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Freehold investement: Scam or legit?

Covering Market, Trends, and Practical (but see LEMON-AID for Building & DIY)
TomKhakis
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Freehold investement: Scam or legit?

#631894

Postby TomKhakis » December 5th, 2023, 8:14 pm

I found this freehold selling for £7500 which returns a total ground rent of £675/year. The return already looks poor, and even worse as ground rents being banned which could drop the return to zero. Perhaps the freehold will be worth more if the leaseholder buys it, but there's 125 years remaining so it could be more than a lifetime to make the money back. So this looks like an audacious freehold scam to me in which a seller is trying to off-load soon to be nearly worthless freeholds. Am I interpreting this wrong? What do you think?

tjh290633
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Re: Freehold investement: Scam or legit?

#631903

Postby tjh290633 » December 5th, 2023, 9:03 pm

It's a long time ago, but an estate agent friend of mine bought lots of freeholds on distressed property in the Oldham area 60 years ago. All the properties got demolished and he owned the land which was then redeveloped.

Those were 999-year leases at £5 per year, or so. He was probably paying about £100 a time, maximum. You have to judge what might happen to yours.

TJH

GrahamPlatt
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Re: Freehold investement: Scam or legit?

#631918

Postby GrahamPlatt » December 5th, 2023, 10:34 pm

TomKhakis wrote:I found this freehold selling for £7500 which returns a total ground rent of £675/year. The return already looks poor, and even worse as ground rents being banned which could drop the return to zero. Perhaps the freehold will be worth more if the leaseholder buys it, but there's 125 years remaining so it could be more than a lifetime to make the money back. So this looks like an audacious freehold scam to me in which a seller is trying to off-load soon to be nearly worthless freeholds. Am I interpreting this wrong? What do you think?


I make that a return of 9% pa. So I don’t see why you say it could take a lifetime to make the money back. Have you got the figures right?

Dicky99
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Re: Freehold investement: Scam or legit?

#631921

Postby Dicky99 » December 5th, 2023, 10:56 pm

GrahamPlatt wrote:
TomKhakis wrote:I found this freehold selling for £7500 which returns a total ground rent of £675/year. The return already looks poor, and even worse as ground rents being banned which could drop the return to zero. Perhaps the freehold will be worth more if the leaseholder buys it, but there's 125 years remaining so it could be more than a lifetime to make the money back. So this looks like an audacious freehold scam to me in which a seller is trying to off-load soon to be nearly worthless freeholds. Am I interpreting this wrong? What do you think?


I make that a return of 9% pa. So I don’t see why you say it could take a lifetime to make the money back. Have you got the figures right?


You may correct me if I'm wrong but my understanding is that the owner of a freehold can only sell it on the open marker if the leaseholder/s have waived their right to first dibs.

Also ground rents are not being abolished for existing leases only for new leases.

servodude
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Re: Freehold investement: Scam or legit?

#631927

Postby servodude » December 6th, 2023, 3:30 am

GrahamPlatt wrote:
TomKhakis wrote:I found this freehold selling for £7500 which returns a total ground rent of £675/year. The return already looks poor, and even worse as ground rents being banned which could drop the return to zero. Perhaps the freehold will be worth more if the leaseholder buys it, but there's 125 years remaining so it could be more than a lifetime to make the money back. So this looks like an audacious freehold scam to me in which a seller is trying to off-load soon to be nearly worthless freeholds. Am I interpreting this wrong? What do you think?


I make that a return of 9% pa. So I don’t see why you say it could take a lifetime to make the money back. Have you got the figures right?


Could it have been meant that there was more than a lifetime "available" rather than "required"?

GoSeigen
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Re: Freehold investement: Scam or legit?

#631933

Postby GoSeigen » December 6th, 2023, 6:47 am

servodude wrote:
GrahamPlatt wrote:
I make that a return of 9% pa. So I don’t see why you say it could take a lifetime to make the money back. Have you got the figures right?


Could it have been meant that there was more than a lifetime "available" rather than "required"?


Unlikely because then the investment would be ligit and the OP would not be worrying about a scam.


My gut feeling would be that the sale of freeholds is genuine. If the yield is higher than usual for the area perhaps it's a distressed seller?


You must do your due diligence though. Ask why the seller is selling. Demand and read all the available documentation. Perhaps visit the properties.


GS

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Re: Freehold investement: Scam or legit?

#633522

Postby modellingman » December 12th, 2023, 5:11 pm

TomKhakis wrote:I found this freehold selling for £7500 which returns a total ground rent of £675/year. The return already looks poor, and even worse as ground rents being banned which could drop the return to zero. Perhaps the freehold will be worth more if the leaseholder buys it, but there's 125 years remaining so it could be more than a lifetime to make the money back. So this looks like an audacious freehold scam to me in which a seller is trying to off-load soon to be nearly worthless freeholds. Am I interpreting this wrong? What do you think?


For the modest sum of £3 (IIRC) you can look up the freeholder's interest at the Land Registry.

