Share of freehold flat property management is running at a loss

hettyGreek

I'm buying a flat, the fee per year is agreed at 1200 a year.

I expected there to be money in the pot (there was a couple of years ago) but I can see for the last two years it's been running at a loss -2-3k. There's only 5 flats so quite alot per flat.

The buying paperwork says to be aware of a poorly managed building and my main priority is not getting something that's difficult to sell on.

There havent been any major repairs or anything, it's things like 2k a year management fee - why is that being paid if the owners themselves are managing it? 290 a year electric just for six lightbulbs in the hallway that are on a timer so switch off after 30 seconds. Then they keep filing accounts late so get charged with 750 fee.

Is this normal for a share of freehold flat?

SmashedAvacado

The flat should break even. Ie what you put in each year should be spent. Your post is a bit confusing - but it seems to be indicating that the on account service charge payments do not cover the costs - or possibly that costs are ending up being more than budgeted. Either way, the way to look at this is at the overall cost contribution on an annual basis. Is it affordable? is other big work planned going forward?

AdrianC

hettyGreek wrote: »

it's things like 2k a year management fee - why is that being paid if the owners themselves are managing it?

Because five people can't simply jointly own a single property. They'll own shares in a limited company which owns the freehold. Limited companies have a load of legal responsibilities, and accountants aren't free.

290 a year electric just for six lightbulbs in the hallway that are on a timer so switch off after 30 seconds.

How much of that £290 (only £24/mo) is actual consumption? How much of it is standing charge on a commercial non-domestic tariff? When was the tariff last reviewed? Is there any maintenance or safety certification included in that?

Then they keep filing accounts late so get charged with 750 fee.

...proof that corner-cutting rarely works out the cheapest option...

If money isn't being wasted, then the £1,200/year is simply not a realistic amount. How long since it was last reviewed? They want to be building the sinking fund reserves up to a realistic level, not depleting them.

eddddy

hettyGreek wrote: »

it's things like 2k a year management fee - why is that being paid if the owners themselves are managing it?

Are you sure that the joint freeholders are managing it - or is that a fee paid to a management company to manage the building?


On a broader level, this highlights the potential problems with "share of freehold" flats. You might end up with 5 "amateurs" trying to manage a building. They might all have different ideas about what work needs to be done, how much they should pay, whether there should be a sinking fund - or they might be completely disinterested - and it all gets very messy.

And even if some/all of the current joint freeholders seem to be sensible and rational, if they sell-up, you can't be sure what the new joint freeholders will be like.

hettyGreek

AdrianC wrote: »

Because five people can't simply jointly own a single property. They'll own shares in a limited company which owns the freehold. Limited companies have a load of legal responsibilities, and accountants aren't free.


How much of that £290 (only £24/mo) is actual consumption? How much of it is standing charge on a commercial non-domestic tariff? When was the tariff last reviewed? Is there any maintenance or safety certification included in that?


...proof that corner-cutting rarely works out the cheapest option...

If money isn't being wasted, then the £1,200/year is simply not a realistic amount. How long since it was last reviewed? They want to be building the sinking fund reserves up to a realistic level, not depleting them.

Oh I get we all own the company. But theres two residents that seem to be running it but still 2k a year is paid to a management company. It seems to be the worst of both worlds, what do the management company do that have been appointed by the owners of the flats and freehold?

Of course I'm not disputing the accounting and secretarial fees, I run a company.

I'm assuming it's 95% standing charge fee, is there not a 0 charge electric tarrif that a share of freehold can use?

Are you saying the 750 fee for late reporting is worth it? The accounts look easy to me, cleaning, gardening, window cleaning, electric, management fee, accounting and secretarial. So seems foolish to submit them late.

eddddy

hettyGreek wrote: »

Oh I get we all own the company. But theres two residents that seem to be running it but still 2k a year is paid to a management company. It seems to be the worst of both worlds, what do the management company do that have been appointed by the owners of the flats and freehold?

That's a fairly standard set up.

The management company should be doing things like:

• Arranging Buildings Insurance
• Arranging maintenance / repairs
• Paying bills (electricity, maintenance etc)
• Managing the buildings accounts
• Calculating and Collecting service charges from the leaseholders

The benefit of it being "share of freehold" is that the management company take their instructions from the joint-freeholders and are answerable to the joint-freeholders.

e.g. The joint-freeholders can prioritise repairs and maintenance jobs, if they want.


Which company is getting fined for late reporting, and who is responsible for that reporting? (i.e. is the freehold company being fined, or the management company.)

For example, if it's a result of negligence by the management company, the leaseholders shouldn't have to pay that.

bouicca21

If it is of any use, I just received the bill for this quarter’s service charge. Communal electricity (I.e. lighting the hall and stairs for a block of 6) is just over £24. Ours are on a movement sensor.

G_M

There are 3 possibiities:


1) £1200 a year is insuficient and needs to be increased
2) whoever is managing things day-to-day (the freeholders or their management company) is inefficient, incompetenant and needs to be changed
3) someone ("two residents that seem to be running it"?) is scimming money off somewhere fraudulently


Either way, if you buy in to this building you'll need to become actively involved and try to improve things. Whether you can succeed wil depend on the attitude/response of the other 4 leaseholders with whom you'll share the freehold.



It's a risk.

eddddy

It's perfectly legitimate for the joint-freeholders to decide something like:

"We don't want a sinking fund anymore, so let's run it down over the next few years by paying a smaller service charge."


TBH, if some of the owners are selling, they might prefer to have the cash in their pocket, rather than in a sinking fund that they will lose the benefit from.


When buying, people don't tend to increase their offers when they find out there's a big sinking fund...

...or reduce their offer when they find out there's no sinking fund.


So it's tempting for owners to run down the sinking fund.