Should we buy our London council flat?

Londonflats

Hi MSE,

Just looking for some advice so here is the whole story. My family have lived in our council flat in London for 20+ years meaning we are eligible for a 70% discount on our flat.

- The flat is in a 13 storey (Ground + 12) building, we live on the 5th (6th inc ground) floor.
- The flat is valued at £100,000 but with discount we can get it for £30,000 with about ~100 years left on the lease (lease is 125 years from the date of the first flat in the block sold, not sure when that is but I assume 25 years ago)
- We currently pay rent of £525/mo
- The entire estate has recently had new doors and double glazing fitted this year which cost the leaseholders £8000 in "major works fees" so we've avoided that cost in the foreseeable future
- The service/maintenance fees are £1000/pa
- Over the next 5 years the "major works fees" are estimated at £7500 (£6000 for the lifts, £700 for pre-maintenance/paint, £800 non-itemised) for each leaseholder, the equivalent of about ~2% of the total cost.
- There are rumours amongst the tenants of the building have very dodgy/dated plumbling that will need to be fixed, though they cannot do this/charge us for it for the next 5 years but it should be upcoming after that.
- The local estate agent told us that because mortgages are near on impossible to get for my block of flats, it will be unsellable. That said because of the location (3 mins walk from underground station, 7 mins walk to overground station, primary/secondary schools, shops, library, swimming pool etc all within 10 min walk) that it is very easy to rent out for £1000/mo when/if we decide to move out but we can't move out for 5 years at least.
- We've heard stories of crazy "major works charges" going up to £60-70,000 in other estates around London, meaning even if we did move out and make a profit from renting it out, it would take 10 years renting out profit to cover that fee should it occur.

Anyone have any ideas what we should do?

tim123456789

Londonflats wrote: »

Hi MSE,

Just looking for some advice so here is the whole story. My family have lived in our council flat in London for 20+ years meaning we are eligible for a 70% discount on our flat.

- The flat is in a 13 storey (Ground + 12) building, we live on the 5th (6th inc ground) floor.
- The flat is valued at £100,000 but with discount we can get it for £30,000 with about ~100 years left on the lease (lease is 125 years from the date of the first flat in the block sold, not sure when that is but I assume 25 years ago)
- We currently pay rent of £525/mo
- The entire estate has recently had new doors and double glazing fitted this year which cost the leaseholders £8000 in "major works fees" so we've avoided that cost in the foreseeable future
- The service/maintenance fees are £1000/pa
- Over the next 5 years the "major works fees" are estimated at £7500 (£6000 for the lifts, £700 for pre-maintenance/paint, £800 non-itemised) for each leaseholder, the equivalent of about ~2% of the total cost.
- There are rumours amongst the tenants of the building have very dodgy/dated plumbling that will need to be fixed, though they cannot do this/charge us for it for the next 5 years but it should be upcoming after that.
- The local estate agent told us that because mortgages are near on impossible to get for my block of flats, it will be unsellable. That said because of the location (3 mins walk from underground station, 7 mins walk to overground station, primary/secondary schools, shops, library, swimming pool etc all within 10 min walk) that it is very easy to rent out for £1000/mo when/if we decide to move out but we can't move out for 5 years at least.
- We've heard stories of crazy "major works charges" going up to £60-70,000 in other estates around London, meaning even if we did move out and make a profit from renting it out, it would take 10 years renting out profit to cover that fee should it occur.

Anyone have any ideas what we should do?

I don't know why you think that they cannot do something that they haven't given you 5 years notice of.

If it breaks tomorrow it will need doing and you (as an owner) will have to pay for it, regardless of whether it was in their 5 yaer maintenance plan or not.

But apart from that the figures look good.

tim

robatwork

how many flats are there as your maintenance figures don't stack up. For example if there are 40 flats then that's £240,000 just for the lifts. Are you having them Willie Wonka style?

Locana

Hi

Actually I think if something does 'break' then they won't be liable for the cost as the maximum service charge they can charge you for five years is what they advise you when you apply for the right to buy. They can increase it by a whatever percent inflation is, buts that's it. They are not liable for any increased costs over the five years.

As for the maintenance figures being 240,000, the cost is actually split between current leaseholders and not all residents within the block (i.e the tenants don't pay). So if there are only three leaseholders within the block then the costs are 18,000 fo the next five years.

I have heard that any property above the 5th floor is pretty much unmortgagable so you may find very much difficulty in obtaining one. But a mortgage advisor will know more about that so ask someone.

The lease should still be 125 years regardless of when someone else may have bought theirs. It should say on your paperwork.

After five years you will have no control over major works charges. And having a lift in your building is very expensive.

A lot to consider.


Lo

cattie

Whilst the figures for you buying it sound very good, you need to look at this objectively. Buying a flat in a high rise block is never a wise thing to do.

You will own a property that will have a very limited market should you ever decide to sell. Only a cash purchaser would ever be suitable. You will also be owning a property with very high outgoings as councils are notorious for the huge charges they levy on maintenance, repairs etc & this will limit your market even further.

Don't forget that there is usually an additional 15%-20% added to any major repair bill for management charges too, so this adds significantly to the costs. Lifts are very, very expensive, so I'd discount the rough figure of £6k you've been given.

