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Living in style

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  • 14/03/2002
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More and more individuals are looking to buy unusual or run-down properties, but with finance more difficult to obtain, what do clients need to know before they put in an offer?

An Englishman’s home is his castle ‘ or in some cases, his windmill, church, folly or lighthouse. Unusual properties are becoming the height of fashion and are regularly seen splashed across the pages of home improvement magazines and featured in television programmes.

However, in reality they can be costly to renovate and depending on location and construction, can also be difficult to finance.

Lenders working with unusual properties tend to be largely guided by a professional valuation when deciding whether or not to offer finance.

Andy Frankish, director at Mortgage Talk says: ‘We approach every purchase as normal, but a lot of the time it is in the hands of the valuers. It depends on whether the property is worth what is being paid for it and whether it is for residential use.’

As a result clients purchasing unusual properties must be made aware that the process will be more complicated than arranging a mortgage on a town house or three-bedroom semi.

For starters clients purchasing a run-down or derelict building would normally need a self-build or renovation mortgage.

John Hay, marketing and product operations manager at Buildstore says: ‘Intermediaries should find out whether the client needs money up front like a normal mortgage, or whether they need some money to buy the property and then more to renovate it. In this instance they would need to use a self-build mortgage. Look at their cash flow as materials and labour need to be paid for.’

Step by step

Self-build mortgages release funds in stages, as each section of the building work is completed. Some products release funds in advance of the building work, others only once work is completed. Lenders will often need to value the property at each stage before they release further funds.

In many cases borrowers need to sell their existing home to fund the building work, but this may not always be necessary, according to Hay.

‘With some self-build mortgages the client has to find the initial equity which quite often involves them selling their house. They would then move into rented accommodation or a caravan on site.

However, there are a number of self-build mortgages which lend higher LTVs, enabling the client to borrow more and so they do not have to release their equity at this stage,’ he says.

Some lenders may be more lenient if you have a long-standing relationship with them, according to George Penaluna, marketing manager at Ecology Building Society. However, he advises brokers not to become too complacent: ‘Do not assume the lender will take it on,’ he says. ‘Before the adviser receives any cash from the client, they should confirm with the lender in writing that they will consider a run down or derelict property.’

One factor, which can influence a valuer’s report or a lending decision, is the actual construction of the property. A former lighthouse or a church probably would have stood during the past century and therefore be fairly robust, while timber properties may be viewed in a different light as they could be fire risks.

Jumping hurdles

If your client is doing a lot of building work the lender may also require supervision by an architect to ensure it is being done properly.

‘Each lender has guidelines on diff-erent construction types. For example, we had a house built entirely from wood which was difficult to place due to the lender’s criteria,’ Frankish says.

The structure of the property can become more problematic if it is a listed building as this can place restrictions on what you can alter and the materials you can use to renovate it.

Michael Lambert, product development manager at Halifax, fellow of the Royal Institute of Chartered Surveyors (RICS), says: ‘There are issues with listed buildings, as the date a property is listed is how it should remain. So if it is listed in 1960 with wooden windows and you want to put plastic in, there would be a problem.’

The location of the property can also prove to be restrictive in terms of renovation. Buildings within national parks or conservation areas, for example, may require special planning permission in order to alter the property.

Lambert also says you need to consider insurance, maintenance and furnishings before investing in an unusual property.

‘There could be insurance implications, depending on what and where the property is and the older the property, the more your client would need to spend on maintenance. It could also be difficult to find furniture for unusual properties such as a windmill or a lighthouse because they are circular,’ he says.

The legalities of buying an unusual property are similar to that of an ordinary home. The usual solicitor checks would be maintained and building regulations would have to be considered.

However, the previous use of the building may have a consequential bearing on the renovation of the property. Penaluna says: ‘Usual checks would be carried out by a solicitor, but if it has been used as an industrial building it may need to be decontaminated. If you are buying a church from the Church of England it would probably have to be de-sanctified.’

If the property was previously used as a commercial premises this may also affect the type of mortgage available and the lending criteria.

Frankish says: ‘Often where properties have semi-commercial usage, for example if someone is buying an old post office and the post office is still below, it could cause problems. The lender thinks it is still a commercial property for commercial gain rather than a residential property. It then comes under commercial lending criteria. We need proof the client is going to use it for residential purposes. This will include showing plans, demonstrating how they intend to convert it.’

If a client intends to convert commercial premises into a residential property, Penaluna says clients must first check whether it needs planning permission. He says: ‘If planning permission is granted then normally it is not a problem.’

Moving on

Before releasing funds, the lender will consider the property’s resale value post-renovation. The ability to resell depends upon the location and condition of the building, akin to a standard property.

‘Reselling an unusual property can work for or against you. People do seem to like unusual properties, but it will probably be a smaller market. Not everyone wants an unusual property, but if they do, they could be prepared to pay more for it,’ Jones says.

Lambert agrees: ‘We look to arrange mortgages on properties, but we want those mortgages to be secure ‘ we do not want to lend on a property that would be difficult to re-sell if it was repossessed. Sometimes there is a limited demand for unusual properties and sometimes there is a good demand for them.’

If the property does not meet the lender’s criteria, for example a timber house, then this could ultimately affect the resale value of the property.

Frankish says: ‘Resale values can be affected, as the fewer lenders that lend, the more difficult resale will be. Somebody buying it will require a mortgage and they will be limited for choice.’

The location of the property can also have a bearing on its resale potential in terms of accessibility.

Lambert says: ‘A few years ago there were two forts a mile off the Humber estuary for sale. You could not drive to them and would need a boat. There may be limited demand for this as it is not in the mainstream market, which could lead to problems reselling. With properties such as windmills and churches there is not usually a large problem as they are in accessible positions so there is more demand for them.’

Buying and financing an unusual property depends on a number of consequential factors, not dissimilar to an ordinary residence, with the actual renovation bumping up costs and proving to be the most difficult part.

However, it appears that by providing sound financial advice, using the correct legal channels and finding a lender willing to generate the cash, it is not impossible to convert that derelict barn into a dream home.

Adele Burton is a staff writer

sales points

A lender’s decision to finance an unusual property largely remains in the hands of the valuer.

A self-build mortgage will usually be required if the property needs renovating.

Properties previously used for commercial means may be more problematic.

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