Buyers will often be tempted by flats for sale at what appear to be bargain prices. But they should be wary as there is usually a good reason why a property is being sold for a low price. Of course you want to pick up a bargain, but make sure that it doesn't turn out to be a bad bargain.
It is often said that the devil lies in the detail, and this is particularly true of buying true when buying any flat. Here's an example of why it is important to check things out -
A property investor saw a flat advertised for sale by auction – the guide price looked well below the likely market price for such a property. It was located in a nice part of a popular south-coast town, so it looked a good bargain.
It was a repossession sale, but why was the flat being sold by auction in the current state of the market. Being a smart investor he decided to check things out further.
Perhaps the flat was very small? - no, the Energy Performance Certificate showed that it had larger floor space than many three-bedroom houses.
Was the unexpired term of the lease too short for mortgage lenders? - again no, it had a 999 year lease, so no worries there.
On further investigation he then found out that the service charge was nearly £4, 000 a year – over £300 a month and way above what would normally be expected. Moreover there were problems with the management of the building and ongoing disputes between the freeholder and some of the flat-owners.
And on top of that major works were going to be carried out to the building but there were no estimates of the likely cost!
This story just shows that what looks to be a good bargain on the surface may turn out to be anything but on thorough investigation.
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Things which can affect the value of a flat
Not everyone has the expertise to carry out the detailed investigations which this investor made. But buyers should always remember the cardinal rule is 'caveat emptor' – in other words the buyer must look out for himself and cannot rely on the seller to reveal all the nasty details!
It is assumed that a buyer will have checked the location and size of a property for themselves – this might seem obvious but it does appear that many auction bidders don't even carry out this most basic check. Some buyers nowadays just rely on looking at the property details on-line without ever seeing the property but a visual inspection is always recommended.
However there are many other things which can affect the value of a flat where you will need to rely on help and advice from your solicitor and surveyor before making a final decision. Let us look at some of these in more detail.
One problem when buying a flat is trying to ascertain the general condition of the whole block in which it is located. When buying a house a surveyor can easily check the whole property, but this may be difficult with a flat especially if it is in a large block. Nevertheless it is usually worth the expense of having a professional survey carried out as a trained surveyor will be able to spot problems that would not be detected by the ordinary buyer.
How long has the lease got to run?
The length of the lease is another major factor in determining the value of a property. Flats in England and Wales are almost always owned on leasehold title, and leases are granted for a fixed period or term.
That period will always be getting shorter and once there are less than eighty years remaining the value of the lease will start to fall considerably. When the period drops below 70 years it is now extremely difficult to get a mortgage on a property, so few buyers will be interested.
The answer to this problem is to get the lease extended. There is legislation which gives flat-owners the right to require the freeholder to extend the term of a lease, but a premium has to be paid as well as other costs.
As the unexpired term of the lease drops the amount which would have to be paid for a lease extension rises. When the term drops below 80 years something known as 'marriage value' will also have to be paid to the freeholder, which is why the value of the lease then starts to drop.
If your are considering buying a flat with a short lease then you will need to consider whether you want to try and get it extended and if so the likely costs involved. Bear in mind that you will not be entitled to apply for an extension until you have owned the property for two years, but you can ask the seller to serve the necessary notice and start the ball rolling.
How much are the service charges? Is the building properly managed?
One of the areas most frequently overlooked by buyers of flats, especially those new to the property world, is the general management of the building coupled with the service charges payable.
Most leases require the freeholder to maintain and repair the fabric of the building, but individual leaseholders have to contribute a share of the costs through a yearly service charge.
The seller should obtain an information pack from the freeholders, which will include details of the current level of service charges and should also include accounts for three previous years.
Freeholders are often reluctant to carry out any works which will cost any substantial amount since leaseholders are often reluctant to pay for them. Sometimes the freeholder just refuses to accept their responsibilities or has even disappeared. This can lead to buildings becoming run-down and unattractive to buyers.
Conversely some freeholders will seek to maintain and repair to a high standard, but this means high service charges.
Major works can lead to major costs for flat-owners
When major works, such as re-roofing, are required to a block of flats the flat-owners may find themselves being required to pay a substantial sum to cover the cost. So it is important for a buyer to find out whether any major works are planned, or are likely to be required in the near future.
When a freeholder intends to carry out major works they must serve what are known as a Section 20 Notices on the flat-owners. So a seller should be able to say whether any such notices have been received.
But the seller should also be asked to obtain a management information pack from the freeholder or managing agents. This will contain details of any S20 notices already served, as well as details of any works already carried out but not yet charged for.
In many cases the cost of major works can be met from a reserve fund which the freeholders will have built up from past contributions by the flat-owners. The existence of such a fund will avoid flat-owners having to meet very large bills when works are required.
But such reserve or maintenance funds do not always exist, or may be insufficient to meet exceptionally heavy costs. Such funds are rare when the freehold is owned by a local council or housing association, and also when the freehold is owned by the flat-owners themselves.
Any problems with the overall management of a block of flats can be bad news for a buyer. Such problems will include not only lack of repairs and maintenance being carried out, but also legal disputes between flat-owners and the freeholder.
Get all the information before committing yourself
When buying a flat your solicitor will make sure that they get all the necessary information from the seller and the freeholders so that you can make an informed decision before committing yourself to the purchase.
Even if you are intending to buy at auction you should consider asking a solicitor to carry out a pre-auction check – the cost can save you buying a bad bargain.