Cash purchase of Freehold flat with no management ?

Hi Philamena,

You are right to identify that this is likely to cause you problems one of them being resale. If a buyer needs a mortgage this will likely be an issue for them, which you are not experiencing as a cash purchaser.

Are you getting this property at a mega bargain price ?

You biggest potential problem here is when major repairs are necessary. If the are no funds how will the money be raised? Also, what are the insurance arrangements? Is the entire block insured or each flat individually? In the case of the latter it is a massive headache waiting to happen. All it needs is one flat to be under insured or not insured at all and in the event of damage by say fire or flood, you might end up with an uninhabitable building with no funds to repair.

I presume you are buying the Flat Lease & a share in the Freehold (unless this flat is in Scotland)?
How is the cleaning of the communal areas paid for & communal electricity bill? What happens when other more major repairs/works are required eg roof maintenance (if flat should be inspected every 3-5 years especially for insurance purposes), woodwork eg communal door or window frames & skirting boards, brickwork etc etc? Does the Lease state anything to do with maintaining the building on a regular basis every so many years cause if not, then how do you get all 12 flat owners to pay up when needed?
Also is there a Block Buildings Insurance policy or do you have to insure your own flat separately?
Is see this more fraught with problems than not.
Neil is spot on in his statement of if ever selling & there's no Leaseholders Agreement in place, a buyer who needs a mortgage will more likely be advised by their Solicitor not to proceed without an agreement in place & this same Solc will be obligated to inform the lender too (if acting for the lender on the mortgage transaction which is common practice) & therefore the lender may stipulate the same.

The way forward is to form a management company with each flat owner being a shareholder, but you need the agreement of all the owners for it to happen. It doesn't cost much to form a company, about £30 - £40, but then unless you or others are willing to run it, and be trusted by the others to do so then you will have to find a reliable management company who won't charge high fees.

Then, unless there are other reasons against it you should be able to get a mortgage if you want one.

If there is no block policy it may be difficult getting insurance where each flat is insured separately as some insurers could argue the point of who insures the roof. There might be issues if some owners don't bother to insure their flats of who pays if there was a major structural problem, the insured flats insurers could say the building was underinsured and not pay out at all.

I would like to know where the management overseer has gone ,was it a limited management company initially looking after all the flats ,as mentioned previously who owns the ROOF ,what happens if a major issue arises regarding flooding from the top down ,what happens if you have external problems with the outer fabric of the building that affects your flat who pays then ,I think this is a potential minefield and I would be asking LOTS AND LOTS of questions to my SOLICITOR befrore I sign on the dotted line

Hi Philamena,
I agree with all the advice given above. I have a friend who owns a first floor flat in London where the original house was split into three by horizontal division, one ground floor,one FF, one 2nd.F.The owner of the top floor has refused to pay any contribution towards electricity, decoration or cleaning of the common areas since he acquired the freehold of his flat, so this cost is bourne by the other two owners, who are also freeholders of their flats. I would strongly recommend you reconsider your intention to purchase the flat unless you can overcome the foreseeable problems.

John

Reply to the comment left by "Neil Patterson" at "02/01/2015 - 10:13":

Thank you for your comments Neil..The flat was about £12K less than other 2 bedroom flats in the area

I bought three first floor flats in a two story purpose built block of eight over 10 years ago with no management company in place. There was no issue with the mortgage back then. There is no block insurance, each flat is owner insured, again not a problem for me. However my conveyancing solicitor recommended I purchase one-off indemnity insurance to cover any uninsured lose in case my neighbors flats are not adequately insured. Sorry I don't remember the details but I was surprised how cheap it was.

In the time of my ownership the only issue has been a leaking roof. The deeds stated that the maintenance of the roof is the responsibility of the first floor flats, with drainage and other ground work issues is the responsibility of the ground floor flats. So I had to bare the cost of repairing three quarters of the block roof myself.

It has been a bit of a gamble but so far the cost of repairs has been far less than the saved management charges. Fingers crossed it stays that way.
Steve

I answer this as a mortgage adviser of some years experience. I am only aware of one lender who offers mortgages on freehold flats. That lender has done so for many years, but if they should pull out of the market for freehold flats, you could be left with an unmortgageable property, which will be difficult to sell.

I have seen several freehold flats advertised over the years (and I can only speak from my own experience here) but there has been a significant discount on the price; around a third of the leasehold value on equivalent flats. I guess this reflects the difficulties in the sale.

I recently bought a flat with no management structure in place. Since then I've set up a management company etc... and we are beginning a (slow) process of works. It was a lot of tedious work and cost me about £5000 in legal fees, but now it's worth about double what I paid for it. Obviously I took a fairly big risk, flats with no management often have shady characters floating around the ownership structure, but then that risk is reflected in the return.

I'd say £12,000 is too small a discount, unless you can develop it, or else if the rental yield is high so that you can treat it as a cash cow for other investments.