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anonguest

Determining A Sensible Price For Short Leasehold

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Following some recent comments in other threads about properties being sold with relatively short leasehold (e.g 50 years or less)......

I was wondering whether the calculation of how much the market price of such properties is determined as the remaining lease life gets very short. Does it, in practice, remain a simple 'linear' function of the time remaining or does it typically become 'non-linear' and the price/valuation dropping off more rapidly as it nears lease expiry (i.e 20, 15, 10 years left) - due to other considerations such as increased difficulty in obtaining mortgages, etc

Edited by anonguest

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We have lots of short leases in central London. It is a real pain as there are ground rent reviews and it is way toooo complicated and most of us normally leave it to the manager...you could look up the Lease website (one of my applicants came in with a copy of a guide on how to extend your lease by John D Wood, try their website)..the search engines should give you come guidance.

Short leases are a pain!

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uh...

well, you can always extend a lease via the statutory route, right? and the compensation you'll have to pay the freeholder is determined by a set formula... i did set a spreadsheet to calculate this once, it's certainly isn't linear, the reversion [& possibly also marriage value, i forget] components of it start to snowball as the lease gets short.

so i guess the market value of a house with a shortish lease must be more or less the same as the value of same house if it had a long lease [in practice lease length makes no distance to market value above about 83 year or so], less whatever it'd cost you to extend it?

Edited by the flying pig

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Following some recent comments in other threads about properties being sold with relatively short leasehold (e.g 50 years or less)......

I was wondering whether the calculation of how much the market price of such properties is determined as the remaining lease life gets very short. Does it, in practice, remain a simple 'linear' function of the time remaining or does it typically become 'non-linear' and the price/valuation dropping off more rapidly as it nears lease expiry (i.e 20, 15, 10 years left) - due to other considerations such as increased difficulty in obtaining mortgages, etc

There is a site that gives you what you want. I have just tried to google it and cant find it. I have a link on my work computer. I cant post from there but if you are without an adaquate answer when I get home tomorrow I will post a link.

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There is a site that gives you what you want. I have just tried to google it and cant find it. I have a link on my work computer. I cant post from there but if you are without an adaquate answer when I get home tomorrow I will post a link.

cheers! much obliged to you.

Edited by anonguest

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so i guess the market value of a house with a shortish lease must be more or less the same as the value of same house if it had a long lease [in practice lease length makes no distance to market value above about 83 year or so], less whatever it'd cost you to extend it?

I think you are right, but I am never sure why this is the case.

If there are two flats on the market that are identical in every way except for the fact that one is held on an 83 year lease and the other one a 125 year lease, surely buyers are going to choose the longer lease?

Lease extensions start to get expensive when less than 80 years remain, so buying something with 83 years unexpired means that the buyer would have the costs and hassle of extending the lease within three years of buying the flat. I would have thought that this would make a difference to the price, but it doesn't seem to.

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I think you are right, but I am never sure why this is the case.

If there are two flats on the market that are identical in every way except for the fact that one is held on an 83 year lease and the other one a 125 year lease, surely buyers are going to choose the longer lease?

Lease extensions start to get expensive when less than 80 years remain, so buying something with 83 years unexpired means that the buyer would have the costs and hassle of extending the lease within three years of buying the flat. I would have thought that this would make a difference to the price, but it doesn't seem to.

i'm sure that a surveyor with experience in lease extensions would be able to do far better than my 'educated layman' view but it's a strange one... logic really ought to dictate [certainly post 'sportelli', which drastically lowered the discount factor that's used in calculating the reversion part of the extension premium, upping your bill for renewal on a £200k flat with an 80 year lease from about £2k to well over £5k (interestingly the case has a smaller proportionate and even absolute impact on a sub 80 year lease, i.e. one where marriage value is payable)] that, as you say, it should matter. maybe it will start to in future if buyers get more savvy & start to understand the implications of sportelli, and when memories of the days when there was a scramble to buy pwoperdee, any pwoperdee at any price regardless of any 'glitches', have properly faded.

i guess maybe £3.5k is too small to show up properly, unlike the whopping extra £10k or whatever it is you become liable for once marriage value kicks in.

Edited by the flying pig

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When extending a lease, exactly who do you pay? Is there a private owner, or the Govt.?

You pay the freeholder.

If you 'own' a flat with a (say) 10 year lease then in 10 years' time the property will revert to the freeholder.

So if you extend your lease from (say) 10 years to 100 years you basically have to compensate the freeholder for the fact that ownership of the flat will be reverting back to him 10 years later than under the shorter lease.

The amount you have to pay him is less than the full market value of a flat [say £100k] because he's not going to get his hands on the £100k for another 10 years, if he had that £100k today he could invest it in (say) a pwoperdee, which, according to Judith Wilson's patented formula, would be worth about £1m in 10 years' time.

But at its simplest if the lease expires tomorrow then the amount you have to pay the leaseholder to extend the lease is more or less the same as the entire value of the flat because that's what's needed to compensate him for giving up something that he's legally entitled to.

Edited by the flying pig

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I went through the lease extension process last year ( as I had to sell a flat and it only had 69 years, left on the lease )

It can be a very drawn out process, but should be completed within a year. These guys explain it step by step. http://www.lease-advice.org/

Basically you serve the Landlord with a notice, he come back to you with a offer within 3 months, you then haggle over price for a while, if you cant come to a agreement within 6 months ( I think ), you apply to go to a tribunal, at this point 80% of cases are agreed between the parties. If not you provide all papers and agurements to the tribunal and then they make a decession.

You may have to play hardball with the landlord.

The calculator on the website gives a good indication of cost, but there can be a whole heap of factors apart from yield and marriage value, like are you the first flat in the block.

Any questions just let us know.

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