Topic 13: Assessing the property (unit 4) Flashcards
What is vacant possession?
Refers to the condition of a property being empty and available for immediate occupation, free from belongings, occupants etc
Having vacant possession increases the market value.
What is a sitting tenant?
What is an assured shorthold tenancy?
A tenancy agreement that sets out a fixed period for the tenancy, usually 12 months.
Allows a BTL landlord to regain possession at the end of the agreement. if the tenant doesn’t have an AST they’ll be much harder to remove from the property, and they could potentially gain an overriding interest in the property over the lender.
Therefore, BTL lenders find it very important to have an AST in place
Explain marriage value
How much is the freeholder entitled to?
Refers to leasehold property
To extend a lease, the leaseholder will need to pay a ‘marriage value’
Marriage value is the difference between the value of the property with the current lease and the value if the lease was extended by 90 years
Therefore, as the term of the lease reduces the marriage value will increase since the property price is also decreasing.
The freeholder has a right to 50% of the marriage value.
How do you calculate the cost of a lease extension?
Diminution value + 50% marriage value = lease extension cost
The calculation considers the diminution (loss) in the landlord’s interest in the property as a result of the extension, and the marriage value.
To calculate diminution value = An amount to compensate the landlord for not receiving ground rent because of the extension + an amount to compensate the landlord for the fact the lease will be reverting to the landlord at a later date
NOTE: Diminution value = The landlords loss in interest in the property as a result of the lease extension
What method of housing construction became extremely popular after world war 1 and 2?
What is the issue with this?
Prefabrication method; ie where the homes components are constructed off site
This saves time for construction which was very important after the wars due to housing shortages
The issue with this was that homes werent built to the standard of today so many lenders require remedial work on these properties today in order to accept them as a security
Why did the Grenfell disaster lead to vendor of similar properties unable to sell
most lenders declined to provide mortgages
on property with similar construction issues as Grenfell
What is the EWS1 form and how does it work?
How long is the form valid for?
Was introduced following Grenfell
It gives assurance to lenders, valuers, residents, buyers and sellers about a building’s
fire risk.
An expert checks the building and uses the form where they decide 1 of 3 things:
1 - The External wall materials are unlikely to support combustion.
2 - fire risk is sufficiently low that no remedial works are required
3- fire risk is high enough that remedial works are required (obs this would affect the value of the property)
It is valid for 5 years
What is reinsurance?
Give the main example of this this scheme in relation to flooding
What is the purpose of the Flood Re scheme
What acc is Flood re itself?
How do claimes work in relation to flood re?
How is the flood re scheme paid for?
A process by which an insurer passes on some of the risk to another
insurer or company in return for a premium
The ‘Flood Re’ scheme (A reinsurance scheme) was introduced by the government and will continue for 25 years
It provides affordable home insurance for those properties
at highest risk of flooding, and increases the availability and choice of
insurers.
Flood Re is a non-profit fund, owned
and managed by the insurance industry
Claims will be made to the insurer and settled in the normal way. Once the claim has been settled, the insurer will claim a settlement from Flood Re for any flood damage (hence reassurance)
To be eligible for Flood Re, property must be residential, have been built before 1 January
2009, be insured by the individual home owner and have a council tax band
The scheme is subsidised by an annual levy on all home insurers. The total annual levy is
split between insurers based on their share of the home insurance market
What is gross yield and net yield in relation to buy-to-let properties?
Give an example of this in action
GROSS YIELD - Rent as a percentage of purchase price.
NET YIELD - Rent minus running costs as a percentage of purchase price
The net yield is the more accurate figure for assessing the return on a property investment
Example:
-Property price when purchased £132,000
-Annual rental income £6,916
-Annual running costs £600
-Net rental income £6,316
- Gross yield (6,916 ÷ 132,000 x 100) 5.24%
- Net yield (6,916 – 600 ÷ 132,000 x 100) 4.78%
An investor can compare the yield on BTL investment with that on other investments such as deposits, shares and bonds (obvs this doesnt include the capital value of the property increasing/decreasing which an investor also will take into account and other things too like mortgage payments)
For which type of freehold property is a lender least likely to agree to provide a mortgage?
A bungalow with a right of way for neighbours at the bottom of the garden.
A freehold flat.
A house with a positive covenant requiring the owner to maintain a boundary wall.
A freehold flat
Many lenders will not lend on freehold flats.
Easements and covenants are unlikely to affect a lender’s willingness to lend unless they are onerous, although they might affect the amount offered.
Parminder is hoping to buy a flat that has a 75-year lease. His lender is insisting on at least 80 years remaining on the lease. How can Parminder satisfy the lender’s requirement?
Once he owns the flat he will have the right to extend the lease by 90 years, so he can sign an undertaking to extend it as soon as he completes the purchase.
There is no way for Parminder to solve the problem.
He can gain an undertaking from the current owner to exercise their right to extend the lease and then transfer the right to Parminder on completion
Answer = He can gain an undertaking from the current owner to exercise their right to extend the lease and then transfer the right to Parminder on completion
Explained = Parminder will not gain a statutory right to extend the lease until he has owned the flat for two years. However, he could reach a formal agreement with the current owner that they will exercise their right to extend by making an application before completion, and then transfer those rights to Parminder on completion. This will obvs come at a cost including marriage value and the diminution value that the landlord needs to be compensated for
Why will mainstream lenders not provide mortgages for retirees to purchase flats in purpose-built retirement properties? Concerns over:
the age of the borrowers.
affordability.
the resale market and values.
Answer = the resale market and values.
Explained = Age and affordability are not necessarily barriers to lending to older people, as it is possible to arrange lifetime mortgages on most property. However, purpose-built retirement flats have a limited market, due to minimum age requirements for owners and high service charges. They are often far more expensive to buy than similar ordinary flats. Lenders are concerned that selling the flat on the owner’s death would be problematic and would affect its security.
Doris lives in a bungalow in a small town with a significant number of similar properties. Her sister Edith lives in a similar bungalow in a nearby town where bungalows are somewhat rare. Both towns are seen as upmarket, desirable places to live. Which of the following statements is true?
The sisters should achieve similar sale prices for their properties.
Edith would probably achieve a higher sale price than Doris.
Doris would probably achieve a higher sale price than Edith.
Answer = Edith would probably achieve a higher sale price than Doris
Explained = All other things being equal, a large number of similar properties in an area would lead to a reduction in prices for that type of property compared with areas where similar properties are not so common
Pre-manufactured property structures are:
not designed to meet modern standards.
backed by accreditation schemes.
not suitable for mortgage lending purposes
Answer = backed by accreditation schemes.
Pre-manufactured structures, which are assembled on site, are backed by accreditation schemes to ensure they meet required standards
