doldrums?
“With property there is no ‘one size fits all’. We sometimes look at properties, or even portfolios that look great on a spreadsheet, but when you dig deeper you often find that they are in a very laboured area where it’s very difficult to re-sell and you become less interested. It’s easy to get blinded by the headline discounts, but with good local knowledge you can easily spot the deals that won’t result in a good end product, and reject them.
“We stick to the pockets of areas that we know, the ones that have ridden out any recession. We have a good base of contacts that will still bring us these opportunities. Two or three years ago or in the midst of the credit crunch, it was very difficult for people buying property to get mortgages. At that point, we were not looking to put too many back on the market, so we were buying and stockpiling. Now, the mortgage products are back, people are out viewing and are putting offers in. With better rates, this time we are selling a lot more. We are in the cycle part that allows us to confidently bring lots of properties to the market because they are selling. Purely because the mortgage choice is much better than it was.”
Your properties are refurbished to a very high spec. Please can you tell us more about how you select your properties and your approach to refurbishment?
“We like to select properties that need a lot of work - the worse condition the better, so there’s more of a mark up. By sticking to our one geographical area, we know the market and we know what the buying public in a particular town will expect, so we aim to provide that high degree of finish. You won’t get away with a substandard finish if you’re looking to sell. That’s why we keep the spec very high.
“We place a huge emphasis on the interior design and the finished product. We follow a bouncing ball process with every project we do, using a particular company to supply all our furniture, soft furnishing, lamps etc to ensure the property is staged appropriately. It is like a traditional show home, which looks great on the photographs, as it displays the lifestyle aspect that people are looking for. We always do that for every property, regardless of what price range it’s in.”
You also seem to get a sense of pride in your work by creating these places, is that right?
“Exactly. It is a personal thing – development projects are a challenge. I like the challenge, and I like to see the start and finish of these projects. When I first visit an old traditional sandstone building that has a fallen roof and has been derelict for years, it’s such a shame. We try to be sympathetic to the old style of the property but sometimes certain things are just past retrieval. But we always manage to get a good mixture of modern and traditional. I do get a lot out of that.”
How do you manage to juggle so many property developments at once without taking your eye off the ball?
“Basic organisational management, I think. We make sure the properties are purchased in a staggered form. We’ve built up teams of trades people that allow us to stagger the work. They are always ready to start work the day after we receive the keys. We have eradicated any problems in this area through our organisational processes. My partner, Paul Traynor, is a lot younger than me. He’s the legs now I’m getting older. He does a lot of the round the site and day-to-day stuff. I do the general management from the top down to make sure everything is working and everyone is where they should be. We communicate really well and we all know exactly where the project is at any given time.”
Your projects are very capital intensive and you have developed some innovative solutions to finance these projects as well as helping private investors to make money. How does that work and how do you structure it so that it works for both parties?
“The banking side is the key to our full process and its success. After working with a commercial bank for over 10 years, and building up a very vast track record with them, we have worked together to set up a specific, bespoke product for our company and our clients. The product is a high monetary value of 85% of the purchase price initially to purchase properties. This is unique to us, with the typical advance being 75%, which is market leading.
“On top of that, they also give us up to 85% of our renovation costs. Which is, again, unheard of - you either have 50% or nothing from most of the commercial lenders.
“Also on top of that, we have another product that we’ve been developing over the last year, which means once the whole build is finished, the project is refinanced and a new valuation is provided up to a level of 75%. This means we are recycling money out at 2, 3, 4, 5 stages throughout the whole process. Ultimately, what we have left in the property while it’s on the market for sale is just a part of the profit that’s left. We don’t have our deposit tied up, we don’t have our renovation costs tied up and we don’t have all of our profit tied up waiting for the sold sign to go up.
“That allows us to move money in and out of our projects on a rapid turn-around basis, which allows us to buy so many more projects, keeping our working capital predominantly in our account to use for the deposits and to use for the difference between the renovation costs, legal costs etc.
“It’s all about cash-flow – the old enemy of the property developer – which is actually in our favour because of the unique facilities our financial products have given us. We are able to work with more partners by setting a fixed return on a venture loan for clients to put into the company. Partners get to join in with various allocated projects, and the fact that we can recycle the money back out of the process almost on a monthly basis, gives the clients a great level of protection coming into a project with us, because their returns are not wholly reliant on the sale of a specific property and any problems that can fall with that.”
So, investors can help you to finance a project without that money being tied up to the end of fruition. Sounds great. What is the typical timeframe that you work on with these types of loans?
“We tend to start our contract at 12 months, as this allows us to use the money a few times, through the whole process. From the outset we have a robust client documentation pack that clearly sets out a repayment plan – in 12 months they will be paid 12% fixed return on the capital they placed in the project. We can always honour that because we are recycling money all the time, it’s not reliant on the sale of the property. If there are any delays in the refurb or the sale it doesn’t affect the client. The client also knows that their money is not sitting with us waiting for a project to start. As soon as it arrives, that is day 1 for their project.
“Fast forward it on 12 months, our clients know that their money will be returned, including their profit on that date. They know exactly what’s going to happen, there are no surprises and no excuses or phone calls saying ‘There’s been a slight problem’. We’ve done over 100 of these types of projects and I’m pleased to say that every single one has been paid on time, every single time. That’s what we want to do and people can relax and enjoy the investment without fear of any surprises or changes in terms.”
