You may be wondering why would anyone buy a leasehold property, when you can buy freehold property instead. You might be a first time buyer and asking why someone would buy a property that you never actually own outright like you do with freehold property.
The reason why people buy leasehold property is they tend to be cheaper than freehold properties and it’s a way for first time buyers to get on the property ladder. Many of the properties in large cities are leasehold flats, which means a leasehold property is their only option to live in a city.
With a leasehold property you are purchasing the right to occupy the property for X number of years, which is the length of your lease and is contained in the lease agreement. As part of your lease agreement you also agree to an obligation to contribute to the cost of maintaining the communal areas of the building, including the structure and roof. You also have to pay ground rent, which is paid to the freeholder for the ‘use’ of the ground and building which is owned by the freeholder.
Let’s take a look at each of these reasons why someone would buy a leasehold property in more detail.
1. To live in a city is a good reason to buy a leasehold property
Many of the properties in cities like London are flats and apartments, which are mostly leasehold properties and why people would buy a leasehold property. To afford a house that is freehold in cities like London is often not an option for the majority of homeowners.
2. People buy leasehold property for affordability as leasehold properties tend to be cheaper
Leasehold properties which are mostly flats and apartments tend to be cheaper than freehold properties like houses, which is a good reason to buy a leasehold property if that’s all you can afford.
3. Building maintenance is done for you with leasehold properties
A good reason to buy a leasehold flat is because the building maintenance is done for you. The downside of a leasehold property is that you get charged a service charge to pay for the maintenance, which can be an expensive additional monthly charge on top of your mortgage payments and utility bills.
4. You can pay to extend the lease is a good reason to buy leasehold property
If you are concerned about the fact that leasehold property comes with a fixed term of ownership, it’s worth knowing that you can pay to extend the lease. But it is only worth buying leasehold property if the remaining term on the lease is 83 years or more.
Once the unexpired lease term falls below 80 years, the cost to extend the lease will include the marriage value*. But in order to extend your lease as a qualifying tenant you need to have owned the leasehold property for at least two years. Which means for you to avoid paying for marriage value, you need to have 83 years left on the lease, which allows for the two years of ownership, plus a further year as a buffer.
Example #1: A leasehold property worth £100,000 with 81 years unexpired lease term and a ground rent of £175 per annum would cost between £4-5,000 to extend, plus costs. Whereas the same leasehold property with 79 years unexpired lease term would cost about £8,000, plus costs.
Example #2: A leasehold property worth £200,000 with 85 years unexpired lease term and a ground rent of £175 per annum would cost between £4-7,000 to extend, plus costs. Whereas the same leasehold property with 77 years unexpired lease term would cost about £15-16,000, plus costs.
* Marriage value is the increase in the value of the property after completing the lease extension, which reflects the additional market value of the longer lease term.
5. First time buyers buy leasehold properties as their first step on the property ladder
Leasehold properties tend to be cheaper than freehold properties, which makes them easier to afford for first time buyers looking to get on the property ladder. But take advice from a good conveyancing solicitor about the lease conditions and make sure the unexpired lease term is over 83 years.
Although 80 years is the cut off after which it becomes difficult to sell a leasehold property, and when it starts to get more expensive to extend the lease term, you want to have more time on the lease when you first own the flat, otherwise it might become difficult to sell it in the future.
But what you should accept for the unexpired lease term depends on how long you intend to live in the property before you sell it in the future.
Also note: If the property has a 99 year lease, check when the 99 years begun, because if it is 99 years from 1989, the unexpired term will not be 99 years from you buy it. When estate agents list properties on Rightmove, they should disclose that the property is leasehold and the unexpired period on the lease.
I recommend you read this article, which is about the disadvantages of leasehold property. This article will help you decide if it is worth buying a leasehold property, and give you pointers of what to check before you buy one.
6. Leasehold property is worth buying if you can buy the freehold
It is possible with some leasehold flats to buy the freehold or a share in it and own it jointly with the other leaseholders. If you own the freehold on the building, this means you have more control over extending the lease term and on which company is instructed to manage the property and service charges.
7. It’s worth buying a leasehold property if you want to live in a flat
It is worth buying a leasehold property if you like the idea of apartment living, as most apartments or flats are leasehold.
8. People buy leasehold properties if there’s a sinking fund arrangement
Some people would only consider buying a leasehold property if the management company has a sinking fund (also known as a reserve fund) arrangement in place for future major expenditure.
In America it is law for condominiums to have a reserve fund, as these reserved funds are in place to cover future major costs and is a way of spreading these major costs between current and future owners of the property.
9. Long 999 year leases
Some people would buy a leasehold property if it has a long 999 year lease, which is known as a virtual freehold property. With a very long lease it means the owner will never have to worry about the cost of extending the lease.
10. Some buy leasehold properties as there’s no need to tend to a garden
If you hate gardening, and if you are not bothered about having your own garden to spend time enjoying, buying a leasehold property is an ideal solution.
Final thoughts about why would anyone buy a leasehold property
The truth of the matter is that if you want to by a flat or apartment instead of a freehold house in England and Wales you don’t have much choice, as the majority of flats and apartments are leasehold properties.
Buying a leasehold flat is generally not a problem, so long as you use a good solicitor who should explain the terms of the lease.
It is important you understand any restrictions the lease has, which can include a restrictive covenant that prohibits you from letting the property to tenants or as serviced accommodation. Make sure you understand the other costs associated with a leasehold property, for example service charges and ground rents, as these can be a costly monthly charge on top of your mortgage and utilities.
If the lease is well written without too many onerous clauses, the property has a good management company to properly manage the building, and the service charges and ground rents are reasonable, a leasehold flat is a perfectly good home and a secure investment.
But if you have any doubts about buying a leasehold property, consider buying a freehold property instead. It may mean you have to buy a smaller house, with a small garden and perhaps out of town, but if it’s freehold you won’t have any of the disadvantages that come with buying a leasehold property.
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Why Would Anyone Buy A Leasehold Property: 10 Reasons Why
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Article written by Russell Bowyer who has been investing in property since purchasing his first commercial property in the 1990's for his own Chartered Accountancy business. But his first property investment project was to turn an old dilapidated restaurant into a large 5-bed home, which he purchased for £117,500 and sold for £450,000 (to see an "after" photo of the house before it was sold see here: About). Russell owns a number of investment properties, which includes houses, flats and HMO's. More recently he has turned his creative side to investing in property using lease options. His largest lease option deal to date was to acquire 12 properties worth over £2 million for just £12, which means he paid just £1 to acquire each property!
