Short Lease: How Low Should You Go?

annetheman

HI everyone,

I am completely in love with a maisonette that has a short lease in my area of choice (but it's not the best street in said area!).
The asking price is £164,000, but I've done some research and the seller bought it in 2005 for £160,000.

I would like to offer about 8% below the asking price and go in at £150,880. 

Would the seller be likely to reject it as it's lower than they bought it for? Is it too low? It has been on the market since November 2019 with no offers yet, and I am in no chain and buying to live in.

House specs: 

• Liveable but in need of a lot of modernisation throughout (I would need to redecorate and change bathrooms and kitchen)
• Grubby exterior (I would need to paint)
• Lowest category ECG (I would need to pay for cavity and loft insulation)
• 70-year lease (but I found a few lenders, miraculously)
• No gas central heating (I would need to install)
• 1 bedroom, large kitchen, large lounge (used as mix lounge bedroom), 2 bathrooms

What would you offer, if you loved it but it had all the problems above? Given these are all expensive problems, I think lower is justified, but what would you think as a seller?

hazyjo

Will the seller at least start the process for the lease extension if you're paying? Will you have the funds to pay for it?

No way of knowing what the seller will or won't accept. What they paid in 2005 is totally irrelevant. The fact it's up for a similar amount is probably due to the short lease. No point in trying to say why your offer is justified, or ask us, it's all down to what they will sell for.

How does it compare to other properties on the market? It should be significantly less for such a short lease. (In answer to your question, it would depend on how much I had in the bank to pay for the extension.)

Is it 'share of freehold' or is there a separate freeholder? Maintenance company? The fact it's not been looked after externally would have me worried. What's the windows and roof like? What other neighbours are part of the block? Is it a conversion or purpose built block?

Often can't install gas in flats. Depends on size of block. If there's a freeholder, they may refuse (the council will prob have a say too). Is there actually gas connected, or are you talking about literally trying to add a supply to the building? 

One bed and 2 bathrooms? Seriously? Is there not a 2 bed with a longer lease available in your budget (with just one bathroom)?

SallyDucati

I would have a look at the cost of extending the lease, eg here https://www.lease-advice.org/calculator/  for an idea.  It is likely to be several thousand pounds, and highly advisable to extend if only 70 years left.

eddddy

annetheman said:

I would like to offer about 8% below the asking price and go in at £150,880. 

FWIW, if I was selling, I would think that an offer of £150,880 was a bit strange. I think I'd either offer £150,000 or maybe £151,000 instead.

But I guess the starting point is to work out what it would be worth if it was modernised and had a long lease. Then deduct the cost of the modernisation, lease extension (including fees), plus a bit of 'profit' for all the hassle involved - and start by offering something below that figure.

And you'll need to bear in mind that you'll need a chunk of cash for the modernisation and lease extension - as you probably won't be able to add them to the mortgage.

steampowered

What the seller bought it for is not really relevant - you just have to offer what you think is fair, expecting a bit of negotiation.

I'd be worried about that 70 year lease personally. You might have a lender willing to lend on it now, but what happens when you need to remortgage? And what happens if you want to sell?

 If you can't pay off the mortgage or remortgage at the end of your fixed term, you could find yourself stuck paying a rip-off standard variable interest rate. 

sal_III

The purchase price in 2005 has little to no bearing on the current market value of the property. Basing your offer on that number is not going to get you anywhere.

What you need to do is find out the cost of extending the lease - X and the average sold price for similar properties nearby with long leases Y. Then offer Y-X-Z where Z is the price you put on the inconvenience of having to deal with lease extension yourself.

For what is worth, if I can afford it I would never buy an inferior property/location to live in, just to grab a bargain.

VincentVincent

If it's listed at only £4k more than it sold for 15 years ago, then the listed price is almost certainly already taking into account the lease length and property condition.
There's no harm offering lower, but if you're going to offer £14k less (which is significant) based on the reasoning that the property needs work and a lease extension, the vendor and/or estate agent will likely laugh in response.

If not, i'd genuinely love to know what part of the country a 1 bedroom maisonette worth £160k 15 years ago remains virtually the same value today.

Tom99

You can ask the seller to serve a section 42 notice, after exchange of contracts, and assign it to you. That way you can extend the lease, at your cost, now rather than in 2yrs time.

