Ground Rent Doubling Buyout

anon_private

Hello,


I have the chance to buy a flat where there will be a ground rent buyout such that the gr does not double every 10y, only increases by the rate of inflation (normal)


Evidently the total cost is £11,000, which the seller will include in the price of the flat.


Does this ammount sound reasonable, and should I be prepared to pay it.


Thanks

Hoploz

If the seller is including it then you're not paying it.

Guess you'd need to get evidence that the eventual cost will definitely not be higher.

anon_private

Hoploz wrote: »

If the seller is including it then you're not paying it.

Guess you'd need to get evidence that the eventual cost will definitely not be higher.

I could buy the flat without the buyout, but it is very difficult to sell a flat with this clause in place. For example, mortgage companies don't like it.



I would like it included, so I would be paying for it.


Most costs escalate over time. If I needed to buy the buyout at a later stage, the cost would be higher

mije1983

How much is the ground rent now? Impossible to say if it's reasonable without knowing that important figure! For example, if the ground rent is currently £1 then no it's not reasonable.

Hoploz wrote: »

If the seller is including it then you're not paying it.

I would say that by including it in the price of the flat, that the seller has added £11k on to the asking price so effectively the OP is paying for it.

anon_private

mije1983 wrote: »

How much is the ground rent now? Impossible to say if it's reasonable without knowing that important figure! For example, if the ground rent is currently £1 then no it's not reasonable.





I would say that by including it in the price of the flat, that the seller has added £11k on to the asking price so effectively the OP is paying for it.

£300/y

---

eddddy

anon_private wrote: »

Evidently the total cost is £11,000, which the seller will include in the price of the flat.

Does this ammount sound reasonable, and should I be prepared to pay it.

Just look at the total price of the flat (including the £11k), and compare it to other similar properties.

You don't really need to care about how the total price is split between freeholder (£11k) and leaseholder (the rest).


Edit to add...

If you're buying with a mortgage, I expect that your mortgage lender will need this dealt with on completion (or before completion).

Tom99

[FONT=Verdana, sans-serif]Depending on the length of the lease £11,000 seems good value.[/FONT]
[FONT=Verdana, sans-serif]If you assume 100 yrs remaining and £300pa now with a review in 10 years either to double or inflation at say 3% pa and a discount rate of 6% then the present value of the doubling rent is c £40,000 and the inflation linked rent c £9,000 so a difference of £31,000.[/FONT]
[FONT=Verdana, sans-serif]You can then use a statutory lease extension to buy out the inflation linked rent in 2 years time.[/FONT]

anon_private

Tom99 wrote: »

[FONT=Verdana, sans-serif]Depending on the length of the lease £11,000 seems good value.[/FONT]
[FONT=Verdana, sans-serif]If you assume 100 yrs remaining and £300pa now with a review in 10 years either to double or inflation at say 3% pa and a discount rate of 6% then the present value of the doubling rent is c £40,000 and the inflation linked rent c £9,000 so a difference of £31,000.[/FONT]
[FONT=Verdana, sans-serif]You can then use a statutory lease extension to buy out the inflation linked rent in 2 years time.[/FONT]

The remining length of the lease is about 989y

Tom99

anon_private wrote: »

The remining length of the lease is about 989y

[FONT=Verdana, sans-serif]I am not sure a valuer would treat rent more than 100 yrs distant in the same way, but if they did and continued to use a discount rate of 6% then the current vendor has the bargain of a lifetime and should bite it off with both hands. The flat would currently be less than worthless and an enormous liability.[/FONT]
[FONT=Verdana, sans-serif]
[/FONT][FONT=Verdana, sans-serif]The problem is that a rent doubling every 10 years is equal to a growth rate of 7.18%pa. But if you calculate the present value of that ground rent at a lower discount rate than 7.18%pa then each future 10 yr period becomes more valuable in present terms than the last.[/FONT]
[FONT=Verdana, sans-serif]
[/FONT][FONT=Verdana, sans-serif]If £300pa is doubled every 10 yrs then by yrs 989 the rent is £300*2^98 which is several trillion billion, not quite a google but think 1 followed by 32 zeros.[/FONT]

[FONT=Verdana, sans-serif]Discounted at 6%pa the present value of the doubling rent would be about £1.1bn.[/FONT]

[FONT=Verdana, sans-serif]I expect that if the current vendor elected for a statutory lease extension, rather than the current £11,000 deal, then the two valuers or tribunal would find some other way of arriving at open market value, either ignoring any rent after a certain period or using a higher discount rate. But the result is still likely to be a very large number compared with £11,000.[/FONT]

[FONT=Verdana, sans-serif]The same is not true for the inflation liked rent, the present value of which hardly alterers beyond 100 years, maybe £9,500 rather than £9,000.[/FONT]
[FONT=Verdana, sans-serif]
[/FONT][FONT=Verdana, sans-serif]By all means buy the flat but make sure the lease variation is 100% guaranteed before you sign any contract. [/FONT]

anon_private

Tom99 wrote: »

