Short lease-what's the discount?

chadfield

Hi everyone

I have had an offer accepted on a property with a 69 year lease and have a query is regarding the impact of this short lease on value.

I asked the EA whether the vendors have looked into how much the lease would cost to extend. She said that they have not looked into this and that the lease was being sold 'as is' (i.e. will not be extended). She also mentioned that the value of the flat reflected the fact that the lease was short-when I asked how this could be if the vendors had not considered the cost of extending, she said that an estimated cost of c.£15-20k had been assumed.

My difficulty is working out whether any discount has in reality been applied. We have offered the asking price of £380k, which is in line with the top price that has been paid for any flats in the block (although ours is one of only 4 with a roof terrace). I do not know whether similar flats in the block have been sold with short or extended leases. EA has indicated that recent sale prices (that have yet to be published on the internet site) have been higher, with price increases of c.£15k in the past six months.

At the end of the day, I am perfectly happy to buy and extend the lease provided this results in a related increase in property value. However, I do not want to buy at a 'long lease' price that means that extending the lease will not add value.

Does anyone have any ideas as to how best to approach this? I appreciate that the survey will provide more insight (expected to hear back on this in just over a week) but would like to address now if poss.

Many thanks

Chris

natwill_3

Hi,

I would strongly urge you to ask the vendor to get a quote from the freeholder for the extension cost.

69 years means marriage value kicks in (as its under 80 years) so freeholder can ask for a % of the increase in uplift in market value of a longer lease.

at 380k the sum could be significant.

My neighbours have a lease of 67 years I think, they are unable to sell the flat without extending it as no one would buy it. On a flat valued at £220k they are paying £20k plus legal fees (theirs and freeholders).

Be very carefull. I will find a link to the other post and link it for you to read


Nat

natwill_3

http://forums.moneysavingexpert.com/showthread.html?t=218931

Joe_Bloggs

Some mortgage lenders will not touch 65 years left on the lease a few will not touch 70. Why should they care when they get their money after 25. You do not have the right to request a lease extenstion for two years. You can always ask but they could refuse. The vendors are counting on the buyer being stupid and poorly advised. If the extended lease does make the property more valuable then expect to pay the freeholder half the value it would make in compensation. see http://www.lease-advice.org/
J_B.

chadfield

Thanks guys for quick advice.

I have e-mailed the EA explaining that we need the leaseholder to get a quote for extension from landlord if they haven't already done so-hopefully, that should clarify matters.

One point that I don't understand is as follows. The bulk of the lease extension cost is related to the marriage value. As you pay the freeholder effectively 50% of the increase in value to the flat arising from the extension, does this not mean that you effectively end up better off (subject to the other elements of the extension cost to be added)? For example, if the lease increased in value by £30k, I would need to pay the landlord £15k marriage value but would be left with an asset worth £30k more? Or is it not as simple as that?

One other question: can you include the costs of extending in your mortgage (i.e. when we remortgage in 3 years)?

Cheers

natwill_3

Yes, your flat may be worth more but only if you are paying under market value, ie adjusted for cost of lease extension.

In my experience EA don't adjust price for short lease but wait and see if the price gets knocked down, alot of people won't realise the significance

Also you don't know what you should be offering til you get quote, and that varies wildly depending on the freeholder, what if its £40k...

Think you can add on to mortgage as long as you are still within borrowing limits

If you want it, negotiate, alot of people will be put off by lease length and I doubt many will offer before quote from freeholder is available

Thats what happened with a flat I was interested in, EA didn't factor in cost of extension of a 79yr lease in asking price, no one would offer til quote got..turned out to be £17k on a 300k flat.

Someone else offered about £283k and got it..it was still on the market a long time for the area as many won't want the hassle of extending

Ps EA when asked said fee likely to be £3k...take whatever they say with a bucket of salt!

natwill_3

chadfield wrote:

Thanks guys for quick advice.

I have e-mailed the EA explaining that we need the leaseholder to get a quote for extension from landlord if they haven't already done so-hopefully, that should clarify matters.

One point that I don't understand is as follows. The bulk of the lease extension cost is related to the marriage value. As you pay the freeholder effectively 50% of the increase in value to the flat arising from the extension, does this not mean that you effectively end up better off (subject to the other elements of the extension cost to be added)? For example, if the lease increased in value by £30k, I would need to pay the landlord £15k marriage value but would be left with an asset worth £30k more? Or is it not as simple as that?

One other question: can you include the costs of extending in your mortgage (i.e. when we remortgage in 3 years)?

Cheers

Don't forget the legal fees of you and freeholder which can be very high....also if freeholder tries it on you may have to go to Leasehold Valuation Tribunel which takes time