The Leasehold Equation

When you’re investing in a leasehold property the number of years remaining on the lease is an issue for a number of reasons.

Mortgage lenders like to have a comfort zone of years left on the lease – usually somewhere between 30-55 years – on top of the mortgage period.  As most people take out a 25 year mortgage, that means that 80 years plus on the lease may well keep your lender reasonably happy.

However, it is worth noting that some mortgage lenders will decline to lend once the lease ticks down below 85 years. As each year of the remining lease lessens, the choice of lenders diminishes still further. Once you get below 55 years – you’ll need to purchase by some other means (i.e. cash or bridging finance) as getting a mortgage will be nigh-on impossible.

What are your options with leaseholds below 80 years?

Avoid them like the plague!

OR see them as a profitable opportunity.

The challenge for owners of short leasehold properties is that their property is reducing instead of gaining in value and that’s something of a rarity in property.  Of course, once a leasehold drops below 80 years the property owner can issue a Section 42 notice, the first step in the statutory process which requires the freehold owner to grant an extension to the existing leasehold.  

If the current property owner is aiming to sell they may not feel that it’s worth the hassle – or may not be able to afford it.  It’s possible that they are completely ignorant of the relevance of how the remaining years on their lease will affect the value of their property.  

Another important point is that for every year below 80 remaining on the lease, the cost of extending it becomes exponentially more expensive.

You could be forgiven for holding up your hands and looking for a property with less hassle attached.  However, this situation has within it the potential for considerable profit.

A winning strategy

If you look for properties – flats specifically – with under 80 years left on the leasehold, the sellers will soon discover that they can ask but they can’t get full market value for their property – Why? Because would be buyers factor in the cost of that lease extension into the price they are prepared to pay, at least they do if they have any sense.  If the owner just wants to get rid of the property – for whatever their reasons may be – they’ll realise that there is a very small pool of people who are able, let alone willing, to buy.  This means the price will come down – a lot. Although it is fair to say sellers often take some time to adjust to their new reality

The legislation that contains that Section 42 notice compels the purchaser of a leasehold property to wait 2 years before they acquire that right to issue the Section 42 notice to begin the process of extending a lease – so there are two steps:

1. As part of the purchase terms, include that the current owner will start the process of extending the lease by issuing the Section 42 notice.  This can then be assigned to you as part of the purchase process.  You will need to have an agreement in place so that the current owner is tied to completing the deal.
2. Use bridging finance to fund the purchase at well below market value.  Complete the lease extension and then either sell or refinance the property at its uplifted value, with a leasehold of 100 years plus.

You’ll not only have solved the problem that makes the property unmortgageable, but also added considerable value.

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