02 Oct How to buy a cheap house
House prices have been steadily rising for the last few years, and even with the recent slowdown because of factors like Brexit, buying a house is still out of reach for many in the UK, especially in the capital. Buying a cheap house and London are rarely found in the same sentence!
There are a few ways of buying a cheap(er) house though, even in the Big Smoke.
Buy a derelict property and do it up
The concept of flipping houses has been around for a long time. But even if you plan on living in the home, the process is pretty much the same: 1. Buy a wreck for a discount. 2. Fix it up. 3. Move into your cheap new home!
The obvious advantage of buying a doer upper is that it’s possible to find a flat or house for a much cheaper price than a ready to live in modernised and renovated property would be. If you choose well, (and are lucky) you might be able to fix up the place with minimal work and money to put in.
If you do a lot of the work yourself, you can save even more money on house renovation costs, and many people have added tens of thousands of pounds to the value of their property this way.
On top of the reduction in the price, you will also pay less stamp duty which could end up being a saving of thousands of pounds.
And finally, when it comes to selling, you may have added value and will benefit from tax-free capital gain – i.e. profit!
Another advantage of doing up a property is that you get to choose how you want to live – do you want an open plan living room, do you want to squeeze an extra bedroom in, or do you want to kit your home out with the latest wired-in sound system? When you gut a property and then start fitting it out, you choose what goes in it. If you’re buying an existing home, you have to put up with the choices of the previous owner – whether that’s a mauve coloured bath or butterflies on the tiles.
Of course, there are disadvantages to buying a cheap run down house. One disadvantage is the uncertainty of what you might find once you start ripping out walls and floors. If there is any real structural damage to the property, it could cost you a lot more to fix than you had originally budgeted for.
If there’s a lot of work to be done to the property, there is also the issue of time that you will have to spend. With a simple fit-out, all the work should be done in a few months, and the property will be ready to move in to, but if you find some real issues, and you’re tight on money, renovations could extend from months to years in some cases.
Lastly, if you have bought a completely unrenovated property, you might not be able to live at the property until the major work is finished, so you will have to consider where you might live while work is being done, and whether or not that living situation can be extended if the build starts to become complicated. You might find yourself paying for rent and a mortgage at the same time, so that’s definitely something to keep in mind.
Where do you find a wreck to do up?
Ok, so you’ve set your heart on buying a property and adding value to it by doing it up. The best place to start is at an auction. These happen all over the country and take place regularly throughout the year. A good place to start is www.eigroup.co.uk which lists all the auction properties in the country. We’ve all probably seen an episode or two of Homes Under the Hammer. The storyline is almost always the same.
The bidders are hoping to find a diamond in the rough, a cheap house to buy that has good bones that just needs a bit of polishing up, that can be bought for a good price, lower than on the open market. Often, the buyer will be planning to do a lot of the work themselves to fix the place up, and then possibly rent it out or sell it for a profit.
Predictably, buyers will run into a lot of the same problems as they would if buying a wreck on the open market, with costs sometimes running high as problems are uncovered with the property, or the build taking much longer than previously anticipated.
With an auction property, however, you also have to look out for additional pitfalls. Because you don’t generally have much time between when properties are put up for auction and when bidding starts (around 2-3 weeks is common), you need to make sure that you look at the auction pack very carefully. If something looks like too good of a deal, there’s a chance that it is. Our suggestion is to make sure you get a lawyer to look at the legal pack – you don’t want to get stuck with a property that can’t be mortgaged.
When it comes to the auction date itself if you are the winning bidder, you will exchange on the day and put down your 10% deposit there and then. If you haven’t done your due diligence on the property, and you decide to pull out of the sale after you’ve gotten the winning bid, you will lose your 10% deposit, which can be quite a sizeable chunk of money. For the same reason, you also need to make sure that all your financing is in place, because if you are the winning bid, you will need to come up with the rest of the money within 4-6 weeks.
Also be careful that you’re not bidding against a wall – which is when the auctioneer drives up the price with imaginary bids from outside the room, so that in reality you are really bidding against yourself and paying more for the property than you would otherwise have.
It’s also easy to get carried away in the heat of the moment – go in to the auction having done your numbers with a final bid price in mind (write it down to remind you!), and then make sure you don’t go higher than you wanted to!
For all these reasons, if you’re not a seasoned auction goer, there may be too many risks to make this a good route to take when buying a cheap home. Our top tip is to do your homework thoroughly and go to a couple of auctions first before actually bidding in one just to see how they work and what happens.
You’ll also get a sense of how guide prices can sometimes be set very low to get lots of people excited who then bid more than they should do!
Buy a repossessed property
Repossessed properties are generally priced lower than other homes on the market, because the property has been repossessed by the lender from the previous owner who has defaulted on their loan or mortgage, and they will usually want to sell it off quickly to recoup the money lost.
These types of properties can present the same types of issues as the ones above, and are often sold at auction. You can also find them listed by some specialist platforms such as Repo List and Property to Renovate. It might also be worth contacting local agents, who may have repossessed properties on their books that they have not advertised.
