Wednesday 2 October 2019

Short leases - danger or opportunity?

I have invested in leasehold properties primarily - an area I would like to think I know a fair bit about, yet we all find ourselves the student still in most parts of our lives. My learning experience was an expensive one when I tried to extend the lease on a property I bought at auction in 2017; the lease took 11 months to extend at a cost nearly double what I thought it was going to be! Sadly this is down to me simply taking a risk too great, and I ended up making very little money on this particular project. I should have risked less, but "you can't win them all" as they say so I used this as a learning experience and moved on.

The other part of leaseholder woes is the excessive charges. Ridiculous charges for things like consents built in to the leases, blatant back hand agreements that Freeholder X uses managing agent Y to manage (and funnily enough the directors of both companies are one and the same), the list goes on...! A good friend of mine Stefania recently had a great victory - she took her freeholder to court and won! Her victory was actually recently published in The Times (click here for the article). She was even able to make a very astute purchase because the seller was not aware that such charges were unfair. She was able to make the most of her property knowledge in order to secure a better purchase price; by getting the charges down to a reasonable level she was instantly able to add value - mind, she did do a big refurbishment job also, but let's focus on the leasehold for the moment.

Here are some factors that will influence the (perceived) value of a leasehold property:

Length of lease
It goes without saying that the shorter this is, the less the property is worth. For all intents and purposes a leasehold is nothing but a long tenancy agreement, really! Sub 80 years and you'll struggle getting a mortgage. You can serve a Section 42 notice on the landlord which forces them to extend it, but only if you've owned it for over 2 years. They will demand you pay for legals and valuation fees. To summarise you get a 90 year extension, buying off the remaining ground rent left on the term and the rent goes down to a peppercorn. However if the length is sub 80 years you also pay half of the marriage value, the difference between its value today and what it would be worth with a long lease. Don't let it go under 80!

Ground rent
It's not unusual for ground rents to be anything from a peppercorn to £250 per annum. However it's the doubling or increasing of these which are tricky. Lenders are NOT lending on anything where the ground rent doubles every 10 years to some absurd amount. A ground rent of £250 becomes £500 in 10 years, £1000 in 20, £2000 in 30 years, £4000 in 40 years and by the time the house is 50 years old it costs £5000 a year in ground rent! When these properties are sold they are done on 999 year leases so even by purchasing a 90 year extension and getting the ground rent to a peppercorn you would still have to "buy off" 997 years of ground rent at £outrageous! Taylor Wimpey has even put aside a special fund of £130 million to buy back freeholds of those they sold on to property investors preying on these types of ground rent investments, which are unfair to leaseholders. I'm actually genuinely amazed this doesn't fall under the protection of the Unfair Terms in Consumer Contract Regulations!

Service charges
As mentioned above, if a backhand agreement exists, or the right for the landlord to charge whatever he likes for his time managing the building then you are indeed at the hands of their pen and mood when they are writing that invoice. Time to think about buying the freehold and self-managing in order to bring the costs down and add value to the property this way.

So in summary: leasehold properties are great investments, in fact all of my properties are just that. Just be aware that there is maintenance with bigger blocks and bigger blocks cost more to maintain. Yes, the costs are divided among the leaseholders, but.... things like roofs and scaffolding, windows and the like are not cheap, even divvied up between everyone! There are pros and cons to both big and small blocks, freehold and leasehold. Ultimately opportunity exists everywhere, you just need to be aware of the pitfalls.

If you are looking to learn more about property or you'd like to reach out, do get in touch via email or visit my website for more details on property coaching to help you get started or if you'd like to hammer down a particular niche with some help and guidance from someone with experience.


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