You talk about moving out into rented accommodation and letting the flat, but what happens during the periods you have no tenants or tenants just stop paying the rent or trash the flat. Do you have the finances to see your way through any such thing occurring?

Buying a property, even if cheap, with such limited options for resale is something I'd never consider personally.

Londonflats

Thanks for all the comments so far guys, I still don't know what to do. Personally I'm in the same boat as Cattie, where I don't think we should buy the property as it has such limited resale options but my parents are desperate to finally get on the property ladder - to secure their future and mine.

Perhaps we would be better off applying for a "grant to vacate" and purchasing a property in a "cheap" part of London.

princeofpounds

Very roughly speaking, you need to figure out what costs you will be avoiding (the rent) for the price you pay, minus all the costs you will add (maintenance etc). Where you have an occasional large cost, you will need to depreciate it, working out what you might need to pay on average in a year to cover the costs as they arise.

Then you need to work out if that represents a good 'yield' on the investment. Don't compare it to a bank account. Compare it to similar risk investments; i.e. maybe what you could get on a BTL property of the same type.

If you plan to rent it out, then you need to deduct all the other relevant costs too, including non-obvious things like void periods, but if you can rent it out for more revenue than the cost of your current rent then you can add the extra on.

So, very roughly, if you are renting it for 6300 pa, but you have to pay an extra 1000pa for maintenance plus 1500pa for major works, plus maybe 1500pa for things like refreshing interior decoration, contingency etc (that number is a guess) then you are saving about 2300pa.

That represents a 7.7% yield on 30k investment. That's pretty good, given it is essentially tax free (because the saving comes out of post-tax income). But it's not astronomically high.

If we consider renting, then 12000pa is potentially gainable. You still have the 4000pa costs, plus let's assume another 3000pa for agents fees and/or void periods and/or tax (and I'm just plucking a number from the air here, you may have different numbers and I have no clue about your detailed situation).

That's a 5000 yield which is 17% yield, which really is very good.

HOWEVER, remember that if you rent it out, you will also lose the value of the artificially-low council rent. You must always include such 'opportunity costs' (google the concept if you don't know it). Paying a market rent yourself would probably knock out much of this yield.

Now, remember those outline calculations are real on-a-beermat type stuff. You might have different numbers and think of more costs or benefits.

But it seems to me that it could make sense to buy, if you plan and cost properly. It isn't as amazing as the discount makes it seem, primarily because you already benefit from a subsidised council rent which you would lose.

jonewer

Londonflats wrote: »

Thanks for all the comments so far guys, I still don't know what to do. Personally I'm in the same boat as Cattie, where I don't think we should buy the property as it has such limited resale options but my parents are desperate to finally get on the property ladder - to secure their future and mine.

Perhaps we would be better off applying for a "grant to vacate" and purchasing a property in a "cheap" part of London.

Why so desperate to get on the property "ladder"? Why do they think this is somehow going to secure their and your future?

You are one of the lucky few who actually have social housing. You enjoy massively discounted rent and almost absolute security of tenure. Why change that?

olly300

I wouldn't buy it.

While there are lots of former council leasehold flats in London and in fact some blocks every single flat has been brought under RTB. However the flats are normally either in buildings under 4 floors high or in zones 1 and 2.

The price you are stating indicates your flat isn't in an very desirable area which means that:
1. You will have problems renting it out.
2. You will have problems selling it on.

Near me there are leasehold flats in council blocks that are the same height as your building.

The only people who will buy them are BTL landlords and the only people who will rent them are university students.

However ex-council flats in blocks that are under 5 floors are easy to buy, sell and rent out, and command a price of twice as much even though they can be smaller in size.

BTW one thing I noticed years ago and two people confirmed it, is that if you are a BTL landlord for student rentals you normally have more than one property.

Owain_Moneysaver

How old are you / your family, and do you have any other savings?

Once you've bought the flat it can be repossessed if you don't keep up payments on any mortgage or if you don't pay for repairs. You also have all the internal repairs to be responsible for. Whereas as a tenant all you have to pay is £525 a month, all repairs taken care of, and if you / your family can't work then there are benefits which help towards rent. This is particularly an issue for older people who get less able to DIY and maintain a property. As a council tenant you should get new bathroom/kitchen/rewiring etc periodically as required. If the building becomes unsound or the area is cleared for redevelopment, as a social housing tenant you will be rehoused. As an owner you'd be compulsorily bought out at the lowest amount the council can get away with and then left on the waiting list.

100 years on the lease now, in 30 years time that's only 70 years, as the lease runs out the value will be dropping and that may not be offset by rises in the housing market. And as the building gets older the likelihood of major repairs increase.

Owain_Moneysaver

robatwork wrote: »

how many flats are there as your maintenance figures don't stack up. For example if there are 40 flats then that's £240,000 just for the lifts. Are you having them Willie Wonka style?

According to Sustaining Tower Blocks, for a 20 storey tower a new lift within an existing shaft would be £200,000 - £235,000. More (possibly a lot more) if new holes have to be punched through every landing for a bigger shaft to accommodate a larger lift for wheelchairs/coffins.