Mary-Anne Bowring, Managing Director of Ringley, one of London's leading Managing Agents, and a Governor for the Institute of Residential Property Management (IRPM) advises how to make the most of the economic downturn by adding value to a leasehold property.
With property prices dropping and the credit crunch reducing the availability of mortgages, for many it may seem like a depressing time ahead. But it's not all doom and gloom: now is a brilliant time for leaseholders to start thinking about investing in their property as significant savings can be made.
Extend your lease
Leases are getting shorter; in some areas of London leases of 40-60 years are now common. Therefore, it makes good financial sense to take advantage of your statutory right by extending your lease by an additional 90 years and get the ground rent reduced to peppercorn. The qualification criteria for extending your lease has been relaxed, for example, you now only need to own the lease for 2 years to qualify.
Extending your lease in a falling market is much cheaper because the property value is taken into account during a lease extension valuation. By making this investment your flat will become more marketable and will increase in value.
For example the cost of a lease extension on £198,000 flat with a short lease of 60 years, would have cost approximately £26,900. Whereas the same flat after a 10% market fall to £180,000, the lease extension would now cost around £24,600 which is a massive saving of £2,300!
The difference in cost is less on a flat where the lease has over 80 years unexpired as there is no marriage value to pay. But there is still a saving. The cost before a 10% market fall based on a the flat being worth £198,000 would have been £6,400 and after a 10% market fall and the flat being worth £180,000 would be £6,000, a £400 saving!
My advice to anyone with a 99 year lease is to watch out as the clock is ticking especially if the property was built in the late 80s or early 90s. Once the lease drops to 79 years the premium will become higher.
Buy the Freehold
Buying the Freehold can benefit the leaseholder in many ways. It not only gives the block more control over the running of the property, it also guarantees a 999 year lease (subject to a majority vote of participants to do so). In addition, the block can decide whether to manage the property themselves or outsource it to a managing agent of their choice.
Owning the freehold presents money saving opportunities as leaseholders can appoint best value contractors which in turn can reduce the service charge rates. It can also generate income as the freeholders will receive ground rent from non-participating leaseholders and will also have the opportunity to sell them lease extensions. As in investment, buying the freehold will increase the properties value and increase marketing potential.
Now is a good time to start thinking about buying the freehold as like lease extensions, the value of the property affects how much this process costs. Provided your block has enough qualifying leaseholders, this is a good time to invest.
Claim your right to self manage
If buying the freehold is out of the question there is another money saving option, that has no significant cash outlay. Provided 50% of the block agrees and that two thirds are held on long leases you can form a Right to Manage Company.
This will give you more control over the running of the block and the opportunity to appoint contractors, such as gardeners and cleaners, of your choice. Having this level of control means that best value contractors can be sourced which in turn will reduce the service charge to make it more affordable.
With this option, the leaseholders can decide to either outsource the management of the block or save money by managing it themselves which again will reduce the service charge rates on a property.
Buying and selling
Those who are lucky enough to have a sustainable deposit to buy a property can afford to be more selective as there are more properties on the market, unlike the overheated market of summer 2007. So any prudent buyer should check the property has a long lease or negotiate as part of the purchase that the seller serves a lease extension claim notice then assigns their rights to you. This means you don't have to wait 2 years to qualify by which time the premium would have increased.
If this is the route you are going down then make sure you get your solicitor to draw up a document which states how much the lease extension will cost based on the valuers advice. As six months down the line this amount could increase if property prices suddenly start rising. If the eventual cost of the lease extension exceeds what was expected, the seller will have to fund the agreed portion of this.
Lastly, look out for a healthy reserve fund and reasonable service charge: properties that have a share of the freehold are good investments.
If you are planning to sell your property now is the time to invest in your lease for the reasons previously outlined. This will increase the value of your property and you will stand a better chance of selling it.
Be aware, if you are planning to move into a new build, negotiate with the developer to make sure that the first years service charge is included within the cost of the flat. This is because in the current climate it's likely that the other flats in the block might not sell immediately which means you could find yourself having to pay higher service charges.
For tactical advice on lease extensions, freehold purchase, right to manage and block management beyond including step by step guides visit www.leaseholdguidance.co.uk.
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