[FONT=Verdana, sans-serif]I am not sure a valuer would treat rent more than 100 yrs distant in the same way, but if they did and continued to use a discount rate of 6% then the current vendor has the bargain of a lifetime and should bite it off with both hands. The flat would currently be less than worthless and an enormous liability.[/FONT]
[FONT=Verdana, sans-serif]
[/FONT][FONT=Verdana, sans-serif]The problem is that a rent doubling every 10 years is equal to a growth rate of 7.18%pa. But if you calculate the present value of that ground rent at a lower discount rate than 7.18%pa then each future 10 yr period becomes more valuable in present terms than the last.[/FONT]
[FONT=Verdana, sans-serif]
[/FONT][FONT=Verdana, sans-serif]If £300pa is doubled every 10 yrs then by yrs 989 the rent is £300*2^98 which is several trillion billion, not quite a google but think 1 followed by 32 zeros.[/FONT]

[FONT=Verdana, sans-serif]Discounted at 6%pa the present value of the doubling rent would be about £1.1bn.[/FONT]

[FONT=Verdana, sans-serif]I expect that if the current vendor elected for a statutory lease extension, rather than the current £11,000 deal, then the two valuers or tribunal would find some other way of arriving at open market value, either ignoring any rent after a certain period or using a higher discount rate. But the result is still likely to be a very large number compared with £11,000.[/FONT]

[FONT=Verdana, sans-serif]The same is not true for the inflation liked rent, the present value of which hardly alterers beyond 100 years, maybe £9,500 rather than £9,000.[/FONT]
[FONT=Verdana, sans-serif]
[/FONT][FONT=Verdana, sans-serif]By all means buy the flat but make sure the lease variation is 100% guaranteed before you sign any contract. [/FONT]

Thank you.


I don't know what you mean by lease variation. Do you mean that I should ensure that the ground rent buyout is guaranteed? I understand that the current vendor has engaged a solicitor, and the estate agent has confirmed this. It is also mentioned in the advertisement. Do you advise buying the flat with the guarantee in place because it ensures good value?



My interest in buying-out the doubling of ground rent every ten-years is because I know that many mortgage companies will not lend with such a clause in place. In fact, the last sale fell through because the solicitor noticed this clause and warned the would be buyer (I don't know the details, just the fact).


My own view is that it is very much in my interest to have the buyout in place. It makes the property a lot more marketable in the event of needing to sell.



I like the idea of the lease being 980y in length. It will never be a short lease which makes the flat worthless, unless the lease is extended. It may be that in terms of valuation 989y would be treated essentially as 125y - both long leases (guess).



Regards


PS. I did not understand: '[FONT=Verdana, sans-serif] the current vendor has the bargain of a lifetime and should bite it off with both hands. The flat would currently be less than worthless and an enormous liability.'[/FONT]
[FONT=Verdana, sans-serif]
[/FONT]
[FONT=Verdana, sans-serif]The end paragraph states: [/FONT]
[FONT=Verdana, sans-serif][FONT=Verdana, sans-serif]'By all means buy the flat but make sure the lease variation is 100% guaranteed before you sign any contract.' [/FONT][/FONT]

Tom99

[FONT=Verdana, sans-serif]

anon_private wrote: »

I don't know what you mean by lease variation. Do you mean that I should ensure that the ground rent buyout is guaranteed? I understand that the current vendor has engaged a solicitor, and the estate agent has confirmed this. It is also mentioned in the advertisement. Do you advise buying the flat with the guarantee in place because it ensures good value?

[/FONT]
[FONT=Verdana, sans-serif]Yes the change from doubling rent to index linked will be via a lease variation deed. You need more than a guarantee, you need 110% certainty that the variation has already taken place or is 100% committed by contract before you sign a contract to buy.[/FONT]
[FONT=Verdana, sans-serif]

anon_private wrote: »

My own view is that it is very much in my interest to have the buyout in place. It makes the property a lot more marketable in the event of needing to sell.

[/FONT]
[FONT=Verdana, sans-serif]The current lease is not marketable at all, it probably is not mortgageable and due to its 989 yr length the ground rent will be very expensive to buy out.[/FONT]
[FONT=Verdana, sans-serif]

anon_private wrote: »

PS. I did not understand: [FONT=Verdana, sans-serif]' the current vendor has the bargain of a lifetime and should bite it off with both hands. The flat would currently be less than worthless and an enormous liability.'
[/FONT]

[/FONT]
[FONT=Verdana, sans-serif]If you use a 6% discount rate to value the ground rent (which might be a typical rate used in lease extensions) the ground rent is worth £1.1bn, hence £11,000 is a bargain. In real life however no one would pay £1.1bn for the freehold so some other method would be needed to arrive at open market value, a higher discount rate or ignoring all rent past a certain date say. The result would still be a very large sum making £11,000 still a bargain[/FONT]