Is A ‘Share Of Freehold’ Flat A Good Idea?
Before you even consider buying a ‘Share of Freehold’ flat, you NEED to read this!
When you’re skimming through an online property portal, a share of freehold flat is one breed of property that it’s worth having on your radar. You see, unlike your standard leasehold and freehold properties, they’re actually quite rare. Search for one in your local area and you’ll see what we mean, providing you don’t live in London.
But, why is that?
Why is a share of freehold flat so rare, especially when on the face of it, they could be very easily confused with a typical leasehold flat?
From the outside, the majority boast double-glazed windows, a parking space and depending on location even a garden, and garage too. Step inside a share of freehold flat and all appears to be business as usual.
Decent sized rooms, plenty of light and high ceilings are all common characteristics, especially in period examples. So, how do you distinguish a share of freehold flat from the reams of properties on Rightmove?
Read on to find out.
To fully understand a share of freehold flat, you first need a basic understanding of both freehold and leasehold.
To own a freehold property means that not only do you own the property, but you also own the land that it’s built on. The main reason why freehold properties are attractive to buyers.
Whereas leasehold properties are in essence the reverse. With a leasehold property, while you own the right to occupy your property, you do not own it, nor the land on which it is built.
This means that you rent the land off the freeholder in the form of ground rent – an annual charge that’s typically in the region of £10 - £100, although some can be higher, so watch out!
What this means is that in a ‘Share of Freehold’ flat, you will acquire shared ownership of the building’s freehold title, but (and that’s a big ‘but’) will still have to maintain the leasehold element of your individual flat.
Sounds complex, but what this basically means is that your property is freehold, only you’ll need to pay a service charge of sorts to maintain communal areas - the entrance hall or garden for instance. But that’s not all, as there’s multiple ways in which this can be done…
1 - Firstly, a freehold could be split between all the flats in a building. With this option, each flat owner would own a share of the freehold in their personal name. This method can be used with a maximum of four flats.
2 - The alternative method is to own the freehold through a company, in which each owner is a shareholder. In some cases, one flat owner may be required to be a director. This could either be someone who's been there the longest, has the largest flat or just someone who has time for the added responsibilities.
Directors basically deal with all the paperwork and admin associated with the building, be it repairs, monthly expenses (electric gate repair & septic tank disposal etc.) or the transferral of shares to new buyers. This is because if you were to buy a share of freehold flat with this structure in place, you inherit a share in the company controlling the freehold. Mind boggling stuff!
NOTE: Regardless of which system a flat uses, you'll still be getting a share of the freehold.
Share of Freehold pros and cons
While leasehold and share of freehold flats are more or less identical to the naked eye, it’s important to recognise that they do differ significantly as you delve under the skin. Some of which are good and others that are not so good. So, to ensure you know what you’d be getting into with a share of freehold flat, take a look at these five pros and five cons…
FYI: Any pros and cons with a (*) we will discuss in greater depth further on in this blog
Pros of a share of freehold flat
Owning a share of freehold flat means that you have greater control over the management of the building.
Because the management company for a share of freehold flat is internal (i.e. you and your co-freeholders opposed to a third party company) the service charges are typically less.
Short leases can devalue a property massively. Owning a share of freehold flat will allow you and your co-freeholders to grant 999 years leases.
Unlike in leasehold properties, a share of freehold flat come with no ground rent.
*Being a niche type of property, you'll often find a share of freehold flat can be cheaper than it's a leasehold equivalent. The properties appeal more to cash buyers.
Cons of a share of freehold flat
While leasehold charges are predictable, charges with a share of freehold flat can be spontaneous. One month you might have to pay nothing and the next you may have to pay X amount of thousand pounds because the roof has been affected by a storm.• Administration involved with the management of the building can be time consuming and if no done right could prove costly to rectify.• The share of freehold method only works with small amounts of flats. Have 10+ share of freehold flats in a building and the organisation and admin would be very difficult.
Being a share of freehold flat you're often restricted when it comes to home insurance. This can also prove more expensive.
Lenders can tentative about issuing house repayments on a share of freehold flat, which can affect salability.
*Renting a share of freehold flat can also be troublesome, especially if you have awkward neighbours or your lease does not directly permit it.
But, what about a Share of Freehold house repayments & buildings insurance?
If you’re planning to buy a share of freehold flat, mortgageability is a factor that you can’t afford to overlook, unless you’re a cash buyer of course.
Mortgages for a share of freehold flat can be incredibly tricky to get hold of. Why? Because to most lenders, a share of freehold flat is a major risk due to all the potential costs involved. To give you a clear idea of what we mean, jump into the scenario below…
You buy a flat in a four story building - you live on the top floor. One night, you wake up to an almighty BANG only to discover the roof has been struck by lightning (rare occasion we know, but stick with us). You’re unharmed, but the building has extensive roof damage. What happens next?
In a leasehold property, this situation would be pretty straight forward. You’d contact the management company – the ones responsible for insuring the building – who would send around a surveyor to assess the damage and estimated cost to repair.
The necessary tradespeople would then be appointed to fix the damage.
Good management companies will ensure all work is completed to a high standard, because as the freeholder the building's both their asset and responsibility.
