We’ll tell you everything you need to consider if you’re thinking about selling.
Selling your home is daunting enough, but it can be even more daunting if you are looking to sell your flat. Short leases or onerous lease terms can render your home harder or almost impossible to sell.
As the Home Owners Alliance rightly points out, “Most mortgage lenders won’t lend on properties with a lease under 70 years.” Some mortgage lenders, including Nationwide, have stricter policies on lending money for leasehold properties “whose ground rent doubles every five, 10 or 15 years.”
As mortgage providers are reluctant to lend money on homes with short leases or onerous terms, buyers will struggle securing finance for the purchase. Ultimately, leaseholders could be stuck with their property decreasing in value.
So, we’ve put together some points you need to consider when selling your flat.
The 80 Year Rule
Before putting your property on the market, it’s crucial you find out how long is left on the lease. The length of the lease will impact on the saleability, especially if the lease is below 80 years. With leases below 80 years, a lease extension will cost significantly more as you will have to pay marriage value.
As previously stated, mortgage providers are less likely to lend on properties with 70 years remaining, and a property with 50 years remaining is “almost impossible to mortgage,” according to leasehold valuer, Nick Plotnek.
If your lease is approaching, or below, this point, there are two options: extend your lease or acquire the freehold together with your neighbours, otherwise known as ‘collective enfranchisement.’
Two Years’ Ownership
Before we consider these options, though, it is important to note that leaseholders can only extend their leases after two years of registered ownership.
It is also worth noting that leaseholders—who have been registered owners for two years—can trigger the extension or enfranchisement process before selling the property to a third party. This way, buyers can benefit from extension or enfranchisement without having to wait two years.
However, taking this approach can affect the sale value of your home. Buyers are not particularly fond of having to finalise these processes having just moved into their home. The option is there, though, if you need a quick sale.
Extending the Lease
There are two ways of extending your lease: you can approach your freeholder directly and request an extension (although they usually overcharge), or you can trigger the process using your statutory rights. The advantage of the latter option is that the terms of the extension are more favourable and will generally save you money overall.
Once the formal process of extension is triggered, the clock freezes on your lease. So, if you start the process with 81 years unexpired, your lease ‘freezes’ until the extension is completed, meaning freeholders will not be entitled to the property’s ‘marriage value.’
Marriage Value
Marriage value is the hidden increase in value of a property arising from the grant of a new lease—otherwise, the ‘profit’ from extending. Freeholders are entitled to 50% of a property’s marriage value if you extend your lease after it’s dropped below the 80-year mark.
Again, keep an eye on the length of your lease and trigger the extension or enfranchisement process before your lease falls below 80 years.
Collective Enfranchisement
Another option to improve the saleability of your flat is collective enfranchisement. This is where all the leaseholders in the block come together to collectively acquire the freehold.
The advantage of collective enfranchisement is that flats with a share of the freehold are more attractive to buyers as the owners are in control of their own service charge and usually have no ground rent to pay.
However, you can face a myriad of issues when pursuing collective enfranchisement. For instance, getting enough people to agree to the process can be difficult if you live in a large block with many flats.
With this in mind, extending your lease often becomes the preferable option, especially if you are looking to sell soon.
Agreeing on the Premium Takes Time
Finally, the lease extension and enfranchisement processes are lengthy, which benefits freeholders as they can use this to demand overpriced premiums for the freehold or extension to come to an agreement quicker.
As Mortgage Finance Gazette notes, “People wishing to sell in a hurry frequently overpay to get a mortgageable longer lease.” They also point out that leaseholders tend to “dispose of the property quickly, accepting a low offer and leaving the purchaser to pursue enfranchisement issues.”
Our advice here: if you are planning on selling your flat, do not make any rash decisions and prepare as soon as possible.
Summary
- Keep an eye on your lease and do not let it fall to or below 80 years
- If your lease is around the 80-year mark, extending or enfranchising will improve the saleability of your flat
- Extending or enfranchising does take time, so begin sooner rather than later
- Seek advice from a specialist leasehold valuer on which option is best for you. Nick Plotnek has over 35 years’ experience and can provide tailored advice if you are looking to sell your flat
From: Mortgage Finance Gazette, Yopa (Lydia Bower) and Prime Location
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