How to finance a property you want to renovate
The other thing to bear in mind is how you actually buy a renovation property. If a house is completely dilapidated, then you may not be able to get a mortgage. If that’s the case, you will have to consider getting bridging finance or putting in cash.
Buying at auction can make this a harder route for you due to the timetables involved. Bridging finance is quick, but very expensive. They will also generally lend you money on a lower loan to value ratio than a typical mortgage. This means you will need access to more cash.
For all the reasons above, you will probably be thinking that buying at auction sounds like a lot of risk and hassle. You’re right. But it’s that risk and hassle than creates the discount to the ‘open market value’. The key piece of advice is:
Caveat Emptor (Buyer beware).
Buy a smaller home
Another way to get a cheap property, is to simply buy a smaller home than your ideal home that you’ve always dreamed of. It sounds pretty obvious, but generally, although not always, smaller homes cost less money than larger homes.
In your area, there will be an approximate rate per square foot. This means that for every square foot of property you will pay £X. In London, that rate varies from as low as £300 per square foot (psf) to £3000 psf. This is the difference between living in Mayfair or Knightsbridge and Leyton or Plumstead.
That means if you buy 1000 square foot (which equates to a small 3 bed house or a generous 3 bed flat) in an area of £300 psf then you pay £300,000. If the area is £3,000 psf then you will be looking at an eye-watering £3m for the same sized home!
However, if you want to get on the housing ladder, while still staying within your budget, and you have to live in a particular area – then find somewhere smaller.
You have a couple of choices. You could buy a new build microflat. These are new build flats designed by companies like Pocket Living. The best examples have been so well designed that they use every square inch of space and can be just as functional as a larger home that is wasteful of space. Many of these types of new developments also incorporate communal indoor as well as outdoor space, increasing the sense of community.
That’s a good general observation. With clever design and use of space, you can get a great home that’s functional, without having to feel like you’re trying to squeeze into a shoebox.
We haven’t yet seen it in the UK on a large scale, but in the US there is a huge movement for what they call ‘tiny houses’.
Of course, you could also buy a small property with potential to expand. So, you could do the obvious things like a loft extension, a side extension. Or you could do the less common (but also effective) ways to add space.
You could build an office in the garden. You could expand into the basement. Or, if you are lucky enough, you can build a new home in the garden.
Buy an unfashionable property
Sometimes properties go out of fashion. Most of us love the Victorian or Georgian period properties. They are considered to be good stock and will always sell as lots of people love them.
However, if you want a cheaper property, don’t dismiss other periods – eg more modern houses from the 30’s, 40’s, 50’s, 60’s or 70’s. Some of these properties are not considered to be particularly pretty but can be well built. Ex-council houses tend to sell at a discount too because they can come with a bit of a stigma.
However, be careful that you can get a mortgage, as some of these homes were built with different building construction types and lenders may be a bit harder to find.
Do bear in mind, however, that if you bought an unfashionable home cheaply, it could mean that when you come to sell it, you may have to sell it cheaply too. It may have gone up in value, but maybe less than surrounding properties.
That’s not generally a problem if you are intending to stay there for a long time, but if you are using it as a stepping stone to get on the housing ladder, then make sure you think carefully about what you will need to step up to the next rung.
The ways to get around this are either to buy in an area that is going up in value (generally through gentrification) or buy adding value.
Build your own home or buy a shell
At Rare Space, we specialise in selling custom built homes. These are homes where you get both choice and value. Some custom build homes are sold as plots where you can build your dream home (within some constraints). Some are sold as shells, where the developer has built the outside, and you get to create the inside, which is basically self-build made easy.
Buying a newly built shell is a great way to save money by saving on stamp duty and by giving you a chance to do a lot of the work yourself, but the real advantage of a new shell is that you bypass a lot of the issues of buying a wreck, or a house at auction.
Construction at Zog House
New build shells have particular advantages because they are built to be airtight and watertight, and come with a 10 year guarantee so you know you won’t have any structural issues like damp, mould, or rot to deal with. You will simply have a brand new blank canvas which is all ready for you to design your dream home around, reducing a lot of risk and uncertainty.
Because a shell is already essentially a house stripped back to the core, you’re not constrained to the layout and design of the previous home (which could cost a considerable amount to change). You have the freedom to lay out your home to suit your own unique needs, and choose the spec and fittings that you like for your home.
Buying a shell can also save you money on taxes. Since stamp duty is calculated on the price paid for the home, buying a shell (which costs less than a full fitted out home) means that you could have stamp duty savings of tens of thousands of pounds.
If you buy a new build shell, you would also be able to reclaim VAT on all building work and fittings bought for the home, as it is still categorised as a new build (which is 0% VAT). That means on a typical £5,000 Ikea kitchen, you’ll get it for £4,000, and if you pick one up in the sale, you still get the VAT back! If you decide to do some or all the work yourself, or can source cheaper materials, then there are even more savings to be had.
If you are interested in buying a shell, then check out our current new build shell properties here.
If you are interested in buying a wreck or doing a renovation on an existing property, please register your interest here and we’ll use our network to try and find you one in your budget.
Good luck in your search!
Please add your comments below or questions you have and we’ll try and answer them.