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  • Auction Tribe

    Section 42

    Hi Guys

    I’m thinking of attending an Auction next week as I’ve seen a Property that has a Guide Price that is within my affordability, without a need to get a Mortgage.

    I suspect it will go for considerably more than the Guide Price, but wondered if anyone could offer any advice based on the following:

    The Property is a 2-Bed Flat held on a 99 Year Lease, approx 45 years remaining with a Section 42 Notice having been served.

    I’m assuming it is possible to call the Auctioneer with a view to purchasing this before it goes to Auction, as I know I have seen many Listings in the past which read “Sold Prior”.

    I have an idea of what the Property might fetch on the Open Market if sold with a full 99 Year Lease, but wondered if anyone had any experience of how one might go about finding out all of the associated Costs with extending the Lease.

    The Flat is being sold with an AST in place, dating back to 2017 and now holding over.

    It is my opinion that if purchased at the “right price”, and then adding the costs of Extending the Lease and any Refurbishment required, there would be a decent amount of Equity created if simply Buying-to-Flip, or am I being naive ?

    Alternatively, it could continue to be rented out, producing a Rental Yield of about 8% based on the Guide Price + 20% which I am hoping it goes for no more than.

    Extending the Lease now will of course reduce the Rental Yield, but will be necessary to make the most of when selling.

    Like many I’m sure, we’ve all seen Homes Under the Hammer when someone acquires a Flat without knowing it only has a Short Lease, and upon Refurbishing and Extending the Lease, they still “supposedly” go on to sell the Property at a healthy Profit Margin.

    This would be my first Auction, and the first time I’ve heard of or dealt with a Section 42 Notice, so any advice on Pros & Cons would be greatly appreciated.

    Kind Regards

    Paul

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    The service of a Section 42 notice starts a formal process for extending the lease. It can take months if you are unable to agree on the premium payable with the freeholder as you will have to go to tribunal. You should check the papers to see a copy of the Section 42 notice that has been served and see what the proposed premium was. You also need to be sure that the notice is valid and that it is properly assigned on completion otherwise you will have to wait 2 years post completion before you will have the right to extend the lease.


    You need to research it carefully basicallly as there's lots that could go wrong.

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    Hi Nats

    When you you say “check the papers” do you mean the Legal Pack should contain any proposed costs for extending the Lease ?

    Cheers

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    The legal pack should include a copy of the Section 42 Notice that has been served. There might be some previous correspondence between the seller and the freeholder if questions concerning the lease extension were raised previously. However, if there is no other correspondence, then you should seek the advice of a surveyor who could perhaps give you a desktop valuation as to how much a lease extension might cost. As a general pointer, you could always use an online lease extension calculator to give you a rough idea as to the premium you can expect to pay. Factor in about £3k - £4k for costs too. 

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    You will also have to pay all freeholders fees, have a chat with a lease extension specialist to get an idea of the cost to you. They might know of the freeholder and the games they will play.

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    Sounds like good advice.  Not knowing how much it will cost to extend the Lease will make it difficult to set a Bidding Limit.  I have been wondering why the Flat is being sold at Auction without the Lease being extended, although if you question this, you might also ask why someone might sell a property requiring a Full Refurbishment, when carrying this out themselves would attract a higher price.

    I guess we can’t know the circumstances of every Seller, and that instead we just have to focus on whether purchasing a particular Property works for us, after factoring in all of the variables.

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    Don’t get carried away because of a low guide price. There are a few fees to be paid when doing a lease extension as you have to pay all parties legal fees and why is the seller selling without doing the lease extension. Also remember time is also money. Remember you will not be able to get a mortgage before you have done the lease extension. 

    But all the best auction is fun to go to

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    I agree that it often looks more attractive when the Guide Price is low, but I take on board the fact that all other costs should be factored in.

    With regards to getting a Mortgage before extending the Lease, I’m not too concerned with this as it would be a “Cash Purchase”.

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    Seller doubtless has no cash to fund a 5 figure lease extension cost (it could be Probate sale) and it takes at least 12 months to complete even for long term owner (ie over the 2 yr min period to request extension)

    Owner may have valid concerns over post Brexit price

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    From watching Homes/Hammer the final sale price seems to be guide price divided by 70% in many cases - ie around 43% increase from the guideline.

    A 45 yr lease remaining will mean a substantial "marriage value" included in lease extension cost - hence expect maybe £40k/£50k plus depending on the property value - plus the legal fees of both parties. 

    If you are looking at a London flat worth say £300k/£350k with a long lease - then you need to be buying at maybe below £200k.

    So you need both the £200k as well as lease extension cost. 

    Homework needed at a serious level

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    Yup, research and then more research required.

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