Property experts in the UK have a saying that the three most important factors to be considered when deciding whether or not to buy a property are “location, location, location”. Whilst it is true that properties in prime locations are generally unaffected by downturns in the property market, there are a number of other factors that a prudent buyer should bear in mind. Different factors will be relevant to different types of property and to the different purposes for which they are being bought.
Purchases of Freehold Properties
It is a common misconception that the word “freehold” means free from restrictions so that the owner of a property can do whatever he likes with it. That is very far from the truth regardless of whether the property is residential or commercial. The title to the property will almost certainly be registered at the Land Registry and there may well be registered restrictive covenants that prohibit the doing of certain things at the property. In addition, the planning permission permitting the original construction of the property may contain restrictions on use and, in some cases, may even restrict the owner’s right to sell the property.
Purchases of Leasehold Properties
Leasehold properties can be subject to the same sort of restrictive covenants and planning restrictions as freehold properties but the majority of the restrictions will be contained in the Lease itself.
In the case of residential leasehold properties one of the most important considerations is the number of years left before the lease expires. If this is less than 82 years most mainstream mortgage lenders will not grant a mortgage and, even if you do not require a mortgage in order to buy the property, there will be a problem when you want to sell it because your market will be restricted to “cash buyers”. It is possible to acquire a lease extension but this can be a very costly exercise.
Buyers of flats, especially flats in older buildings, should look very carefully at the service charge accounts and if any major works are scheduled they need to find out whether a one-off “levy” will become payable: sometimes these can be quite substantial.
In the case of commercial leasehold properties it is vital to ascertain whether the lease is or is not excluded from the security of tenure provisions of the Landlord & Tenant Act 1954. If that Act is excluded you will not be automatically entitled to a new lease when the current lease expires. It is equally vital to establish the position with regard to rent reviews and service charges.
Inspection, Survey and Valuation
If possible, never buy a property without seeing it for yourself. In addition, unless you are a qualified surveyor/valuer it is a always advisable to obtain a professional survey and valuation. Do not assume that the ‘asking price’ is reasonable and do not rely on a survey/valuation carried out by or on behalf of a proposed mortgage lender unless you are getting a mortgage for more than 85% of the purchase price.
Make sure you have all necessary funds arranged before you exchange contracts to purchase the property. Do not rely on offers of finance that are “conditional” on things over which you have no control or that are expressed to be “approved in principle”. If, after you have exchanged contracts, the mortgage funds are not forthcoming and you can’t provide the necessary payment on the agreed completion date you run the risk of losing your deposit and, potentially, being sued for damages for breach of contract if the property is later sold to someone else at a lower price.
Never buy a property at auction unless you have 1) inspected the property yourself; 2) read and fully understood “The Legal Pack” (you should instruct a solicitor to do this for you unless you are fully conversant with such documents); 3) made all necessary financial arrangements for the price you are bidding because once your bid is accepted you are contractually committed to buy the property and failure to do so could be very costly.
If you are proposing to buy a property with a view to letting it out and if you need a mortgage you must make sure that you get a “buy-to-let mortgage” because most ordinary mortgages prohibit the letting of the mortgaged property. Buy-to-let mortgages are more expensive than ordinary mortgages and often the deposit you will have to find is greater.
When letting the property make sure you use an Assured Shorthold Tenancy Agreement for a term of less than three years and, unless you are using a letting agent, make sure you register the deposit under the Deposit Protection Scheme. Failure to do this could result in you having to pay the tenant three times the amount of the deposit. Landlords have to comply with numerous regulations and, unless you are an experienced landlord, you should engage an established letting agent who will deal with all compliance matters
When budgeting for your purchase you must bear in mind the associated costs, namely survey and valuation fees, mortgage ‘arrangement fees’, search fees, your solicitors’ fees, (in the case of commercial leaseholds) the landlords solicitors fees, and Stamp Duty Land Tax (“SDLT”) on an increasing scale starting at 1% of the purchase price rising to 7% on prices exceeding £2m.
The practice of using a Special Purpose Vehicle (a company formed purely for the purpose of buying and holding a property) so as to avoid future SDLT liability has become less attractive since the latest budget. This is because the SDLT payable by SPVs on residential properties costing more than £2m will be doubled to 15%.