First Time Buyer, Auction, Short Lease

hoc

A triple combo of red flag terms, I realise.

A flat in the southeast is being sold on auction. Guide price 125k. Flats typically in the area 200k. Reason for auction sale is stated: can't be sold traditionally or on mortgage due to short leasehold (61 years remaining from original 99). Owner has rented out for years and extending lease requires living at least 2 years. Flat looks fine, nothing obviously wrong with it.

If purchased and owned for 2 years, the earliest leasehold renewal would be with 59 years left. Is 10k a realistic cost for this? This is a guaranteed right with some legally defined upper limit and arranged directly by the individual owners, not collectively as all owners of 8 flats in the building, is that right?

Assuming minimum reserve price 10% above guide price and possibility to win for 140k about 30% below market would the more experienced of you be interested in this? Is it a clear case of wouldn't touch with a barge pole?

Grumpelstiltskin

How would you pay for the flat?

hoc

Grumpelstiltskin said:

How would you pay for the flat?

I'm actually not the prospective buyer, it's for my friend I'm asking here to try to help as I'm not familiar with flats and leaseholds or auctions. Anyway, the answer is he would pay all cash from savings.

eddddy

hoc said:

If purchased and owned for 2 years, the earliest leasehold renewal would be with 59 years left. Is 10k a realistic cost for this? 

Looking at the calculators (and assuming a relatively insignificant ground rent), the lease extension cost might be nearer £23k to £28k - plus costs of maybe £4k to £5k.

See: https://www.lease-advice.org/calculator/

hoc said:

This is a guaranteed right with some legally defined upper limit and arranged directly by the individual owners, not collectively as all owners of 8 flats in the building, is that right?

The vast majority of flats (and leasholders) are eligible for statutory lease extensions, and the landlord can't prevent it  - as long as the leaseholder doesn't mess-up the process (which I've seen happen a few times).

Some info: https://www.lease-advice.org/advice-guide/lease-extension-getting-started/

You can extend the lease of just one flat. Alternatively, the leaseholders often have the legal right to club together and buy the freehold.

hoc said:

Owner has rented out for years and extending lease requires living at least 2 years. 

You have to own the lease for 2 years - you don't have to live in it for 2 years.

But is the current leasehold owner willing and able to serve a section 42 notice before completion? If so, you don't have to wait 2 years. (Have a look at the special conditions of sale to see if the seller is offering this.)

hoc said:

A flat in the southeast is being sold on auction. Guide price 125k. 

Is this a 'traditional' unconditional auction?

Or a conditional auction (sometimes called the Modern Method of Auction). There are some good reasons to be extremely cautious about those.

So do you have the purchase price available in cash - plus the extra £30k+ for the lease extension in cash?

hoc

eddddy said:

hoc said:

If purchased and owned for 2 years, the earliest leasehold renewal would be with 59 years left. Is 10k a realistic cost for this? 

Looking at the calculators (and assuming a relatively insignificant ground rent), the lease extension cost might be nearer £23k to £28k - plus costs of maybe £4k to £5k.

See: https://www.lease-advice.org/calculator/

hoc said:

This is a guaranteed right with some legally defined upper limit and arranged directly by the individual owners, not collectively as all owners of 8 flats in the building, is that right?

The vast majority of flats (and leasholders) are eligible for statutory lease extensions, and the landlord can't prevent it  - as long as the leaseholder doesn't mess-up the process (which I've seen happen a few times).

Some info: https://www.lease-advice.org/advice-guide/lease-extension-getting-started/

You can extend the lease of just one flat. Alternatively, the leaseholders often have the legal right to club together and buy the freehold.

hoc said:

Owner has rented out for years and extending lease requires living at least 2 years. 

You have to own the lease for 2 years - you don't have to live in it for 2 years.

But is the current leasehold owner willing and able to serve a section 42 notice before completion? If so, you don't have to wait 2 years. (Have a look at the special conditions of sale to see if the seller is offering this.)

hoc said:

A flat in the southeast is being sold on auction. Guide price 125k. 

Is this a 'traditional' unconditional auction?

Or a conditional auction (sometimes called the Modern Method of Auction). There are some good reasons to be extremely cautious about those.

So do you have the purchase price available in cash - plus the extra £30k+ for the lease extension in cash?

Thanks for that. Sorry on phone, can't quote individually to reply.

Wow, extension would be much higher than I thought, you're correct 30k should be required. Articles I had read with examples suggested much lower. So an optimistic purchase at 140k plus 30k for extension would be 170k, still a saving over market but only around 15%.

Yes, the owner is willing to serve Section 42. It's at the cost of the buyer, not sure how much it would be, probably some saving in doing so but the cost of extending doesn't change drastically between 61 and 59 years.

It appears to be an unconditional auction. 10% deposit is required at auction end. There's a 200 page bundle I haven't had time to review the details.

Yes, the prospective buyer has funds in cash to pay purchase and 30k for extension. However, based on above figures, I'm inclined to think this isn't such a good deal.

BlueVeranda

eddddy said:

hoc said:

Owner has rented out for years and extending lease requires living at least 2 years. 

You have to own the lease for 2 years - you don't have to live in it for 2 years.

While there might be a genuine reason for the owner not extending the lease before sale (lack of ready access to £30k would be an obvious one), lying about the requirements seems like a bit of a red flag to me. 🤔

eddddy

hoc said:

Yes, the owner is willing to serve Section 42. It's at the cost of the buyer, not sure how much it would be, 

It's a minor point - but those legal and valuation costs (payable by the buyer) would be included in the £4k to £5k cost estimate I mentioned in the previous post.

Grumpy_chap

hoc said:

A flat in the southeast is being sold on auction. Guide price 125k. Flats typically in the area 200k. Reason for auction sale is stated: can't be sold traditionally or on mortgage due to short leasehold (61 years remaining from original 99). 

If purchased and owned for 2 years, the earliest leasehold renewal would be with 59 years left. Is 10k a realistic cost for this? 

£10k seems exceedingly low to me.

FWIW, we extended the lease on our flat (at 81 years) in 2020 and the costs were around £14k including legal costs.  Rates are now higher as there has been a judgement that changes the calculation.

I would suggest the cost to extend the lease will be the difference between going rate (£200k) and this property rate (£125k).

hoc

For those who may be interested in an update no bids were made and the property was not sold. We have been following prices in the area and after a slow down in the last 3 weeks more properties with better prices are being listed. The only prices holding or increasing are rents.