U4: T13 - ASSESSING THE PROPERTY

Question 1

Can you recall the difference between an easement and a covenant?

Answer 1

Easements give others certain rights over the property. Covenants impose obligations upon the owner or restrict what the owner can do.

Question 2

Can you recall what a flying freehold is and why can it cause problems?

Answer 2

A flying freehold is a part of a freehold property that extends above or below another person’s property but is not next to or touching the ground. It can be a problem, because the owner of the land may fail to maintain their property, which could result in damage to the property with the flying freehold.

Question 3

We looked at leasehold in Topic 4. When someone buys a leasehold property, what are they actually buying?

Answer 3

Buyers of leasehold properties buy the right to lease the property for a number of years, at the end of which the property reverts to the freeholder. In effect, leaseholders pay a large sum for the right to rent the property for a specified term.

Question 4

Lenders tend to avoid lending on freehold flats because:

a) there might be difficulties in renewing the freehold.
b) there is a limited market for this type of property.
c) it may be difficult to establish liability for commonly owned parts of the structure.
d) the owner can only acquire possessory title.

Answer 4

c) It may be difficult to establish liability for commonly owned parts of the structure.

The freehold is owned outright – it does not have to be renewed. The market is limited only in the sense that it may be difficult to obtain a mortgage. There is no reason specific to freehold flats why an owner may only be able to acquire possessory title.

Question 5

Which of the following is true in relation to leasehold tenure?

a) A marriage value only applies to extending leases with more than 75 years to run.
b) Lenders will only consider lending on leasehold property with an unexpired lease of 40 years or more.
c) Most lenders are happy to lend on former local authority high‐rise flats.
d) An owner must have held a lease for at least two years before they can apply for a lease extension.

Answer 5

d) An owner must have held a lease for at least two years before they acquire the statutory right to apply to extend it.

Question 6

The cost of extending a lease reduces as the unexpired term reduces. True or false?

Answer 6

False – the premium increases as the unexpired lease term reduces, because extending the lease adds more value the nearer it gets to expiry.

Question 7

Joe is considering buying one of four more or less identical flats in the same area, all of which are valued at £150,000, but each has a different remaining lease term. Which flat is most likely to have the highest marriage value?

a) The flat with a current unexpired lease of 90 years.
b) The flat with a current unexpired lease of 60 years.
c) The flat with a current unexpired lease of 40 years.
d) The flat with a current unexpired lease of 20 years.

Answer 7

d) 20 years – the difference between the value with the current short lease and the extended lease would be the most significant of the options. Option a) would have no marriage value, because the current lease still has 90 years to run.

Question 8

Paula and Joe live in a converted water tower in a very rural area. The conversion was designed by an architect to their specific requirements. If they were to sell the property, why might a lender have concerns about offering a mortgage on it?

Answer 8

There are a number of reasons why a lender might be reluctant to offer a mortgage – a key one is that there might be a limited market for such a property and therefore it might be difficult for the lender to sell should it ever need to repossess it. Another issue is the construction method and materials used; these might require investigation to ensure that it is structurally sound and there are no expensive maintenance requirements, which would affect its value.

Question 9

It is likely to be difficult to find a lender prepared to lend on a flat above a restaurant. True or false?

Answer 9

True. Lenders are not usually keen to lend on multi‐use property, such as flats above shops and restaurants.

Question 10

Which of the following properties is likely to be most attractive to a lender in terms of security?

a) A brick‐built, detached freehold Victorian property.
b) A brick‐built freehold bungalow on a road with a history of mining subsidence.
c) A recently built leasehold flat in a purpose‐built block.

Answer 10

A) A brick‐built, detached freehold Victorian property is likely to be most attractive to a lender. A history of mining subsidence would be of concern to a lender. The value of flats tends to be less than that of houses, and leasehold tenure can be more problematic than freehold, although the location would be an important factor.

Question 11

Which of the following statements are true in relation to the Flood Re scheme?

a) Insurers must reinsure flood risk through the Flood Re scheme.
b) The premium the insurer pays to Flood Re on each property depends on how often the property has flooded in the past.
c) Only properties built before 2009 are covered by the Flood Re scheme.
d) The insurer may pass on the cost of its Flood Re premium in the premium it charges the property owner.

Answer 11

c) and d) are correct.

Question 12

The net yield on a buy‐to-let property always includes mortgage payments. True or false?

Answer 12

False – the net yield includes running costs but not mortgage payments.

Question 13

When will a lender require information about the builder of a property?

Answer 13

If the property is <10 years old

Question 14

When someone buys a leasehold property, what are they actually buying?

