What's the point of buying a Leasehold property?

AlexMac

Entsolen said:

... please be patient with me and explain what I may be missing...

To me, the main advantage of getting a mortgage over renting, is that a lot of the money you put into the property... gives you ... ownership of the property and you can sell it and get a lot of that money back, where's with renting the money is just gone.

However, when you buy a Leasehold property, the lease starts running out...you have a right by law to extend the lease, but again, that's extra money and headache... 

Whereas with a freehold... you fully own it, so you are not bound to any... crappy rules, like no pets,fees to the freeholder, (who) might go broke or do something dodgy.

So it seems ...a much better decision to buy freehold, whereas with a leasehold it almost feels like you're renting for a very long time.

Am I missing something? Is extending the lease not as expensive or painful as I imagine? Is the value lost due to the lease running out quite negligible?

The reason I'm asking is because I am looking to become a first time buyer in London...it almost feels like I'll be throwing more money down the drain if I go with Leasehold, and it would make more sense financially to hold out a little and get a freehold instead.

Others, above, have addressed some of your fears about leasehold, but essentially, you're right in that Freehold gives you more control. I have a preference for freehold, having owned four freehold houses and five leasehold flats over the past 47 years, although I've never experienced problems with the freeholder (more on this below).

The real issue is, however, availability.  There are probably massively many more leasehold properties around in your likely price-range than freehold ones? Look at what's on the market today:

Enter "Flats" (most of which are leasehold) as "property type" into the filters on Rightmove, with "London" as a search area, and you'll see almost 17,000 flats on the market in the price-range up to £600k, compared to only 1,200 "Detached, Semi, of Terraced "houses (most of which are freehold) - 

Reduce the budget to £450k , and there few "Houses" for sale in London; only 370-odd compared to ten thousand "Flats".  Even if you have a million quid to spend, there are still almost eight times more flats than houses; presumably cos that's what developers build?

So while I sense that you have a presumption in favour of freehold, you may not be able to freely choose given the limited available stock. Round here in SE London, most of the cheaper houses are two storey ex-Council 3-bedders on the old "Cottage estates; really sound properties, often very well-built, with good gardens -our kids had one in Charlton. 

If you do (have to) buy a leasehold, ask about tenure; who the freeholder is, what the service charges are, whether these include a "sinking fund" for future major of cyclical works like external decorations to common areas, wheter any major work is pallned (as you'll have to share these costs) and how the freeholder or their agent behaves?  The problem is, many Estate Agents won't know, or won't say, because the only way you can really get trusted answers to all this stuff is via your solicitor's formal written enquiries  after your offer has been accepted and you've started committing time and fees to the purchase.  But you can ask!  And use Google once you know who the Freeholder is to see if they've been in any disputes which have made it to Court.

Of my five leasehold flats, three were so-called "shared freeholds", all in 19th Century conversions where the individual flat-owner Leaseholders collectively owned the block's freehold via a Non-Profit Limited Company.  In consequence, we had control, (albeit we had to work at getting on together!) and in most cases, managed legalities and maintenance ourselves.  In my last 2-bed leasehold property, in consequence, we had the lowest service charges in the area (about £1,200 a year), best maintenance arrangements and a big, growing sinking fund for the 7-yearly external decor.  By contrast, mates of mine who bought a flat at about the same time in a new development a mile away- exactly the same size and purchase price as ours - but with a conventional Commercial Freeholder and Managing Agent, ended up with service charges which racheted up to almost £6,000 pa before they bailed out and bought a Freehold.  My two ex-Council leasehold BTL flats are however very reasonable.  Service charges of only £800-900 pa, and bills of about £4-5k every 6-10 years for major maintenance as the Council freeholder is competent and fair. 

So there you are; "it's like a jungle out there; sometimes, it makes me wonder, how I keep from going under..." as GrandMaster Flash sang in his iconic 1982 hit!

Scotbot

user1977 

You're mistaken (though quite a common misconception) in thinking that there are no "rules" with freehold properties too, they're really just as likely to have the same sort of restrictions.

No they are not. I have no restrictions on what I can do with or in my  freehold property as long as it is legal. Some modern estates have community charges for freeholds for maintenance of common land and some  may have covenants regarding shared access of stuff like driveways but the vast majority of freeholds do not.

If it was build pretty 2000 it's a reasonable assumption there won't  be any. 

