Going concern or cottage?

[cromercrabholiday]

Our five year plan, which is working nicely, had the Norfolk cottage as a pied-a-terre so that we could sell up in Surrey and look around for the retirement cottage. The holiday business was a method of getting some income from it until we needed it ourselves.

In the event, our Surrey sale last year and our Suffolk project means that we will finish up next year without the need for a temporary base in East Anglia, so I am starting to think about selling it once this season is finished.

Have any of you looked at whether you could do better selling as a holiday cottage business rather than just selling it as a cottage? When you were buying your cottages/gites, did you buy a business or simply a property that you then launched as a business? If you bought a business, how did this compare with the market value of the property/ies?

It's early days and I've got to discuss the concept of a sale with Jane, but all information would be gratefully received.

John

[weardalebeka]

I have looked at whether it would be worthwhile buying an existing holiday cottage 'business' but tbh in the are we are thinking of the extra cost just doesn't seem worthwhile. The odd one we saw wasn't our style anyway so we'd be better off starting up a new place from scratch rather than trying to deal with changing the style of an existing business.

[J&J]

The first thing to make clear is that you are in the UK and the situation there is different from other countries so I hope anyone else reading this will take that into account. My advise is based upon my own UK experience . . .

The problem you have, if you sell it as a going concern is that a buyer will not be able to get a standard mortgage. Neither will they be likely to get a buy to let mortgage as this is based upon the long term letting potential to cover the interest payments. This means that any buyer needing finance will have to pay commercial rates. A commercial mortgage will commonly be at around 1.5% above LIBOR rate (the inter-bank lending rate), or perhaps more, which, as we've all heard a lot about recently is higher than base rate. The LIBOR rate is currently at 5.61% so anyone looking for a business mortgage will have to be looking at a variable rate of over 7% which compares poorly against current residential deals at around 5%.

To work out what it is worth as a business, first you will need a realistic valuation.Then you need to work out what your annual profit is after all expenses have been paid. Generally speaking you can add about 1.5 times or 2 times the profits on to the value of the property.

If a buyer is planning on obtaining a mortgage, a bank will only usually lend up to 70% of the property value - and that value will be based upon their own valuation of what the property would sell very quickly for in case of repossession.

So, I suppose what I'm really saying is that you may find it much easier to just sell the house as a residential property. If you make a big profit on your holiday rentals, and you're prepared to wait for the right buyer to come along then it could be worthwhile selling as a business but you are quite likely to find yourself not having made any progress after a year or so.

Good luck.

Titch.

[firstgreen]

Titch,

Thanks for sharing your experiences.

I have always wondered if having a proven track record of rentals increases value. I imagine it all depends on the purchaser’s objectives, private use or commercial venture.

firstgreen.

[Giddy Goat]

It sounds, from what has been said, that a proven track record of holiday lets might well help to sell a property more quickly in a popular holiday destination, but won't add value. However it will sell very quickly anyway I suspect John!

[Jimbo]

When you're selling a warehouse on an industrial estate, a buyer will only have commercial use in mind. When you're selling a domestic house that has been converted into a rental property, you have something flexible onto which a buyer's can graft their present and future dreams and necessities. It can be made wholly commercial, partly rental and partly residential or returned to its former glory as a home (but with the thought that it might be utilised for rental again when the kids have gone or you are made redundant). And, with an established letting record, a buyer can see that it will work commercially if they choose to exploit that possibility now, or in the future.

So yes, I'd add a bit for the commercial aspect but promote the property to appeal to the widest audience. A price is only a guide these days and you can decide whether or not to accept whatever offers come along. And, as Titch says wisely, give yourself time to sell.

Jim

[A-two]

Excellent advice from Titch. I think that from a pure marketing perspective, unless you are making an absolute killing on the rentals, the return on the investment derived from rents is not it's main selling feature, so you would not want to present it to the market that way, which would also be limiting its appeal.

Sometimes people can perceive a rental property as a negative, not well looked after. It also all depends on the characteristics of a buyer. If the inquiry is from an investor, then the business side should be stressed, but if it's from a newly married local couple looking for their first home, then they couldn't care less about your rentals.

Also, the value in the business includes your database of guests, management systems, advertising leads, furniture, linens and general inventory items you would need to leave behind for anyone wanting to take over the business as a smooth transition. These items and others you do not have to give them free of charge included in the price of the house and would be a negotiable extra, or take those items with you.

As a general rule, I would concentrate on getting the house under contract first, then offer the extras. You could be muddying the waters by making it all inclusive as it is not a commercial property, it's a residential home and you are likely to put off many people if you try and market it as a commercial property, when really it isn't one. There's kind of no gray area, at least here anyway. You're either commercial or you're not. You're not.

I find the idea of marketing your home as a wonderful Pied-a-Terre rather appealing personally, and if that's its highest and best use, then that's how it should be marketed. The fact that the new owner could rent it out occasionally as well to help with the expenses is a bonus. So that's how I would market the rental side - mention it as a bonus to the seller, not it's heart and soul. It will then help to sell for a good price, without haggling over what the rental side is actually worth. I'd be tempted to price on the ambitious side, without actually stating why, of course depending on your local market conditions.

