Buy flat in old building with no reserve fund

by Readers Question

3 years ago

Buy flat in old building with no reserve fund

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Buy flat in old building with no reserve fund

I am planning to buy a buy to let property for the first time and need advice. I have found a 1 bed flat at a decent price (£5k less than similar properties). It is a converted flat in an old 1910 built house, which has 7 more flats. All flats are on leasehold and service charges are at £115 pounds per month which is not very high but not too low either in the area. We do know the building is old and will need repair from time to time. Buy flat in old building with no reserve fund

After initial legal checks, my solicitor has found that all the money collected as service charge is being spent (on cleaning, gardening, repairs etc.) and there is absolutely no reserve fund being left annually. Since the building is not very young, I fear more repairs will be required in future, and with no reserve fund, we will be sent a sudden big bill. A £100 increase in service charge will almost kill any monthly profit I will make.

The freeholder has been asked if they are aware of any major repair work that might be required in future and they have refused to comment which is not very useful.

I was wondering if it is a good idea to buy such an old property with already high service charge and no reserve fund, even though it cones at 5k below market price and the area will definitely see property price appreciation of 10% over next 2 years.

Any advise will be helpful.

Thanks

Rita

Comments

Mark Alexander

3 years ago

Hi Rita

One piece of common ground that I've discovered with experienced property investors is that they have learned to trust their instincts.

I study the way that people think and communicate and from what you have written I am very confident that you know what your instincts are telling you, don't you?

This is why I think you have a dilemma ....

1) Your instincts are telling you to walk away
2) You are not sure whether to follow your instincts because you have already invested time and money into finding this deal and you are not yet confident in your ability to find a better one

Am I right?
.

Gary Nock

3 years ago

Rita I think in addition to the problems outlined the property will also have a short lease. For lenders purposes a short lease is under 70 years.

And no reserve fund on an old property like this is asking for trouble.

Walk away.

Joe Bloggs

3 years ago

negotiate a discount.

David Aneurin

3 years ago

1. I agree that it is a non starter, mainly as the service charges seem to be too high.
2 However if you are a glutton for punishment you could:
Buy the flat
then take over the management
possibly take over the freehold (is there any ground rent which would make the sums even less attractive)
Then everything is in your hands
But you will need support from at least 4 leaseholders.

I'd walk away.

Assuming each flat pays an equal service charge the management company are burning through over eleven grand a year just keeping the place ticking over. That sounds like quite a lot for a building that's only got eight flats (and presumably nothing fancy like a lift on site). A £5k discount isn't enough to cover the risk that they'll come back for another big wad of cash to fix the roof or whatever.

Also 12 years as an agent and 20 years as a property investor have taught me that no property will "definitely" go up in value by 10% over a period of time.

Don't read anything into the freeholder refusing to comment though. He's just making sure you can't come back and sue him later. Even if I believed the building was in tip-top condition I wouldn't comment either in his position.

Hi Rita,

If the development is not part of a Residential Management Company I wouldn't personally go for this property.

There being no savings account will ring bells when major works are required.

If its a RMC, that would atleast give you the option to have more of a say into the works that are being carried out and the contractors used. If you make any savings that could than be transfered into the sinking fund.

But I would avoid it, especially if it isn't Right to Manage.

Kind Regards

rita chawla

3 years ago

thanks a lot everyone.

The only reason i am still considering this property is because it is in an area that will hopefully see good property price rise as well as rental demand in the next few years (with supermarkets and new offices being built etc.). So if i keep the place for 3-4 years, hoping there is no major repair required within that time, i can sell it off at a good price.

But on second thoughts, if i want to do that i should rather do that with a property that is in a better shape (good building condition, RTM etc.) so in case the property price rise is not significant, i am not forced to sell it off fearing repair bills.

I will be deciding on this over the weekend. Thanks a lot for all your help. really appreciate it.

brian clement

3 years ago

The property you described will always be troublesome. Conversions in old buildings have poor soundproofing, awkward shaped rooms and generally expensive to keep in good order. Some repairs can be very expensive. I have owned some properties like this one. but I also owned the freehold. If you want this property because you cant afford anything better, try making a much lower offer. Hopefully make some money over the next few years and sell it when boom time comes (2020). Be careful that your dream of being a landlord doesn't turn into a nightmare. Good luck.

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