If you cannot afford to extend the lease now then you are taking a much bigger risk. It will be even more expensive to extend in 2yrs time and, as said, maybe very difficult to re-mortgage.

The only upside is that proposals to make lease extension cheaper may have been implemented in 2yrs time, or maybe not.

annetheman

Thank you all for your excellent points and all very good suggestions as to how I could think about this. I will answer the second poster since they asked the questions most have:hazyjo said:

Will the seller at least start the process for the lease extension if you're paying? Will you have the funds to pay for it?
That is one of the conditions I was going to put on the offer, since I won't be able to start myself until 2 years from now. 
According to various different lease extension calculators, it would be approximately £13,000-£16,000 for 99 years, around the same price as buying the freehold; I can afford this, sort of. Worst case scenario is let's say it doubles to £30,000 within 2 years; I can save that within 2 years but I may well be in negative equity then, although perhaps not because of the prices in the neighbourhood which brings us to.....

How does it compare to other properties on the market? It should be significantly less for such a short lease. (In answer to your question, it would depend on how much I had in the bank to pay for the extension.)
Oh, it is significantly less! Other one beds in the area are around the £250,000 mark for one in a decent if not modern state (SE commuter town). Modern/nicer ones are £300-400,000


Is it 'share of freehold' or is there a separate freeholder? Maintenance company? The fact it's not been looked after externally would have me worried. What's the windows and roof like? What other neighbours are part of the block? Is it a conversion or purpose built block?
Separate freeholder, who seems to be "active" as I saw in the documents they tried to apply for planning for a bungalow at the end of the garden!! Denied. The ground rent and service charge is £150 per annum, to increase to £200 after 5 years and £50 increments every 5 years thereafter. 
I wouldn't mind buddying up with the other leaseholder to manage the property ourselves as there are only 2 of us - hopefully I will know them well before the increase at 5 years.

Often can't install gas in flats. Depends on size of block. If there's a freeholder, they may refuse (the council will prob have a say too). Is there actually gas connected, or are you talking about literally trying to add a supply to the building? 
You definitely could here, it's a converted 1950s house. The freeholder may refuse, but these are questions I need to ask before I put an offer in. I have no idea if there is gas connected, I will ask at the viewing on Sunday (they moved it  )

One bed and 2 bathrooms? Seriously? Is there not a 2 bed with a longer lease available in your budget (with just one bathroom)?
This is my point, I see a lot of potential. I need to ask the freeholder to make changes to the layout but, on the condition that is okay, whenever I want to move out, I can convert bathroom 2 into a bedroom and rent as a 2-bed or something. I don't know; it is for me to live in and I love the fact there are 2 bathrooms as I have different uses for each lol don't ask why. That's just me and each to their own.

annetheman

Tom99 said:

You can ask the seller to serve a section 42 notice, after exchange of contracts, and assign it to you. That way you can extend the lease, at your cost, now rather than in 2yrs time.

If you cannot afford to extend the lease now then you are taking a much bigger risk. It will be even more expensive to extend in 2yrs time and, as said, maybe very difficult to re-mortgage.

The only upside is that proposals to make lease extension cheaper may have been implemented in 2yrs time, or maybe not.

Pleeeeeease sweet baby Jesus - this law is archaic!

Retired_Mortgage_Adviser

If a comparable property with a 99 year lease sells for 250k and you could get this one (with a 70 year lease) for 160k, it's either an amazing bargain or (more likely) has other things to look out for as well.

Assuming you have a decent deposit, the mortgage shouldn't be an issue (assuming everything else stacks up). Any decent broker should be able to get you one at high-street ish rates. The sweet spot (to access mainstream/ish rates) is that you have at least 35 years lease remaining at the end of the mortgage term.

In your place, the things to look out for -

- predatory freeholder (a freeholder bothering to take the effort to manage a house converted into 2 flats always rings alarm bells for me)

- lease conditions

- why is the EPC so low?

- what are the maintenance arrangements

- is it possible to install gas appliances in the property

If you do decide to go ahead, as others have said, you should get the vendor to kickstart the statutory lease extension process.

Based on my experience buying properties to let out, I have often come across sellers who have a psyschological block to selling below the price that they bought for, even though that's what it might be worth. It's not logical but people often aren't. So it could well be that 160k is the floor price below which the vendor will not go, so it would be useful to keep that in mind as well.