Answer 14

Buyers of leasehold properties buy the right to lease the property for a number of years, at the end of which the property reverts to the freeholder. In effect, leaseholders pay a large sum for the right to rent the property for a specified term.

Question 15

Can you recall the difference between an easement and a covenant?

Answer 15

Easements give others certain rights over the property. Covenants impose obligations upon the owner or restrict what the owner can do.

Question 16

Define Marriage value?

Answer 16

For houses with less than 80 years left on the lease, the difference between the current leasehold value and the value of the house if the lease was extended by 90 years. Called the ‘Marriage Value’.

A property with 80 or more years left automatically has no marriage value.

Question 17

How long should a new owner have owned the lease of a flat in order to have the right to extend it?

Answer 17

At least 2 years

Question 18

A landlord received ground rent during the period of lease extension. True or false

Answer 18

False.

They receive peppercorn rent which is practically equal to nothing.

Question 19

The cost of lease extension is equal to:

A) The diminution
B) The marriage value
C) The diminution and 50% of the marriage value
D) The diminution and 75% of the marriage value

Answer 19

C) The diminution and 50% of the marriage value

Question 20

Define the diminution in relation to lease extensions.

Answer 20

Diminution is the loss of the landlords interest in the property as a result of the lease extension.

In other words, the landlord is going to receive the property 90 years later than they otherwise would have done and therefore lose ‘interest’ in the property to a certain degree.

Question 21

Property prices are inevitably low in sparsely populated areas. True or false

Answer 21

False.

Sometimes they have higher prices to reflect exclusivity.

Question 22

Give an example of a property issue that would affect the insurability of a house and therefore valuation?

Answer 22

Subsidence
or properties with a history of subsidence that has not been professionally rectified with guarantees.

Question 23

The ‘Flood Re’ scheme is an example of what?

Answer 23

Reinsurance

Question 24

The ‘Flood Re’ scheme was introduced in 04 April 2016 and will continue for how many years?

Answer 24

25 years

Question 25

Define reinsurance.

Answer 25

A process by which an insurer passes on some of the risk to another insurer or company in return for a premium.

Question 26

You can insure commercial property on the ‘Flood Re’ scheme. True or false

Answer 26

False.

The house must be residential

Question 27

The house must have been built before 01Jan2009 to be eligible for the ‘Flood Re’ scheme. True or false

Answer 27

True

Question 28

Define the net income/total return calculation.

Answer 28

Total return = Rental income - cost of mortgage. Expressed as a percentage of the purchase price

Question 29

Define net yield calculation

Answer 29

Net Yield = Rental income - running costs (not the mortgage). Expressed as a percentage of the purchase price

Question 30

With respect to Marriage value, there must be less than how many years left to run on the lease?

Answer 30

Less than 80 years

Question 31

In relation to the ‘Floor Re’ scheme - insurers pay a:

A) Capped premium
B) Uncapped premium

Answer 31

A) Capped premium

Question 32

In relation to the ‘Floor Re’ scheme - insurers pay a:

A) 1 Capped premium to cover all houses under the scheme
B) A capped premium for each house under the scheme

Answer 32

B) A capped premium for each house under the scheme

Question 33

Define Absolute Title

Answer 33

Clear title is established – the most secure form.

Question 34

Define Possessory Title

Answer 34

The owner is registered as the owner but is not protected from a claim by another person that they owned the land before it was registered.

Question 35

Define Good Leasehold title

Answer 35

Applies in connection with leases longer than seven years. The leasehold is good but the right of the lessor (freeholder) themselves to grant title may not be guaranteed.

Question 36

Define Adverse possession (unregistered land) title

Answer 36

Applies if land has been occupied for 12 years without challenge from the legal owner – at this point the occupier may apply for possessory title.

Question 37

Define Adverse possession (registered land) title

Answer 37

Applies where the land has been occupied for 10 years without objection from the registered owner.

Question 38

Define Qualified Title

Answer 38

Title subject to defect in registration. Very rare.

Question 39

Applies where the land has been occupied for ten years without objection from the registered owner.

1. Possessory
2. Good leasehold
3. Adverse possession
4. Absolute
5. Qualified

Answer 39

3. Adverse possession

Question 40

Applies in connection with leases longer than seven years. The leasehold is good but the right of the lessor themselves to grant title may not be guaranteed.

1. Possessory
2. Good leasehold
3. Adverse possession
4. Absolute
5. Qualified

Answer 40

2. Good leasehold

Question 41

Clear title is established: the most secure form.

1. Possessory
2. Good leasehold
3. Adverse possession
4. Absolute
5. Qualified

Answer 41

4. Absolute

Question 42

The owner is registered as the owner but is not protected from a claim by another person that they owned the land before it was registered.