I agree with GG, that it's going to attract interest quickly because not only does it look like a really lovely spot, but nearly all the work to get it ready for sale has been done already and to a very high standard, with appealing photographs, a clean and tidy house without cupboards spilling over with household junk and plenty of details about location and area attractions for anyone looking from out of town.

Good Luck!

My 2 cents.

[cromercrabholiday]

Thanks everybody - useful advice. Just need to persuade Jane that her baby can be sold. Worse, our daughter said yesterday that she wanted to run the house when we got too decrepit (I think that's next year by her reckoning ).

[Giddy Goat]

Sounds familiar!

[Jimbo]

A2 wrote:

You could be muddying the waters by making it all inclusive as it is not a commercial property, it's a residential home and you are likely to put off many people if you try and market it as a commercial property, when really it isn't one. There's kind of no gray area, at least here anyway. You're either commercial or you're not. You're not.

We sold a 6-bed Georgian farmhouse in the UK before we bought our gite complex in the Dordogne. It had been our family house but, after various family members (against our advice) decided to marry or die, it became too big for us and the dogs. Whilst we were figuring out what to do, we set up a B+B business and this thrived because the house was beautiful and in an excellent location. When we came to sell, our property agent was opposed to any mention of the B+B business for similar reasons to those A2 has stated. However, it was a vibrant business (with four diamonds from the Tourist Board), so we insisted that some mention should be made in the house notes. We compromised with a tiny mention of the B+B but with much pouting from the agent.

In the event, the house sold to buyers who set up an entirely different enterprise, after buying surrounding land from the local farmer. They were actually looking for a smaller house and a separate plot of land but, because our property had been granted permission for commercial use, they were encouraged to think that appropriate permissions might be granted for their enterprise and a residential house rolled into one. They told us that, without the details about the B+B use, they wouldn’t have considered our property.

Of course, maybe 99 other buyers saw the B+B details and rejected the house. We’ll never know. My only point is that sometimes it pays not to be too rigid when you’re selling property. Peoples’ reasons for buying are often strange and unpredictable. And your instincts aren't always wrong.

Jim

[A-two]

A2 wrote:

You could be muddying the waters by making it all inclusive as it is not a commercial property, it's a residential home and you are likely to put off many people if you try and market it as a commercial property, when really it isn't one. There's kind of no gray area, at least here anyway. You're either commercial or you're not. You're not.

Jim

Comparing your B&B to John's home is apples and oranges. One is zoned commercial, (as you point out) whereas the other is zoned residential (regardless of how many rentals he does). Which is the point I'm making above isn't it?

So I'm not quite sure why you have quoted me as a counterpoint to your own post, when essentially you are agreeing with everything I have said, including this quote, if you go back and read it in context?

Anyway, if John was considering selling a B&B in my area, I would have advised he market it full on as a commercial enterprise, also suggesting as a bonus that it could be converted back to a single family home, so as not to exclude other home buyers. In other words, the reverse emphasis to what I said above. I have already said that of course you don't want to exclude any possible buyers, but you do have to decide what you're selling and pitch it accordingly.

"Going with your gut" is one way of doing it, but I would rather rely on hard facts. Marketing a property is an art, but a successful strategy is not completely devoid of hard facts. It relies on hard and soft data obtained from a number of sources, some of which has to be purchased, much of it available free if you go to the local pub often enough.

It's essential to have the data about recent buyer behavior in the area, to know who has been buying what over, say, the last six to twelve months, focusing on comparable properties to the one that is about to be sold. Notice the "sold" signs, find out what sold quickly, what has been on the market forever, what has been withdrawn from the market because it didn't sell. Monitor the market, know every house for sale in the Town, talk to your new neighbors, uncover the trends. They do exist even if not immediately apparent.

Selling houses is a numbers game, and the more people you can walk through the door to look at it, the better. That means presenting the house in a way that appeals to most buyers looking in the price range. If a hoard of wannabe vacation rental home owners have recently "discovered" John's Town, and his is the only one being pitched at them, that's terrific, but it's not something I would want to gamble on a vague instinct.

There's always an exception, and someone will tell you they found a needle in a haystack with no problem, but most people are going to find that if they present their home in a way that only appeals to a few select people with a specialized interest, they are stuck on the market for a very long time, which is what Titch was saying in so many words.

However, there is definitely an "added value" factor in letting all potential buyers know that the home has a track record of paying for itself, which even if they don't intend to take advantage of it, speaks to its appeal as a good investment.

(You can probably tell by now that I do this for a living.)

[Windy]

What I wonder about is when I come to sell whether I should risk stopping taking bookings so that the lodge is the new owners' from day 1, or whether to carry on taking them and sell with bookings "attached".

Obviosly if it took a while to sell there is the potential lose a shedl oad of money by having it sitting vacant.

[Giddy Goat]

Glad you asked that question John as there may come a time when we sell our French property too ...

[cromercrabholiday]

My view is to start selling in the early Winter, when we have few bookings and the rates are low in any case (the North Norfolk coast in Winter can be fantastic, but is an acquired taste!). We will not take any bookings for the following year and will play it by ear.

John

[cromercrabholiday]

I've eased Jane into the idea of selling the cottage. She is up there this weekend and will have an estate agent round on Monday to see what we are looking at.

We've got bookings for this summer, so the earliest will be in the Autumn.

John