The real cost of a cheap property
The purchase price is the smallest number in the calculation and the one everyone focuses on.
A property bought at a discount is only a bargain if the total cost of acquiring, holding, improving and exiting it is below what it is worth. Each of those four stages has costs, and the ones that are forgotten are the ones that erase the margin.
The discipline is to build the full calculation before making an offer, and to include costs whether or not they apply immediately.
Acquisition costs
These are paid at completion and cannot be borrowed against the property.
- Stamp duty land tax, including the 5% surcharge on an additional property
- Legal fees, searches and any disbursements
- Survey and any specialist reports
- Lender valuation and arrangement fees, if mortgaged
- Auction buyer's premium or administration fee, if bought at auction
Holding costs
These accrue for as long as you own the property, and they are the costs that most often turn a good deal bad when a project runs long.
- Mortgage interest, or the opportunity cost of the capital
- Council tax, insurance and utilities during any void or refurbishment
- Service charge and ground rent on leasehold property
- Security, if the property is empty
- The cost of any delay, measured in months of the above
Improvement and exit costs
Refurbishment costs more than the quote, and selling costs more than the commission. Both should be estimated generously rather than tightly.
- Works, plus professional fees, plus a contingency of at least 15%
- Estate agency fees on resale, and the cost of preparing the property to sell
- Capital gains tax, if the property is not your main residence
- The void between the end of a tenancy and completion, on a tenanted sale
- Any early repayment charge on the finance used to buy it
Common questions
- How do I know if a cheap property is really a bargain?
- Add every cost — stamp duty, legal, survey, finance, works, holding costs and exit costs — and compare the total against an independently established value. If the total is below the value by a margin that compensates you for the risk and the time, it is a bargain. If the margin is thin, a single unexpected cost will erase it.
- What is the biggest hidden cost of buying cheap property?
- Holding costs during a project that runs long, and refurbishment overruns. Both compound, because finance costs accrue and the market can move. A 15% to 25% contingency on the works, and an assumption that the project will take longer than planned, are the two allowances that prevent a bargain becoming a loss.