PM overcharging trap
I’ve just negotiated a deal to purchase a 2 bed new apartment in Nottingham. A repossession that sold at the height of the boom in 2003 at £125,000. I’m aiming to get it for £50,000 less.
However, having agreed a price I was absolutely gob smacked when I received this week the legal contracts at the size of the service charge. The apartment is located in a newish block built just over 7 years ago. It has no lift; which can inflate the service charges considerably; the windows are UPVC, so no external decoration. That leaves a litte bit of grounds maintenance and the block insurance.
I was expecting to pay between £5 -700 for the service charge and ground rent on the property.
I’ve just had the contract details from my solicitor. The costs for the ground rent is £100 which is what I would expect for a property in this location & age and with most of it’s 999 lease remaining. The service charge from OM property management is simply staggering. The charge for the last 6 month was just shy of £700 putting the annual bill at about £1400. The worrying aspect as a potential purchaser is that the fees have escalated from just over £500 per half year in 2003 to £700. That’s a 40% increase in 7 years. During this time rents have move by may be 10% maximum from say £525 to £575.
The result is that the net rent that a landlord actually gets to keep has been squeezed.
My target is to achieve a net rental return after paying the service charge of about 7.5%. In this case whilst the gross rent is at slightly above 8% after taking the service charge and ground rent off, the net rent drops dramatically to 6%. The most worrying thing is the service charge inflation. This is rising much faster than the rent. The result for me as a landlord is a massive potential profit squeeze on this investment.
Peverel OM have poor history
Having looked into some of the background of the managing agents OM property management who I have come across before when I owned my own apartment in Newton Chambers in Birmingham City Centre is not reassuring.
The reality is that OM property management have a ‘mixed’ reputation to say the least for management on their rental properties. Many of the large builders used them because as the UK’s largest property management company they were a natural choice for a national building company.
The costs of management for this potential new acquisition for my property portfolio contrasts starkly with a one bedroom apartment I own which is literally around the corner. Here the apartment is also in a block; but here there is no management company and certainly not a large national one like OM. I’ve just sent of a cheque for £125 to one of the other conscious owners to pay for the redecoration of the hall and to provide a new carpet. The ground rent on this apartment is £35.50. Maintenance charges come to about £100 pa. These flats actually suffer from what would be described in legal parlance as a defective lease as they have no management company or any obligation within the lease for the landlord / freeholder to ensure the communal areas are maintained. It therefore falls to the leasehold owners to sort out amongst themselves the maintenance. There are obviously difficulties and dangers in this. For instance, if the parties don’t agree or one party refuses to pay there is no mechanism to enforce the payments. However, it does also highlight that most individuals are reasonable and left to their own devices will kind of get together and sort out a problem; because ultimately they have a strong self interest to do so.
Overcharging on service charge – what can I do?
Landlords are frequently confronted by the spectre of overcharging by property management companies.
The lease is always the starting point for how management charges are calculated and will normally lay out the proportion that you are liable for.
If a landlord is unhappy with the amount they are being charged then they can make an appeal to the Leasehold Valuation Tribunal (LVT).
They can do this by submitting a form 27a to the LVT. Property Hawk recently covered the phenomenon of leaseholder landlords being overcharged on their block landlord insurance.
For more FREE advice a landlord can contact the Leasehold Advisory Service.
I would advise that a landlord do it soon. Useful free services such as this I feel unfortunately will fall victim to the spending cuts resulting the rampant overspending on other far less useful schemes.
I don’t want to dance to somebody elses tune.
One of the reasons I became a landlord is that I didn’t want to dance to anybody else tune. It seems to me that if I end up buying this flat I’ll be part dancing to the beat of a trumped up property manager occupying a very expensive office suite in central London & helping to swell their corporate profits. I’d be therefore working to fund their over inflated property management costs with little scope for appeal. This is not something I want to lock myself into.
Instead I’m looking at some alternative investments where management is carried out locally and I get to keep all the rent. Property Hawk users with a long memory may remember that we love maisonettes.
Landlords, especially newbie landlords should be wary of the management charges when buying a leasehold property; particularly one of the new apartments that have sprung up over the last decade. Estate agents are often ignorant to the real charges from property management companies and the facts only come to light one a landlord has gone down the route of agreeing a purchase. Never mind having a HIP or EPC; surely one vital bit of information a purchaser needs and the seller should provide is an up to date figure for the ground rent & service charges. Then a landlord & homeowners can make a proper and informed choice what the real costs are involved in the properties they buy.