With an inherited BTL I’m about to purchase another property. This is a two-bedroom maisonette with 53 years remaining – but with only 53 years on the lease. I know this needs to be extended to make the property viable for a BTL and have researched the process – so I know what to do and how to do it, but how difficult is it in reality?
It is not hard to extend a lease; you just enter negotiations with the freeholder and agree a price. The cost is progressively greater the fewer years left on the lease.
Negotiations to extend a lease can begin when the remaining term drops below 80 years. You would be very well advised not to negotiate on your own behalf, but engage a solicitor or other suitably qualified person highly conversant with leasehold law to negotiate on your behalf. Choose a solicitor that specialises in leasehold law.
Clearly you cannot agree a price to pay for this flat until you have clarity on how much it will cost you to extend the lease. The profit in the deal is based on the increase in value of the flat being a significantly greater amount than it costs you to extend the lease.
You need to be aware that, in a stagnant market, the value of such a flat will reduce as each year of the lease ticks down to zero, when the flat reverts to the ownership of the freeholder.
There are issues you need to be aware of:
Even if you can do all of the above, you still will not be able to get a mortgage to buy the flat because you are still buying a flat with a 53 year lease at point of purchase and mortgage lenders will not recognise the validity of the lease extension agreement. Thus you must buy the flat first, extend the lease, then get a mortgage on it.
This will still require you to purchase the property with cash, but it does open up another way to finance the purchase by using bridging finance. Bridging lenders will finance the purchase, knowing that you can extend the lease and thus obtain a mortgage which will be used to repay the bridging loan within a matter of months.
Lastly, the owner of this flat should be aware that it is not mortgageable and that their only option is to sell to a cash buyer (or a savvy buyer that knows how to leverage bridging finance). This means they should be prepared to accept offers below the asking price for someone that can actually complete on the purchase. How much below the asking price they will accept will depend on their motivation to sell; do they need to sell quickly or can they afford let the flat sit on the market indefinitely?
This type of purchase, when negotiated and structured with skill, can yield a sizeable profit and it is a recognised strategy of being able to buy at a discount, add value over a matter of months, refinance based on the higher value created by the extended lease and recycle your cash out and onto your next deal.