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Auction PropertyLearnings

Buying A Leasehold Flat? Make Sure There Is A Good Management Company or Freeholder

Today I went to see a flat on an estate close to Crystal Palace, London. I knew the estate having been there earlier in the year to view an auction property.  The estate was in reasonable condition – although on my second and more recent visit I noticed that the estate had got scruffier over the past 6 months. It didn’t help that when I parked my car, I noticed the car next to me had, had the window smashed in….This rang alarm bells.

When you are buying a flat you are only buying part of the building.  You are buying a lease which gives you permission to use your particular flat for a certain number of years. The rest of the building (i.e. the hallways, roof and any communal gardens etc) and the land the flat is built on will be owned by the Freeholder.  The Freeholder is not necessarily someone who lives in one of the flats – the Freeholder may be a person/company who lives many miles away and who has never even seen the flat!

Buying the Freehold to a building is a very specialised type of investment and is known as “Ground Rent Investment”. This type of property investment is seen as a long term income yielding investment. This is because most flats have to pay an annual “ground rent” – that is, each flat owner (leaseholder) has to pay an annual rent to the Freeholder for the land (or ground) which the flat is built on. This can range from as low as a few pence per year to  many thousands per year.  As a leaseholder of a flat you will normally also have to pay a service charge – this is a charge for the maintenance, repair and upkeep of the building. This is usually undertaken by a management agent who will oversee that the gardens are kept tidy, hallways are kept clean and so on.

When you buy a flat – you only have control over your four walls – outside your door – in the hallway, the paths, the gardens etc this is usually managed and maintained by someone else. That means what the rest of the building and common areas are like is really important. You will only have so much contriol over these – but will have to pay towards them. That means that you have to be sure that the service charge you are paying every month is actually going into the maintenance and repair of the building.

You will see many flats go to auction which have absent freeholders or no management companies – what this means is that nobody is looking after the maintenance of the building or ensuring the buildings insurance is in place. This is a key issue which affects the price of a property and you will struggle to get a mortgage on a property which has an absent freeholder or no management company in place.

So back to my 2 bed flat in Crystal Palace, London….

Well the communal hallways left a lot to be desired – some carpet would be nice rather than a bare floor:

The grass had been cut – but I hope somebody had organised to move that sofa:

But the deciding factor for me – was the still smouldering burnt out garage – this did not feel the sort of estate I wanted to be a long term investor in.

7 comments
    1. Sam

      I need it Nick – when I was taking this picture I was approached by a guy who was asking what i was doing! I said i was there on a viewing and was just taking pictures of the block and the area!!! I felt very uncomfortable indeed!!

  1. Shaun

    Sam

    You make a very valid point and I agree wholeheartedly with your article. In the property you highlighted, it is quite obvious that there there is no competent or proactive management company or freeholder in place and of course, one to steer away from. However, whilst it is easier to say to steer clear of the “bad” agents/freeholders the inverse is true and it is really difficult to actually know whether there is a “good” management company or freeholder in place for the property you are buying. All of my portfolio is in central London and all of them have managing agents who are large (supposedly reputable and competent) managing agents. I recently had the experience on one of my properties where the residents had to form an association, get the required support from owners and oust the managing agent as the agent had squandered reserve funds, did not maintain the property well enough and engaged in unprofessional business practices, for example, not going through the proper procurement process when seeking quotes for work (ie. just went with the first and only quote they sought!) This property was a large high spec development near Canary Wharf with supposedly professional management!

    My point is, whilst it is a lot easier to steer clear of the incompetent and obviously bad managing agents and freeholders, it is a lot harder to make sure there is a “good” managing agent or freeholder in place.

    If you have any ideas on how to find out (just short of reviewing a managing agent’s annual accounts for each development they manage) I’d be grateful to hear them.

    Shaun

    1. Sam

      Shaun I agree. We also own flats where there are large “professional” freeholders and they are nothing of the sort. It is an absolute minefield when buying leasehold properties. There is a definite need for more transparency in this sector as being a freeholder seems to be a licence to print money!

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