Not all houses are freehold, some  may  be lease hold in some Northern locations. Generally a peppercorn charge  but since the OP is in London not relevant to them

tryingmybest99

ended up with service charges which racheted up to almost £6,000 pa before they bailed out and bought a Freehold.  My two ex-Council leasehold BTL flats are however very reasonable.  Service charges of only £800-900 pa, and bills of about £4-5k every 6-10 years for major maintenance as the Council freeholder is competent and fair. 

Do you know how they can put service charges up so much (to a regular payment of £6k per year)? It is a big fear of mine that it will happen to me! I thought that anything expensive had to have a section 20 notice and had to be reasonable costs, i.e. you'd only pay that amount if there was work that genuinely needed to be done (and you could ask for more quotes etc).  

Section62

Scotbot said:

user1977 

You're mistaken (though quite a common misconception) in thinking that there are no "rules" with freehold properties too, they're really just as likely to have the same sort of restrictions.

No they are not. I have no restrictions on what I can do with or in my  freehold property as long as it is legal. Some modern estates have community charges for freeholds for maintenance of common land and some  may have covenants regarding shared access of stuff like driveways but the vast majority of freeholds do not.

Of the freehold properties and land I've looked at I've yet to find one which doesn't have at least one covenant.  I'm not suggesting they don't exist, but I'd suggest that saying "the vast majority of freeholds [don't have at least one covenant]" wouldn't be backed up by a rigorous analysis of property titles.

diystarter7

SallyDucati said:

Apologies if it's already been said, but I think the most important point is to not let a lease get below 80 years, as past that point it becomes much more expensive to extend.   And also is the point the property value will drop due to mortgage companies not liking it.  Unfortunately a lot of people don't realise this. 

I did extend the lease on my last flat and tried to tell a neighbour the pitfalls of not doing so, but she didn't see why she should spend the money, until it got to 74 years and she ended up on a standard variable rate on her mortgage as she couldn't get a new deal.  Ended up costing her a lot more than she needed to.

A great post highlighting the massive pitfalls of a lease on a house where you do not really need one.

[Deleted User]

Yes, it's a scam. Most countries don't do it much, if at all, but you know Treasure Island...

Gycraig

diystarter7 said:

user1977 said:

diystarter7 said:

Woolsery said:

diystarter7 said:

A lot of inaccurate info here re the lenght of leases.
It's not 999 years as posted by some but 125 years, in London it is on apartments built 20/30/35 years ago

In central london they were 999 years but the majority in london are 125 years.

The country extends beyond London. My info was 100% accurate, relating to a house built in 1898 and rebuilt in 1948. It was in Bath; like many others built on land owned by a charitable trust. I believe there are thousands of older leasehold houses in the NW around Manchester.

Of course, more modern leases are different and the problems with 'rocketing costs' are well documented. You can't paint the two things with the same brush.

the vast majority of people would run a mile form a leasehold house

Without knowing what the lease says? Many are ultra-long leases and utterly benign. Would be daft to run away from them.

And just as many are not "benign."
I've met someone who had a nice apartment in central London. They had lived there for a good 40 years but the remaining lease was 65 years-ish and they wanted to sell up and move to the cost/Weymouth area and were staggered/shocked and upset when given valuations on their property by EA as they did not think the impact would be so massive. They could not afford to renew the lease and where they were hoping to move to, they could not afford, so not as "benign"  many times.

Best avoided especially houses

Could said friend have afforded a free hold house when he bought his leasehold flat though ?. 

Bet he was devastated his flat had only gone up 2000% or something in 40 years. 

NameUnavailable

Entsolen said:

I know that this must have been discussed a lot. And I have attempted to do my own research on this. But I'm still not getting it, so I ask you to please be patient with me and explain what I may be missing in my understanding.

To me, the main advantage of getting a mortgage over renting, is that a lot of the money you put into the property through the mortgage payments is "retained", as in, it gives you more and more ownership of the property and if you wish, you can sell it and get a lot of that money back, where's with renting the money is just gone.

However, when you buy a Leasehold property, the lease starts running out. Doesn't that mean that every year you're actually loosing value on your property, and therefore a bigger part of the money is gone, just like with renting? Plus you need to pay fees to the freeholder, plus there may be certain crappy rules, like no pets, plus the freeholder might go broke or do something dodgy.

As I understand you have a right by law to extend the lease, but again, that's extra money and headache that you need to throw at the property somewhere down the line. 