1. Possessory
2. Good leasehold
3. Adverse possession
4. Absolute
5. Qualified

Answer 42

1. Possessory

Question 43

For which type of freehold property is a lender least likely to agree to provide a mortgage?

A) A bungalow with a right of way for neighbours at the bottom of the garden.
B) A freehold flat.
C) A house with a positive covenant requiring the owner to maintain a boundary wall.

Answer 43

B) 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

Question 44

Title subject to defect in registration.

1. Possessory
2. Good leasehold
3. Adverse possession
4. Absolute
5. Qualified

Answer 44

5. Qualified

Question 45

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?

A) 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.
B) There is no way for Parminder to solve the problem.
C) 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 45

C) 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.

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.

Question 46

Why will mainstream lenders not provide mortgages for retirees to purchase flats in purpose-built retirement properties? Concerns over:

A) the age of the borrowers.
B) affordability.
C) the resale market and values

Answer 46

C) the resale market and values

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.

Question 47

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?

A) The sisters should achieve similar sale prices for their properties.
B) Edith would probably achieve a higher sale price than Doris.
C) Doris would probably achieve a higher sale price than Edith.

Answer 47

B) Edith would probably achieve a higher sale price than Doris.

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.

Question 48

Pre-manufactured property structures are:

A) not designed to meet modern standards.
B) backed by accreditation schemes.
C) not suitable for mortgage lending purposes.

Answer 48

B) backed by accreditation schemes.

Pre-manufactured structures, which are assembled on site, are backed by accreditation schemes to ensure they meet required standards.

Question 49

Which of the following leasehold flats is likely to prove the most difficult to mortgage? A flat:

A) above a small parade of shops in a village.
B) in a purpose-built residential block in the high street of a medium-sized town.
C) above a row of shops in the high street of a medium-sized town.

Answer 49

C) above a row of shops in the high street of a medium-sized town.

Flats above shops are less easy to mortgage than those in a purpose-built residential block. However, those in a small parade of shops in a village or relatively quiet part of town are likely to be more mortgageable than those above shops in a busy high street.

Question 50

The ‘Flood Re’ scheme is:

A) designed to run for 20 years from 4 April 2016.
B) subsidised by the government.
C) available for properties built before 1 January 2009.

Answer 50

C) available for properties built before 1 January 2009.

The Flood Re scheme is designed to help property owners who live in areas with flood risk and is paid for by a levy on all home insurance companies. It is intended to run for 25 years from 4 April 2016.

Question 51

Lenders tend to avoid lending on freehold flats because:

A) there is a limited market for this type of property.
B) there might be difficulties in renewing the freehold.
C) the owner can only acquire possessory title.
D) it may be difficult to establish liability for commonly owned parts of the structure.

Answer 51

D) it may be difficult to establish liability for commonly owned parts of the structure.

It may be difficult to establish liability for commonly owned parts of the structure. The freehold is owned outright – it does not have to be renewed. The market is limited only in the sense that it may be difficult to obtain a mortgage. There is no reason specific to freehold flats why an owner may only be able to acquire possessory title.

Question 52

Which of the following is true in relation to leasehold tenure?

A) Lenders will only consider lending on leasehold property with an unexpired lease of 40 years or more.
B) An owner must have held a lease for at least two years before they can apply for a lease extension.
C) A marriage value only applies to extending leases with more than 75 years to run.
D) Most lenders are happy to lend on former local authority high-rise flats.

Answer 52

B) An owner must have held a lease for at least two years before they can apply for a lease extension.

Question 53

Paula and Joe live in a converted water tower in a very rural area. The conversion was designed by an architect to their specific requirements. If they were to sell the property, there might be a limited market for it. True or false?

Answer 53

True

Question 54

Apartments in a retirement complex are usually easier to sell than those in other purpose-built developments. True or false?

Answer 54

False. Retirement apartments are usually harder to sell due to the limited market and high service fees.

Question 55

It is likely to be difficult to find a lender prepared to lend on a flat above a restaurant. True or false?

Answer 55

True

Question 56

The net yield on a buy‑to‑let property always includes mortgage payments. True or false?

Answer 56

False

Question 57

Which of the following statements are true in relation to the Flood Re scheme? Select all that apply.

A) Only properties built before 2009 are covered by the Flood Re scheme.
B) The premium the insurer pays to Flood Re on each property depends on how often the property has flooded in the past.
C) Insurers must reinsure flood risk through the Flood Re scheme.
D) The insurer may pass on the cost of its Flood Re premium in the premium it charges the property owner.

Answer 57

A) Only properties built before 2009 are covered by the Flood Re scheme.
D) The insurer may pass on the cost of its Flood Re premium in the premium it charges the property owner.