Flat with short lease

merlintess

Hi,

First time buyers in the process of buying a flat in SE London. The offer was reduced to £190K to reflect a short lease (67 years). The current owner will be serving a section 42 notice so we can extend the lease on purchase. We have received a quote of £37K including legal fees for the lease extension from a solicitor (independent from conveyencer) - although obviously we have had no discussion with the freeholder. 

We have our mortgage offer from Nationwide too. The valuation on the mortgage offer is £190K - although I imagine this is the figure based on the diminishing lease? The estate agent told us that with the lease extended, the propertys value would be £285K, although looking at similar propertys on the market we're beginning to think this is very optimistic, and that it's probably more around £250K, if that.

We told the EA we are going to get a Home buyers report and valuation done and that if the valuation came back considerbly less than £285K we would have to renegotiate our offer. He began to squirm a bit, and said that the vendor would not renegotiate on £190K. We're now wondering if we should
a) bail now and lose £400ish in legal fees
b) book and wait (5 week wait) for the Homebuyers report and valuation at £600 to find out the actual value (based on the extended lease)
the result of this will tell us how good of a deal we are getting on our £227K total spend, plus hassle of extending the lease. I think if the valuation is below £250K we will feel its perhaps not worth it, and if the vendor won't budge on £190K, we will bail and lose around £1K in fees. 

Would appreciate any thoughts on this, thanks.

princeofpounds

Why is it not worth it if the valuation for the property with a long lease is below 250k? As you say, you are spending ~227k. Most people spending 227k get 227k worth of property, so who cares if the valuation with the long lease is 250, 285 or 230? You would still be getting a bargain.

Perhaps I'm missing something in your explanation of the numbers involved...

Tracet74

You should get getting a quote to extend the lease by a surveyor, not a solicitor.  Also, some lenders are twitchy at lending against a property with 67 years remaining, irrespective of whether a Section 42 notice has been served.

merlintess

Tracet74 said:

You should get getting a quote to extend the lease by a surveyor, not a solicitor.  Also, some lenders are twitchy at lending against a property with 67 years remaining, irrespective of whether a Section 42 notice has been served.

Thanks for your reply. We actually already have the mortgage offer confirmed. The solicitor is a lease extension specialist who will be carrying out the legal work to extend the lease for us.

Tracet74

tomgaiger said:

Tracet74 said:

You should get getting a quote to extend the lease by a surveyor, not a solicitor.  Also, some lenders are twitchy at lending against a property with 67 years remainof whether a Section 42 notice has been served.

Thanks for your reply. We actually already have the mortgage offer confirmed. The solicitor is a lease extension specialist who will be carrying out the legal work to extend the lease for us.

Glad your mortgage has been approved.  A solicitor would serve the Notice but I've never heard of a solicitor actually doing the calculations.  Usually you get the surveyor to do the calculations, which are then given to the solicitor to put into the Notice.  Likewise, the solicitor would not carry out any negotiations as this is done by the surveyor.

merlintess

princeofpounds said:

Why is it not worth it if the valuation for the property with a long lease is below 250k? As you say, you are spending ~227k. Most people spending 227k get 227k worth of property, so who cares if the valuation with the long lease is 250, 285 or 230? You would still be getting a bargain.

Perhaps I'm missing something in your explanation of the numbers involved...

Hi thanks for your reply. I think there needs to be a fair buffer between the £227K and the valuation in order for us to take on the cost/effort/risk of dealing with the whole lease extension process, rather than just finding another property and paying market value. Certianly if the valuation came in at £230, I would think we'd be in a position to renegotiate the asking price since we'd been 'sold' the idea of buying a 285K flat for £227K when in reality that would be demonstrated to be not true by the valuation.

ChloeManoey

I'm really, really surprised you got a mortgage offer on that one! Most lenders wouldn't even consider it. 

How will you be paying the 37k to extend the lease? If you have the money available and you are willing to go through the stresses of it, then I guess it's a possible bargain when complete? 

merlintess

ChloeManoey said:

I'm really, really surprised you got a mortgage offer on that one! Most lenders wouldn't even consider it. 

How will you be paying the 37k to extend the lease? If you have the money available and you are willing to go through the stresses of it, then I guess it's a possible bargain when complete? 

Nationwide's minimum lease is 55 years I believe. Don't quote me on that though! Also it's a 10 year term so maybe that helps? We have the cash to pay for the lease. In theory it is a bargain yes, and it was certianly presented to us as such! However it's becoming apparent that it could be much less of a bargain than we were led to believe. I think it's more the realisation that the EA is trying to pull the wool over our eyes at every turn - he initially said the lease extension would be about 25K - it later turned to an estimate of 37K. Then the initial value of 285K drops to 250K, and the vendor won't budge on price, no matter what the Home buyers report and valuation says apparently. Just seems to be turning a bit sour...

eddddy

tomgaiger said:

However it's becoming apparent that it could be much less of a bargain than we were led to believe. I think it's more the realisation that the EA is trying to pull the wool over our eyes at every turn - he initially said the lease extension would be about 25K - it later turned to an estimate of 37K. Then the initial value of 285K drops to 250K, and the vendor won't budge on price, no matter what the Home buyers report and valuation says apparently. Just seems to be turning a bit sour...

It sounds like you're being a bit illogical over this.

Don't get hung-up about what the EA said (take everything an EA says with a pinch of salt) - concentrate on the numbers, instead.

If you're getting a £250k house for £227k, it's a bargain. If you can negotiate some more money off, it's even better.

BUT...

• Who says the lease extension will cost £37k? (It will be an opinion rather than a fact. But it's useful to know who's opinion it is.)

• Total fees for the lease extension could be £2k to £4k - or much more, if it goes to tribunal.

.... and of course the EA would say that the seller won't budge on £190k.  What else do you expect them to say? If the EA was daft enough to say "I think the seller will accept £180k" - I imagine you'd immediately drop your offer to £180k.

rik111

You sound like you are typical mug punters.... 
The agent told you with lease extended it would be worth £285,000. Did you not check this and compare to other 2 beds in the area, particularly ones that have sold recently ? If it really was a case of buy for £190, spend 25k extending the lease, then flip for 285k, the agent would have a book full of investors that would bite his hand off and agree to complete in 4 weeks. Not sell it to nervous first time buyers, no agent wants the hassle of first time buyers, particularly on a complicated sale....
Tread with caution, sounds like your being mugged off, bargains are usually snapped up not left to first time buyers.

princeofpounds

tomgaiger said:I think there needs to be a fair buffer between the £227K and the valuation in order for us to take on the cost/effort/risk of dealing with the whole lease extension process, rather than just finding another property and paying market value.

The cost is almost entirely incorporated in the 227k figure already, except perhaps a few incidentals. The effort is relatively minimal, at least on the scale of time required for a 4-5 figure gain. As for risk - what risk? Someone who has owned the lease for two years has a statutory right to extension through Tribunal at a price defined by formula , in almost all cases.

Forget the 285 figure. It's nothing more than estate agent fluff. Even the 250 figure isn't that relevant - it's just your hope. All that matters is the 227 you are actually paying, and whether you want to own the property or not.

Whilst I'm not sure you're a mug in the way that rik111 describes, I do think you have unrealistic expectations around how 1+1 should equal 2.2 here... if it were easy to make significant sums of money just by extending leases people would be all over it. Sometimes it happens - particularly when the lease is so short it's totally unmortgageable - but it's not the norm.