Who invests money with you?
“Our client base is a mixture of different types of investor – we have a lot of retired people or almost retired people working part-time later in life, who have built up a good level of savings but want more than the paltry return they get from the banks, or whatever else they are involved with at the moment. They tend to go more down the monthly paying option route, as they like the extra bit of money coming in every month to help to fund their lifestyle. We do entry levels starting from £20k right through to much larger sums.
“We also work with high-net-worth investors who have looked into us. They know the ethics that we run with and that we’re a safe pair of hands, and they take their 12% lump sum at the end of the year. Perhaps dovetailing it in with some other investments. There are very few of them that are property related. Some of them, have small portfolios, I think they just have a suite of investments and look to try and get a balance of returns and something to be happy with, something that will slot in alongside other investments that they have.
“Our relationships are based on trust and great communication with clients. We’ve seen each other’s children grow up, we go for lunch and socialise, and that’s the way we like to keep it. We have a kind of club feel, but at the end of the day we understand that it’s still a business transaction and that’s why we do what we say we’re going to do each and every time without fail.”
Do you have a set margin that you are aiming for?
“We aim for 30-40%. We make our first part of the profit at purchase. We are very lucky that we have a lot of people that bring properties to us off market, meaning we buy them at a sizable discount from the start, so we’ve made a lot of margin before we’ve even got the keys. Then by adding value to the property through the high spec refurb we aim to significantly raise the valuation of that property, so there’s a chunk of money in there too. Because the spec and the end product are good we usually sell for pretty much valuation price.”
How do you go about your due diligence on the end values?
“We base our end values on our knowledge of the area, which we hope is accurate after all these years, but it’s also good to get a professional viewpoint as well. We have about 6 or 7 agents that we work with and when we ask them for a re-sale value we know it’s an accurate one, not one to pitch at us to try and get the business. It needs to be realistic. We are very lucky, we have the home reports system in Scotland, where every property that you purchase has a full valuation and home report with it. You know at purchase what that has been valued at by a specific RICS valuer. That said we will also get our own independent valuation, probably through Allied, or DM Hall, or Shepherds, some of the large panel surveyors, who will go out and do us a valuation at the point of purchase. We know these surveyors well as we have known them for years so they can give us an accurate valuation based on the expected end result as per our refurb model.”
It is clear that Ken and his team at Panacea Property Scotland have flips and developments covered. If you are interested in finding out more information or you wish to speak to Ken in more detail about what they do visit the website or drop him an email.
TIMESCALES FOR FLIPS
- Look at the development to see if it’s in an area that is going to sell within 2 or 3 months, work back from that
- Include 3-4 months to develop the property (depending on the size of the property and the scope of the works)
- Add a further 2 months to put the house on the market and get an offer
- Once a purchase has been agreed, add 6-8 weeks for conveyancing.
PANACEA’s GUIDANCE FOR FLIPS
- Finance – Have your finance pre-approved and in place. Make sure you have funds set aside to cover the deposit, a realistic budget for renovation and buying costs, as well as the finance payments until the point of sale.
- Be realistic about the budget. Don’t roughly estimate a figure, & ensure you include all associated costs, legal fees, stamp duty, selling costs, utilities, and tax.
- Be very careful of headline-discounted properties that are offered to you. Big discounts are often big for a reason - no resale market on a lot of them. Do your research before buying.
- Think backwards. Firstly, is this property going to resell? Because if it doesn’t resell then all bets are off.
- Get yourself a good trade team & brief them early
- (during the purchase process if you can). Get 2 or 3 people to quote each job. Always have a timeline in that quote & penalties for not completing on time. Always have a signed contract.
- Be very careful if you’re buying at auction. You can pick up some great properties this way (eg. the Bridge of Allan Hotel), but you have to know what you’re doing. Auctions can be a dumping ground for problematic properties. Be careful.
CASE STUDY 1: BRIDGE OF ALLAN Small hotel
Building: Former small hotel in Bridge of Allan near Stirling
Planning: Building warrant and planning approved for 6 luxury apartments with views of Stirling Castle and Wallace Monument.
Works: Roof overhaul, damp proof course, specialist timber treatments, 6 x ensuites, commenced early June with the first show-flat planned for August.
Purchase price: £375,000
Total build costs: £400,000
End values: £1.5m
CASE STUDY 2: CAMERON HOUSE ESTATE
Building: Derelict, former gatehouse in the grounds of Cameron House Estate & 5 star Hotel. Large glass extension approved, in addition to the refurbishment of the main house. Loch Side location with open views of Loch Lomond.
Planning: Scottish Heritage Building and C Listed.
Works: Extensive works
Purchase price: £155,000
Total build costs: £250,000
End Value: £600,000
CASE STUDY 3: BOTHWELL
Building: Large red sand stone house. The oldest property in the town of Bothwell and was used as a field hospital during the battle of Bothwell. In a very poor condition when purchased but fully restored retaining many of the original features.
Works: Converted in to one 4-bedroom house and two 1-bedroom luxury apartments. All done to a high spec. Landscaped gardens, specialist timber and roofing work and damp proof course.
Purchase price: Total site purchased for £440,000
Total build costs: Total build cost approx £200,000
End values: Both flats already under offer to sell at £175,000 and £190,000. House on the market at offers over £574,995
Phone: 077 487 63236