Help me calculate profit on selling our property

[Sandrine1982]

Hi. So we bought a flat in south London 5 years ago and we are now selling it. We planned to stay here much longer but for various reasons we need to move and upsize. The flat has got a shorter lease now which will affect the price (86 years).

We're considering selling it to the local authority because it would be much quicker and simpler (council is a cash buyer, no chain, no agent fees and no need to go through the hassle of extending the lease as they will factor that in their offer).

We are currently waiting for their official offer and I'm trying to work out what price we can accept so that we're not at a loss.

So here's a few numbers

• We bought the flat for £396,000
• We had a 100,000 deposit
• We paid £24000 in fees and stamp duty (higher rate)
• Outstanding mortgage will be £258,000 when we sell
• We made monthly payments of £1090 for 5 years in capital repayments, so £65,400 in total

The way I calculate it is as follows:

If we sell the flat for the same amount we bought it, this would mean we'd make a profit of £14,000 (i.e. 396,000 - 258,000 = 138,000;
138,000 - 124,000 = 14,000).

However the way I understand whether we're at a loss is to ask whether we would have been better off renting a similar property for 5 years. So I work it out by taking the amount we paid to the bank in 5 years (65,400) minus the profit (14000) and divide it by 5 years x 12 months.

65400 - 14000 = 51,400

51,400 : 5 : 12 = 856.67

The average monthly rent for a similar property in this area is £1400 and we "lost" only £857 pcm, so we've made a profit.

Is this the correct way of looking at it?

The council's offer will probably be lower than if we went through an agent, but I'd really prefer the council as we would be immediately proceedable with a simple chain.

So I'm just looking at what amount we can possibly accept and still be profitable.

Any views on my maths skills (or lack thereof) will be appreciated :)

Thanks

I think you're looking at it in a not very helpful way for you. You need to move and upsize. What you have spent thus far - mortgage payments, purchase price, stamp duty, fees - is all irrelevant to where you are now.

What will you likely get for it if you go through an estate agent?
How much will you have to spend to get it ready to sell?
How much will the fees be through an estate agent?
How much will it cost you to extend the lease?
How much is it worth to you (in monetary terms) not to have to deal with the hassle of the above?

If you want to try and calculate a figure vs renting you need to factor in that you were no longer earning a return on your deposit which would have been invested somewhere had you not bought. You'd also want to consider any additional costs of owning - maintenance etc.

I would find out how much an agent will price it at for a quick sale with a proceedable buyer and how much they will price it at for a Norma sale.
How much it will cost to extend the lease.
Also work out how much you need to buy another property. No good selling if you can’t buy what you need

The Council won't care less about how you've worked out your profit. They will simply look at market value and make you an offer based on that.

Your comparison should be what you'd get if you sold it on the open market. How you justify owning the flat compared to renting is largely irrelevant.

The starting point is what you're likely to get if you sold to a "normal" buyer. Work out what your numbers based on sale to Council, no commission, possibly rent whilst you find somewhere else to buy. Compare that to what you'd get from a normal buyer, pating mortgage rather than rent whilst you wait for sale to go through, commission etc.

You paid 420,000 including fees.

You have then spent however much on mortgage interest, and likely some money on improvements.

You will still incur costs selling in all probability.

In a simple profit calculation it comes down to wether you receive more for it then you have spent.

How efficient a way of providing a home it was is another question which has to include all sorts of factors like the opportunity cost in tying up the deposit and loss of geographical mobility.

It may well be in a stable market that you make a loss once all costs are incurred, however a loss of say £30k to provide five years accomodation is still fantastic value if the commitments didn’t stop you doing other things.

There are too many numbers here that aren’t relevant. Some are about cash flow rather than profit. But to be honest your explanation confuses me.
Renting for 60 months would have cost you £84k with no assets to show for it.
You have already paid £24k in transaction costs and can expect to pay maybe £2k more if you sell and move without an onward purchase. Therefore to break even you would need to have spent £58k on the interest portion of your mortgage.
£84k of rent less £26k of costs is £58k. Assuming there are no other sunk costs anything less than £58k on interest is profit from not renting.
There is a whole other conversation about cash flow and equity when making this move though.

Work out what you would get selling via an agent and net off their fee plus VAT, and cost of extending the lease.

Compare with offer from the council.

Then weigh that against likely purchase price of a bigger place plus costs (legal fees plus VAT / searches /survey / stamp Duty / any fees to lender / removal costs ).

Hi. Thank you all for your helpful replies.

Just to answer some of your questions.

• The property was valued at £400K by two different agents however they both said the interest might not be as high as we'd hope because of short lease. Buyers may try to negotiate price on that basis.

• Lease extension would probably be around £7-9K, estate agent fee around £5K.

• How much would it be worth to me if I didn't have to go through the hassle of extending the lease, doing viewings, perhaps losing the buyer at the last minute anyway, or losing out on my next dream property because our buyer is in a chain etc? I'd be prepared to forego £10-15K for a simple, hassle-free sale to the council compared to the open market. I understand the council is also more flexible, so the offer would be on the table and the sale could go through as soon as we find a new house.

We have a mortgage in principle for upsizing plus some savings, so that's not really an issue. I'm just trying to make sense of whether selling to the council at a lower price is a stupid idea.

I think I'd be very happy if they offered the same price we bought it for, but I don't think they will....

It doesn't matter what you've paid as your home is only worth what someone will pay you or the ceiling price in your area. I would have it valued by an ea or look up similar properties to see what they've sold for

It’s a difficult one. Try not to look too much at the profit side of it if you really need to upsize. When will you hear back from the council?

They've offered £390K !

I think that's about right - I don't think we'd achieve much more on the open market considering the short lease and commission for the estate agent.

Do you think that's a good offer?

If EAs valued at £400k then it certainly sounds tempting.

I don't understand why you need to know what "profit" you have made anyway because there is no CGT to pay if it was your home.

Oh congratulations that sounds like a great offer. Now you get the fun of house hunting!