FTB, advice on reserve fund for leasehold property please.

southerngirl_2

I'm a first time buyer in the process of purchasing an apartment in a 5 storey listed building of which there are 50 apartments.

My solicitor received financial statements from the Management Company for 2008 which showed a reserve fund of £29,000, he is currently waiting for financial statements for 2009 and 2010. In comparison my solicitor lives in a building of 64 apartments which has a reserve fund of close to £100,000.

I spoke to someone who's lived in the building for the last 10 years who said the service charge had been £70 a month for years and it's recently been increased to £140 a month. The facade of the building has recently been painted and the roof coverings are being renewed in the coming year. I've asked my solicitor to find out from the Management Company what other works are scheduled for the next five years and what the anticipated costs will be.

The building itself appears to be in good condition and the only areas identified by the surveyor that needed attention were the roof coverings and some redecoration to the joinery in the next year or so.

I've finally found an apartment which provides everything I need but I now have some concerns over the size of the reserve fund. At the end of the day I guess it comes down to whether or not I can afford any extra costs that would be passed onto me on top of the monthly service charge.

I don't know if this is a straightforward question to answer but what would you consider to be a reasonable reserve fund for a building of this size?

Would the lack of a reasonable reserve fund make you reconsider purchasing the property?

Thanks for reading, any advice would be welcome.

glottalstop

How refreshing to find someone looking at a purchase with such intelligent foresight, and asking such excellent questions. Pat yourself on the back and reach for another segment of chocolate orange.

The balance of your Reserve may be depleted because the building has just paid for the expensive periodic external works. You should look at the lease terms, which will say external decoration every 10 years for example, and maybe internal parts every 5 years.

You may also have revealed the perils of a historically low service charge. £70/pm is quite economic even for a large well-managed block. I pay £105pm in a smaller modern block, it has been £130pm in a period where Reserves were being built up. This may be why your charges have jumped to £140pm, but even so that is not extreme.

In a building like yours the aim should be to accumulate a more substantial reserve, your solicitor's experience strikes me as being a good one, to smooth out the possibility of big expenditures in future. On the plus side, there are 50 properties who will share the burden with you. If the reserve had been empty I would have said leave it, if it had been £65,000 I would have said that looks ok.

You are doing the right thing by asking to look through accounts and budgets, on the basis of which your solicitor should look to agree/retain a sum on completion in case of subsequent service charge balancing which your seller is liable for. That is quite sensible and normal these days, where block accounts may not be published until many months after the purchase has gone through.

However:

1) carefully study the lease so you are fully aware of what may come at you in future - including admin charges or other ways in which charges may be demanded - and the implications of your block management arrangements. For example, do you share 1/50 of the block water charge or do you have your own meter?
2) know your manager - look them up, ask what the local experience has been. A good test of value is to look at the cost of the building insurance policy, you can roughly compare it with a fair market price quite easily.
3) does the lease contain a clause allowing you to ask the building owner to replace the manager if they let you down ? You can always undertake RTM if not.

G_M

Very good advice above but an additional suggestion:

Talk to other residents. Knock on a few doors. Eventually you'll find the local busybody who knows everything. She (sorry - usually a 'she'!) will tell you more (yes, I mean much more!) than you need to know about the other residents, the noise levels, etc etc, as well as telling you all about the planned building works and such. Remember people tend to like complaining, so you'll need to evaluate the complaints about the management company, other residents etc, but you'll get a LOT of insight into what to expect once you live there!

southerngirl_2

Thank you for the compliment glottalstop All the intelligence I have gained into this purchasing process has been down to the knowledgeable and helpful people on this board, without you all I would be lost!

Thank you both for the advice. Once I know how much is currently in the reserve fund and what works are planned then I'll have a clearer idea of where I stand.

Does anyone else have any further advice?

jsm1976

My advice would be to thoroughly check out the Property Management Company (PMC), and how they are employed.

Is there a Residents Management Company (RMC) that employs the current Managing Agents?

Is it a Tripartite lease, with a PMC named in it?

The former is preferable but, as mentioned earlier, Right To Manage (RTM) is always an option if the majority (+50%) of the leaseholders become unhappy with the current PMC.

Where there is an option in the lease to replace the Managers, this usually require proof of mis-management by said managers, and is very difficult to prove.

When you find out who the managers currently are, research them. Stay away from OM Property Management, and (from experience) Trinity Estates Property Management.

We have just completed RTM, its not something I would like to do again, I wish I had your foresight when buying a leasehold flat!

Good Luck!

southerngirl_2

Thanks for the advice jsm1976. The building is managed by John Mortimer Managment Company. Have searched online but haven't found any feedback on them from a management company perspective. Will wait and see what the financial statements show.