Block insurance passed on to leaseholders

chucknorris

I have recently been looking at buying a freehold investment of a block of flats (in general rather than a specific block). I was quite shocked by what the agents that deal with these properties are telling me. That freeholders earn up to 25% on commission from the insurers. That doesn't sit well with me for two reasons:

1. I am looking for a good investment not to fleece leaseholders, so from a moral point of view I wouldn't want to be part of this.

2. From a purely financial point of view I suspect anything so grossly unfair would eventually be stopped. In fact when I mentioned this to my wife who works for an insurance company (but not in an insurance field) she said she thought that recent/forthcoming legislation is going to make it illegal to hide these commissions and they have to be declared rather than buried within the insurance cost. Which is of course fair and should be done.

Now to the point (sorry about the long intro) does anyone have experience or know if a leasehold tribunal would allow any commission as fair? I can see that they might consider any commission as being unfair (which is also my opinion, although I would consider a small admin charge as being fair based on the time it took to do the rebuild estimate and procure the insurance, but this wouldn't be much).

Probably I will now look for investments where there is no management or insurance rights (where the leaseholders themselves do this). Because obviously I cannot buy something in a market where the price is based on exploitation and that exploitation would not be exercised as it means the yield is far lower.

Richard_Webster

Isn't it good to find a freehold investor who isn't out to fleece people!

carefullycautious

Admirable :T

goldbyron

Wow - I think you would make a great freeholder...refreshing.

princeofpounds

My understanding is that currently these sorts of commissions are (unfortunately) legal and that is one reason why freeholds that have the provision for the freeholder to unilaterally select insurance and pass on the cost are in much demand. But I only know that from reading around the subject so it's possible the situation has changed. LEASE would probably be the place to ask.

Richard_Webster

The person who owns the freeholder company might also own a separate financial services set up which would sort out the insurance and that company might keep the commission. Ultimate owner won't mind which company makes the profit!

ILW

How would you expect to make any money from your investment if it is all long leases and you are not going to take a commision on management charges?

chucknorris

ILW wrote: »

How would you expect to make any money from your investment if it is all long leases and you are not going to take a commision on management charges?

From the ground rents which compare quite well to corporate bonds (which I was also looking at). For example the Tesco corporate bond with a coupon interest of 6% but because it has gone up in value only effectively pays about 5.3% with 19 years to run. However ground rents rise although mainly every 25 years, but this offers a good hedge against inflation whilst they still pay reasonable income. There really isn't any need to cheat the leaseholders, that's just pure greed. With a corporate bond you simply get your money back (if the company hasn't gone bust of course).

I am currently looking at a freehold block which pays 5% (just on the ground rents), but has reviews every 10 years linked to private sector pay and the next review is in 6 years, so it is a lot better than the Tesco corporate bond.

I have a reasonable amount to invest now and quite a lot in 7-10 years when I sell my properties. Buying now would let me test the water for later as obviously some things do not turn out the way that you expect. This freehold also comes with the right to insure but for reasons described above I don't think I would charge anything that was considered unreasonable.

EDIT: I think a big rethink is going to happen on insurance to blocks of flats, the FSA previously looked at it but did nothing in 2008 but are re-looking soon, I think it's only a matter of time before something is done to rightly protect leaseholders.

Perhaps my best strategy would be to wait for the bottom to fall out of the market for those that seek to fleece leaseholders then buy into this market.

chucknorris

Richard_Webster wrote: »

Isn't it good to find a freehold investor who isn't out to fleece people!

Are we really that rare?

Doozergirl

chucknorris wrote: »

Are we really that rare?

Er yes. And you will find that with the boot on the other foot, that they will take you for a ride instead.

We tried to sell SOF with the flats we converted. They didn't want it! It is the bain of my life. I am not interested in making money out of them at all but these people don't help themselves.

We tried to sell it again to them, they decided to take the Right to Manage themselves (freedom, we thought!) but no, they did nothing, made the flats effectively unmortgageable because they let the company be dissolved. Management reverts to us, they still don't take it seriously. Don't reply to letters, don't pay their bills, their insurance (we don't charge them a commission), their groundrent. New Year we will be selling it to them (best for them, although no doubt they'll screw it up) or hiring a managing agent to do it for us and profit from it. I'm not spending my life hunting people down to pay for the maintenance of their own building.

I hate it. I hate it more than anything I do.

chucknorris

Doozergirl wrote: »

Er yes. And you will find that with the boot on the other foot, that they will take you for a ride instead.

We tried to sell SOF with the flats we converted. They didn't want it! It is the bain of my life. I am not interested in making money out of them at all but these people don't help themselves.

We tried to sell it again to them, they decided to take the Right to Manage themselves (freedom, we thought!) but no, they did nothing, made the flats effectively unmortgageable because they let the company be dissolved. Management reverts to us, they still don't take it seriously. Don't reply to letters, don't pay their bills, their insurance (we don't charge them a commission), their groundrent. New Year we will be selling it to them (best for them, although no doubt they'll screw it up) or hiring a managing agent to do it for us and profit from it. I'm not spending my life hunting people down to pay for the maintenance of their own building.

I hate it. I hate it more than anything I do.

Thanks you have opened my eyes to what it could be like. I know I would find it extremely annoying continually chasing unpaid service charges, I think I will give this a miss, back to the drawing board.