Some may even re-house you while the work is being done. Worst case scenario here would be that your service charge increases slightly to recoup some of the repair costs and cover any increases in building insurance. But overall, not much of an inconvenience.
However, share of freehold repairs are slightly less straight forward. You’re first port of call would be to inform your insurance company, who would send round a surveyor to assess the damage.
Based on the verdict they’d then come back with a figure of what they’d be willing to pay out. This can differ depending on your insurer. In the situation that the pay-out doesn’t cover all the repairs, you and your co-freeholders may have to recoup the difference - problematic if you suffer from awkward neighbours.
Providing you can secure the funds, the works will be carried out and once complete, your insurer will instruct a surveyor (likely the same one) to assess the standard of the repair.
NOTE: If you’ve done the repairs to your share of freehold flat ‘on the cheap’ and your insurer isn’t satisfied, they are perfectly within their rights to invalidate your insurance.
Why? Bad repairs can easily go wrong a second time, and often make the situation even worse, which means to them you're a higher risk - a risk they may not wish to take. When repairing ANY property, we’d always advise investing in the best tools, tradespeople and materials you can.
It’s with scenarios like this, are where the share of freehold vs leasehold debate really heats up and also why getting a share of freehold house repayments can be a challenge.
In granting a mortgage, a lender is investing their capital into your property, so they want it to be safe. And sadly with a share of freehold flat, the large, often spontaneous maintenance costs, come as an immediate red flag, as costly unexpected issues (like the above) could see you fall behind on your repayments.
But, that’s not to say all lenders refuse to lend on share of freehold flats. In fact, many are willing to take the risk. So, before you send off your application, here’s 3 tips to ensure you maximise your chances of approval…
Buy a share of freehold flat with a lengthy lease
Leases affect the value of a property immensely. Anything under 85 years starts to affect a property’s value. Leases of 70 years or less can make a property unmortgageable, or at the very least up your interest rate. As mentioned above, owners of freehold flats have the luxury of granting themselves 999 year leases, so when you’re property shopping be sure to bare this in mind. If a share of freehold flat has a low term on its lease, it could be a sign of a dispute. In this case, we’d advise you to walk away.
Take out a specialist share of freehold house repayments
As only certain lenders will lend on a share of freehold flat, you may be required to take out a specialist house repayments. This means a lender may give you slightly different conditions to those of a standard residential house repayments, or demand a higher deposit or interest rate. Remain open to this and a house repayments offer for a share of freehold flat could be yours very soon!
Ensure a management company is in place
Speaking of specific conditions, one of the most common with a share of freehold flat, is for a management company in place. Something worth knowing prior to your housing search, as it’ll significantly increase your chances of house repayments approval.
Can I rent a share of freehold flat?
Renting a share of freehold flat is possible, but depends on the conditions of the lease.
With any breed of freehold flat, renting is difficult because you’re not the sole owner of the building.
To do so, what’s called a ‘consent to let’ needs to be written into the lease that’s held between each of the flats.
Some share of freehold flats own a larger percentage of the building's freehold - this could because they're larger, on the ground floor etc. - which can make this slightly easier or harder.
FYI: A consent to let may be a good thing to bring up during a lease extension.
If you wish to use it for short term lets like Airbnb, it’s also worth remembering that none supportive neighbours may insist you include a clause that specifies lets are for at least 3 months.
Going against a clause like this could give your neighbours an excuse to take you to court, so do your research!
How much value does Share of Freehold add?
The value of a share of freehold flat compared to a leasehold flat may well be higher in some instances, but in the majority of cases it makes little to no difference. However, what would to some extent determine the value of a share of freehold flat would be…
Lease length – The longer this is the healthier the value. To renew a lease for a leasehold flat you could be looking at well over £10,000!
Building share – Typically, share of freehold flats with a larger percentage share of the freehold are more desirable. Fewer co-freeholders mean that decisions are typically made quicker and management is far easier.
Is Share of Freehold a good thing?
Share of freehold flats are a great place to live... if you pick yours carefully.
They combine all the perks of flat living with the control of freehold, providing you don’t have too many co-freeholders.
Ask us and a share of freehold flat with a bit of period charm would be our preferred choice. High ceilings, big windows and characterful interior features like dado and picture rail, makes living in these sort of flats feel almost no different to life in a house - apart from the absence of stairs of course.
Flats like this, unlike those in blocks, are far more likely to come with fewer co-freeholders. Yet another advantage.
But that’s not to say we’ve taken side in the ‘Share of Freehold VS Leasehold’ debate. Besides, leasehold flats can be a lot less hassle than those with a share of freehold.
They also more convenient for landlords, as a large majority of leasehold flats will not have an issue with rentals, although this is something you should always look into before buying.
Which type of flat works best for you, ultimately depends on your circumstances, although regardless of which way you sway in this debate, we’re confident we can help you out.
We’re a trusted cash buyer of property across England and Wales.
So, if you’ve already got your eyes on a share of freehold flat and are struggling to find a buyer, we can be that buyer. Equally, for those struggling to sell a share of freehold flat on the open market, we can swoop in and close a sale in as little as 7 days.