Tuesday, 30 January 2018

Are you a victim[1] of a new-build leasehold? A digression

Just look at the howls of self-pity coming from house-buyers on discovering that their property is leasehold!

How can this be a problem? Buying a house must be one of the safest purchases you’ll ever make. You must engage the services of your own solicitor or conveyancer, who should point out the snags. If, as most do, you need a mortgage, they will also do a survey to determine whether your purchase ‘is worth it’ (the price you are paying)

OK, I know. In the real world housebuilders and estate agents will have their ‘recommended’ solicitors or conveyancers, who may also act for the sellers—a clear case of Conflict of Interest. Mortgage lenders are only concerned that there is sufficient equity in your purchase to cover their loan. Nor are they (were they?) required to show the results of this value survey.
[In sept 1967 I bought 19 Arless Way for £3,950, leasehold at £30 p.a. for 99 years. On a PV basis at 6% this is a lump sum of £500 (99=perpetuity). But then there’s inflation! By 1977 when we came to sell for £12,000? That £30 was now only £8.66 worth)

If you are really cautious, and follow advice, you will commission your own survey, but that is generally to do with condition, not whether the price is reasonable. [We keep coming back to the sad fact that the main purchase motivation is future capital gain. There is also the widespread delusion that ‘someone’—usually ‘the government’ will ensure you are not swindled, that there is a law to stop That Sort of Thing]
So buyers beware! If you buy a leasehold property, ask for advice. Listen to it.

And it shows up in the price of a house: Some research
Back in the 1980s I published a paper on house-price valuation by computer. You can see it here at http://www.conallboyle.com/housing/BoyleJofVALUATION1984.pdf .

What I found out about the effect of ‘leasehold’ on the price of a house: Leaseholds were about 3% cheaper to buy than freeholds. Based on the Land Value, leaseholds knocked 10% of the land value off the selling price of the {land + house}. These numbers closely reflect the calculations by valuers of ‘Present Value’. The market price simply reflects the difference.

It’s sometimes claimed that ‘freeholder’ status is desirable, and has a value. This seems to be the thinking when homeowners try to buy the freehold. PV calculations are ignored and a higher price demanded for the privilege of being a freeholder. This is just hearsay and a small amount of experience on my part. (A research topic anyone? Is there any published work on this?)  My research does not seem to bear out this intrinsic value of being a freeholder.

Another advantage of being a freeholder is that you are free to do things that leaseholders can not. Painting your front door a garish colour is the usual example. But even as a freeholder you will be bound by covenants, which may include the door colour.

So it all comes down to enforcement. It’s obvious who is the enforcer if there is a Ground Landlord. Who enforces conditions on a freeholder? Perhaps the outraged neighbours would if the covenant really matters. Otherwise it is a dead letter whatever the tenure.

A modern twist is that the housebuilders who sell leasehold are only intent on selling on the lease to the financial sector. As playthings of financial capitalism they are sliced and diced, turned into derivatives many times over. Ownership of a single lease may devolve onto hundreds or thousands of speculators, who have no idea what they own, let alone interest in enforcing the onerous conditions of the lease.

Ground Rent: Land Value Tax for landlords

What the housebuilders have twigged onto is the value of the land. Leaseholders pay ground rent. Does that not tell you what they are doing? [I see that the Scottish LVT advocates (http://www.andywightman.com/hot-topics/lvt) actually want to call it annual ground rent]

Leasehold is a very traditional way that landowners have their cake and eat it! Under leasehold they rent you the land to build your house for a fixed period, usually 99 years. After that they are entitled to repossess the land, and your house on it without paying a penny compensation. For this privilege you pay an Annual Ground Rent.

Now it is a very simple task to calculate the Present Value of 99 years of Ground Rent, even allowing for inflation in-between. Any competent property professional will be able to advise the buyer of the loss of value this entails. It beggars belief that this is not explained before purchase. In a way Ground Rent is a sort of Land Value Tax but with the proceeds going to a ground landlord, who these days may bundle up a tranche of theses ground rents and sell them on to Vulture Capitalists funds.

[In fairness, I ought to mention that there are some good ground landlords. The Calthorpe Estate and the Bourneville Estate both in Birmingham have this positive reputation. They ensure that the areas they control are not spoiled by poor development. This is not altruism. They still make a healthy long-term profit, probably higher than the get-rich-quick market financiers.

Qs for my ex Poly chums

(I’m assuming the lease is for a single house, not a flat in a block, and is a long-term one greater than say 80 years to run. Obviously other considerations apply if less than 20 yrs, including Leasehold Reform Acts)

Leasehold vs Freehold: Should a competent EA (Estate Agent) be able to explain that there is a price difference, and why?

DO THEY normally explain this to clients, or do they expect others eg conveyancing solicitor to explain it, warning buyers of effect. Is the concept of due diligence relevant?
Would same EA have the knowledge to calculate the difference?
OR is the difference somehow  glossed over as fairly trivial?

In my (V limited) experience, leaseholders will try to achieve an exorbitant (ie greater than PV) price to enfranchise lease. True? Based on the sentimental attachment of owners to freeholder status.

Is it true that vast majority of leasing set-ups are purely financial, although a veil of decency with bullshit about maintain the ‘upmarket character of the neighbourhood’, prevent scrap metal dealers, bordellos etc. opening . Although, even freeholders are subject to covenants? And who enforces this? [does it really devolve to Local Authority?]

BUT, are there some ‘good’ ground landlords, eg Calthorpe, who, while making good profits long-term, see it in their interest to ‘maintain the neighbourhood character’?

Would a Building Society or other lender ever balk at a loan because the lease was too onerous?

[1] Today, we are all victims! (Apart from middle-aged white men of course) There’s an interesting article in Spiked by Frank Furedi about how we morphed from Universalist values of liberty, equality etcetera of ALL of humankind, to identitarian politics of equality of opportunity. This has now become victimhood and total innocence (can do no wrong) of me-too. http://www.spiked-online.com/newsite/article/the-hidden-history-of-identity-politics/20596#.WnCjUCOcZMY

No comments:

Post a Comment