Buying the land can help you to sell a property

In a slumping market, it's tempting to do anything you can to boost your property – but is it worth the effort and the cost? Alessia Horwich reports

As the housing market slumps further, homeowners are looking for more ways to add value to their homes. But forget repainting everything magnolia and "decluttering", if your property is leasehold, one relatively cheap way to boost the desirability and even profitability of your home is to get your hands on the freehold.

The difference between purchasing a leasehold and a freehold is quite simple. If you buy a freehold, you are not only buying a property, but also the land on which it sits. With leasehold, you do not own the land, just the building, or even just the floors, ceilings and internal walls. This is the case for most flats, since in many cases what lies below is someone else's flat. You can, however, together with your neighbours, set up a company to buy the land, which then becomes the shared freehold.

If you only own the buildings you are expected to pay annual ground rent to your landlord and you may have to pay annual service charges for the upkeep of communal areas.

The value of the freehold depends on several factors. First, the type of property, prices in the area and the state of the market as a whole. You also need to take into consideration the value of the landlord's interest – how much ground rent is received and how much the house will be worth at the end of the lease. The deciding factor is often how long the lease still has to run. If it is longer than 70 years, then it has very little value at all. However, as it drops below this is will increase in value, as there is the leaseholders need to either extend or purchase the freehold.

Andrew Bulmer, a spokesman for the Royal Institution of Chartered Surveyors says: "Because the variables are considerable, it is not possible to designate the value of the freehold as a percentage to the value of the house. It needs a specialist chartered surveyor to calculate it."

Ultimately, the price you offer will be a starting point from which you negotiate until you settle on a figure that will compensate for the loss that the landlord will suffer by selling.

If you do not have the cash to buy the freehold outright, you have two options for securing finance in order to make the purchase. "You can either go to your existing lender for a further advance or completely remortgage," says Ray Boulger, technical director for mortgage broker John Charcol. "Both options are viable and which is most appropriate depends on your existing mortgage."

For those who have plenty of equity, either option is feasible and, considering the extremely low rates currently available for low loan-to-value (LTV) mortgages, remortgaging may look appealing. However, for those who already hold a good mortgage deal at over 75 per cent LTV, remortgaging completely could be a less attractive proposition. This is because new borrowing will push up the LTV and therefore the rate of interest with it. Still, owning the freehold could increase the value of the property as well, and if both the loan and the value rise proportionately, the LTV could remain roughly the same.

When it comes to buying the freehold, the process varies depending on the type of property. For a house in which you or your family are the only occupants, you can simply approach your landlord and negotiate the freehold purchase.

If you live in a property with two or more flats and want to set up a shared freehold, you could follow a similar route, negotiating directly with the landlord. But you also have the legal right to seek "collective enfranchisement". To do this, at least two-thirds of the leaseholders (both if there are only two flats) must petition the landlord to purchase the freehold. If you can not reach an amicable agreement with the landlord, the dispute goes to the Leasehold Valuation Tribunal. This process is long and complicated, and will incur legal costs of at least £500.

A property that is sold freehold is, in most cases, a more attractive prospect to buyers. Mr Bulmer says: "It's difficult to get a mortgage for a property that has a leasehold of 50 years or less. This will make it difficult for sellers to shift the property. In this case, it would be extremely advantageous to purchase the freehold in order to be able to offer it as part of your house to prospective buyers."

Melfyn Williams, a spokesman for the National Association of Estate Agents says: "The majority of properties are easier to sell when they are freehold rather than leasehold, but a lot will depend on the length of the lease – if it's 999 years then it's almost as good as a freehold."

Purchasing the freehold can also add value to your home, especially if your lease is running short. As Mr Williams says: "In the majority of cases, it would add value by at least the amount you pay for the freehold if not more." However, this can be deceptive. Sometimes the valuation of a property will be much the same with or without the freehold attached, but the saleability of the property is a different matter. Properties with a short lease are, in effect, unsaleable, and are therefore worth little or nothing at all.

When it comes to flats, the purchase of the shared freehold will give you control over the communal areas of your own property. "The principal motivation is one of control," says Mr Bulmer. "Because of the way the lease is structured, purchasing the freehold is unlikely to add value to an apartment. But a freeholder will have more control, and a better-managed estate could increase the value of the property. It's not the acquisition of the freehold per se."

Owning the freehold for your apartment can affect how your property is viewed by lenders, though opinions here are divided. Debbie Cocker-Brown, the head of conveyancing at Pepperells Solicitors, says: "More often than not, owning the freehold is of no additional value to the lender as they want to see that there is a management contract in place, assuring the maintenance of communal areas. Your covenants need to be running and most lenders prefer leasehold because it assures this."

But Mr Boulger argues that "there are cases of management companies taking service charges and doing nothing. It's much more likely that the property would be well maintained if it is owned by collective freeholders than by another party. So, if anything, this is favourable for lenders."

Once you have purchased the freehold there are costs involved. You will be responsible for the upkeep of communal areas. For houses, this is less of a concern, but with flat0s this includes vital parts such as corridors and exterior spaces. You will no longer have to pay service charges or ground rent, but these areas must still be kept in good condition to make sure that the property doesn't degrade in value.

Ultimately, it's a question of weighing up what the lease costs you against the price of the freehold. The cost of the lease is not just the service charges, ground rents, terms of the lease and all obligations that you pay now, but also what they could potentially rise to in the future. If the price of the freehold is worth freedom from all these charges then it could be a good investment. As Mr Williams says: "Look at all the factors, but nine times out of 10, it will be the right thing to do."

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