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Post by d_saver on Jan 19, 2017 12:09:10 GMT
Hi,
I wondered if anyone has/uses a base percentage or other calculation to estimate recovery costs for properties. I understand each case is different, but just looking for a ballpark. In the case of business ventures I've seen go under, recovery costs have sometimes eaten all the available cash by the time the administrators etc take their fee. Not expecting quite the same with property, but expect the costs may sometimes be significant?
For example, property with development permission bought for 700k. I'm thinking more realistic 500k+ value. Assuming it goes the default route, what would you suggest the approximate recovery costs would be? I'm just trying to figure out how this might affect LTV.
Thanks.
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Post by GSV3MIaC on Jan 19, 2017 13:16:44 GMT
/mod hat off
I'm afraid that's a 'how long is a piece of string' answer, with too many variables. From the top ..
a) How good was the original valuation ('bought for £700k' is not evidence of worth .. my uncle could have sold it to me, and it could be worth £6, or £6M).
b) What's the climate like when it sells (probably at auction). If we assume it was really worth £500k, then it could easily sell for <=£300k at auction, if there are few buyers and if the few there are know you are shifting it in a hurry.
If it's a residential house there could be quite a few interested parties; If it's a steel rolling mill, rather fewer.
c) There is a fixed cost of administration/receivership, and a variable cost (related to the size/complexity of the asset(s)) too. How big those are if affected (a lot) by how cooperative/sensible the debtor is (or more usually 'isn't'), and how
much effort it takes to dispose of it (advertising, auctioneer fees, etc). £100k of costs would probably be in at least the right order of magnitude for your £500k asset, but ....
d) Adjust for 'surprises'. e.g. discovering a big vein of gold under the land (fat chance) down to discovering major pollution or subsidence or planning issues ('wot, me, guv?').
So you've got a random(ish) distribution with a long tail. For most sane cases, assuming a reasonable valuation to start with, the assumption is generally you can extract 70% of the supposed value (which is why this is a "magic number" for several purposes, which IIRC prevents some types on investment being made if the LTV if higher than that .. and why it turns out to be the stated LTV rather too often).
When recovery is a lot less than 70%, the issue seems to be much more likely to be 'the original valuation was highly fictional' &/or the 'debtor was a royal PITA', rather than the recovery costs were always doomed to be higher than expected.
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Post by d_saver on Jan 19, 2017 13:24:09 GMT
Thanks - I was really just interested in expected costs such as auction, legal, etc. Not valuation issues - I already form my own opinion of this. I just have no idea of the costs involved in repossessing and disposing of a property.
I'm saying, if I think (and assume) the property goes to auction at 500k, what slice would legal costs, auction fees, etc take out of that. I realise that the costs will vary widely from case to case, but I'm really just after a very, very rough figure to apply to my expected recovery value. So if it would be reasonable to expect to take 100k out of this for legal and auction fees, that's what I wanted to know.
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nick
Member of DD Central
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Post by nick on Jan 20, 2017 15:20:48 GMT
My rule of thumb when it comes to property is to assume 70% recovery on valuation - roughly a 25% haircut for a distressed sale and 5% for administrator/receiver fees. Obviously every case is different with development loans demanding a higher haircut and tenanted BTL property a lot lower.
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Post by reeknralf on Jan 20, 2017 16:06:24 GMT
5% sounds right for bigger properties, but not enough on cheap properties. A recent default on AC sold for £70k (50% of RICS value), and £35k of this went in fees. Recovery of 33p in the £ on a 70% LTV loan.
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