This guide was last updated 13 October 2022
Leasehold properties are commonly associated with apartments, where the owner of the property owns the apartment itself, but not the land on which it lies.
This is owned by the landlord and is leased to the apartment owner. The length of these leases vary, but what’s important to know is that the less time left on a lease, the lower the value of the property.
When the lease of a property has 99 years left, the property is usually 99-100% of its value if it were a freehold property (i.e. compared to if the property owner also owned the lease). The moment the length drops to about 80 years, the value can be expected to drop to about 75% of the value compared to its value as a freehold property. After that, the value will fall exponentially over time. For this reason, a ‘short lease’ is usually considered anything under 70 years. If you were looking for a property at a very low price, then a short lease could be their answer. The goal would be to purchase the property and then extend the lease in order to bring the value up again. But this isn’t as simple as it might seem.
The first problem a buyer would encounter is getting approved for a mortgage. Many lenders are not willing to offer mortgages for short lease properties because they are less likely to get their investment back, especially if the buyer defaults and the lender is left with a property at significantly less value than that of the mortgage.
There are also other costs to consider. Firstly, while it’s very difficult to find a mortgage for a short lease, it is even more difficult to find a mortgage that has a reasonable deal. You should expect the mortgage to be more expensive and you will need to budget accordingly. But perhaps the biggest expense will be the extension of the lease itself. It’s important to get a surveyor’s quote on how much this could cost, in both best – and worst-case scenarios. Just keep in mind that the best and worst case values will become increasingly distant from each other the shorter the time left on the lease, making the investment less predictable and riskier.
Once the budget has been established, the next thing to consider is how much the extended lease will add to the property value. This is crucial information because you need to know what the likelihood is of your resale turning a profit. This is possibly the most important part of a surveyor’s job, but they will also give you an idea of the current value of the property with its short lease, so you know what ballpark range to pitch as an offer to the estate agent.
However, there is a pretty significant roadblock in the way of this strategy. Flat owners are legally required to own the property for a minimum of two years before they are able to approach the lender for a statutory extension. There is a way to get around this, however. It is possible (and required by some mortgage lenders) to have the vendor apply for an extension on their lease and then reassign the benefit of the notice to the purchaser. This would need to happen before the lease is transferred to the buyer. If this isn’t done, then the buyer would need to wait for two years before they apply for a lease extension, and the shorter leases are more expensive to renew, so would cost more for every year of delay.
The biggest obstacle to buying a short lease property is getting a mortgage approved. As mentioned earlier, it is very difficult to convince a lender to offer a mortgage, and even if they do they tend to be unfavourable and expensive deals. That is unless you contact a broker like Coreco. We have access to many lenders, both public and private, that are not available to most buyers. We are experts in specialist mortgages and, if you come in to talk with us, we can advise on your situation and give you honest, professional advice on what your expectations should be. Then, with your approval, we would find the best mortgage deal available to you, saving you a potentially huge amount of time, effort, and money.
There are a lot of obstructions in the way of buying a short lease property, but with the right guidance and thorough planning, it can make for a very lucrative investment.
If you’d like to know more about short lease properties and the process of applying for a mortgage for one, call us on 0207 220 5110 now or arrange a call using the form below.
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