Where's with a freehold once you buy it you fully own it, so you are not bound to any rules set by the freeholder, and you don't incur any depreciation due to the lease running out. 

So it seems like financially it's a much better decision to buy freehold, as a substantially bigger part of the money that you pay for the mortgage is retained in your ownership of the property, where's with a leasehold it almost feels like you're renting for a very long time.

Am I missing something? Is extending the lease not as expensive or painful as I imagine? Is the value lost due to the lease running out quite negligible?

The reason I'm asking is because I am looking to become a first time buyer in London, and obviously with Leaseholds I have a lot more options in terms of choice of properties as well as the Help to Buy scheme.

But it almost feels like I'll be throwing more money down the drain if I go with Leasehold, and it would make more sense financially to hold out a little and get a freehold instead.

Commenting without reading all previous responses so others may have made similar points, but...........

Any flat (with some rare exceptions) in England will be leasehold. The lease is necessary where there are more than one home within the same building as it sets out rules such as contribution to maintenance, common areas and what you can or can't do to the property.

The thing about pets is also there to protect you - what if the people in flat above/below you had a dog that they left alone a lot and kept barking, or pooping in the hallway? Most will allow pets but the clause means that the freeholder can take steps if the pet becomes a problem to others.

The value of most leases will increas along with property values in general. I sold my last flat for significantly less than true market value (long story) but still came away with nearly £200K 'profit' after paying off the mortgage.

The problems with leases are short leases that cost a lot to extend (but if buying such a lease you should be paying a price that reflects the cost to extend). High ground rents - over £250 outside London or over £1000 inside London and it's an assured tenancy which means less rights and difficulty in finding a mortgage etc. So, look for a place with peppercorn or very low and fixed ground rent.

Another issue is maintenance and service charges. Again, buy wisely to avoid places with high charges and poor management. Ideally find somewhere that's got Right To Manage (the leaseholders manage the building) or better still a shared freehold where you collectively own the freehold. If you buy a freehold house you still have to pay to maintain the building, unless you intent to let it fall into disrepair over time. If the guttering needs replacing you have to pay for it. If the guttering on a leasehold needs replacing you pay a share of it.

I have a flat with a 900 plus years lease remaining, peppercorn ground rent and a share of the freehold. It's nearly (not quite) as good as having a freehold property, in an area where I couldn't afford a freehold property.

A freehold newbuild or more recently built house is likely to have a service charge for communal grounds, as well as covenants about what you can or can't do to the house. If you buy a listed house there are rules about what you can or can't do to it (and criminal penalties if you break them!).

So, a lease is fine if you buy the 'right' one.

SensibleSarah

I live in one of the 'good' leasehold houses. 950 ish years left on the lease, no ground rent or any kind of service charge. My local council is the freeholder. 
However, I still wouldn't recommend it and I'll never buy leasehold again because it just makes things more complicated. I am not staying here forever, but if I was, I'd want to make some changes/improvements to the home and I'd have to consult the freeholder first, which costs money each time. 

My council have offered me the freehold for a cost (which I think is a bit cheeky, because it's not like they make anything from ground rent and it costs them nothing as a house currently!) plus legals, which isn't money I have to spend right now, but will consider doing it before I sell just to simplify things. It doesn't seem to make a difference to value round here though (some houses in my street are leasehold, some freehold), only possibly the appeal to potential buyers, so will make a decision nearer to the time. 

Ath_Wat

diystarter7 said:

SallyDucati said:

Apologies if it's already been said, but I think the most important point is to not let a lease get below 80 years, as past that point it becomes much more expensive to extend.   And also is the point the property value will drop due to mortgage companies not liking it.  Unfortunately a lot of people don't realise this. 

I did extend the lease on my last flat and tried to tell a neighbour the pitfalls of not doing so, but she didn't see why she should spend the money, until it got to 74 years and she ended up on a standard variable rate on her mortgage as she couldn't get a new deal.  Ended up costing her a lot more than she needed to.

A great post highlighting the massive pitfalls of a lease on a house where you do not really need one.

You "need one" if the house you want to buy has one.  Nobody is suggesting that everyone rush to buy leasehold houses,.  Everyone knows it's not a positive.  What people are saying is that when you buy any house the advantages it has to you can outweigh the disadvantages, even if one of those disadvantages is that it is leasehold.