I have two flats in a 70's built development in North East England. There are twelve flats in total and the total ground rent is around the same level as that which you quote. Because it is small there's no separate management company involved - the freeholder organises the management of the buildings and garden and takes a management fee for doing this. It is possible that the purchaser of this freehold will become not just an investor but also a property manager. Do you want the hassle of property management (as well as the hassle of actually collecting the ground rents)?

modellingman

theta
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Re: Freehold investement: Scam or legit?

#640369

Postby theta » January 15th, 2024, 9:14 am

TomKhakis wrote:I found this freehold selling for £7500 which returns a total ground rent of £675/year. The return already looks poor, and even worse as ground rents being banned which could drop the return to zero. Perhaps the freehold will be worth more if the leaseholder buys it, but there's 125 years remaining so it could be more than a lifetime to make the money back. So this looks like an audacious freehold scam to me in which a seller is trying to off-load soon to be nearly worthless freeholds. Am I interpreting this wrong? What do you think?


Ground rents banned from new developments won't affect existing ones. If anything, it could make them more scarce and arguably more valuable on the margin.

You can look at the freehold/ground rent as the equivalent of senior debt to a company (with the leasehold being the equity equivalent). The debt is secured against the property, in much the same way as debt is secured against a company's assets. First loss is the equity tranche, debtholders would only lose money if equity is wiped out. Similarly, for a flat, ground rent needs to be paid or else the flat (leasehold) goes to the freeholder (who is more senior than even the mortgage or any other debt secured on the property), something that obviously the leaseholder won't want and won't let happen, unless the property becomes worthless otherwise.

Therefore a proper comparison is to long term debt. I would argue that 9% yield is pretty good from that point of view. It likely is better than that because of rent reviews put in place. Check what these are. Typically ground rent will double every 25 years (which makes it more or less catch up to inflation) or there may be a different review, but it's very unlikely it will be unchanged for 100+ years. This makes it even better than nominal corporate debt in comparison.

The biggest issue IMO is the small size. There's some friction in having to send rent demands every year and potentially chase it in case the leaseholders ignore them (which is unlikely, given their property is at stake, but it's possible nonetheless). It's not as hands-off as having a bond in your brokerage account. Otherwise, far from a scam, in fact arguably much better risk/reward than most assets.

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Re: Freehold investement: Scam or legit?

#640486

Postby brightncheerful » January 15th, 2024, 9:51 pm

Possibly the seller bought it in the hope the leaseholder would buy it for more. Finding the leaseholder wouldn't or isn't interested, it's now for sale to anyone. The op should check whether there are any hidden responsibilities that come with it before buying.

Long ago, I bought for my father 76 ground rents on modern houses in Chadderton. The seller was one of my clients and we paid 10 years purchase (yp) (ie, 10% yield). The leases were (originally) 999 years at ground rents ranging from £15 to £25 a year. I came up with some ideas for selling the freehold to the lessees, including a special arrangement with a local solicitor for the costs. Some lessees bought, but not as many as we thought, and probably they didn't because they couldn't see the point. In the end, I sold all that we had left to a professional ground rent investor for about 12 or 13 yp (8% or so). Getting paid wasn't the issue so much as having to send out rent demands and reminders.

After we'd sold, I asked the buyer's solicitor why buy. I was told that what is done is not to inform the lessees of the change of ownership so as to make it difficult for the lessees to sell, which then makes it easier to extract payment from the lessee in exchange for the information needed for the transfer. Also, where possible to enforce covenants that have been breached, such as decoration, repair, and alterations.

DrFfybes
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Re: Freehold investement: Scam or legit?

#640531

Postby DrFfybes » January 16th, 2024, 9:02 am

brightncheerful wrote:After we'd sold, I asked the buyer's solicitor why buy. I was told that what is done is not to inform the lessees of the change of ownership so as to make it difficult for the lessees to sell, which then makes it easier to extract payment from the lessee in exchange for the information needed for the transfer. Also, where possible to enforce covenants that have been breached, such as decoration, repair, and alterations.



The purchaser wasn't called Van Hoogstraten by any chance? Buying a flat with a requirement to keep a mat outside the front door in the communal way then finding they were gone in the morning then getting a "Covenant Breach letter" was AIUI not uncommon. Huge charges to release the info required for sales was another. Gold plated refurbs done at extortionate rates was also quite a nice earner. Arrangement fees for insurance that were more than the premuims. I lived in Brighton in the 90s, our Freehold was sold without our knowledge but I found out and got the residents to chip in and we bought it back. This sort of stuff was very much in the news at the time, now I think it as been stopped.

Paul

brightncheerful
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Re: Freehold investement: Scam or legit?

#640567

Postby brightncheerful » January 16th, 2024, 11:30 am

The purchaser wasn't called Van Hoogstraten by any chance?


No it wasn't. But that name rings a bell; I cannot recall why, though but daresay it'll come back to me.

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Re: Freehold investement: Scam or legit?

#641905

Postby Grumpsimus » January 22nd, 2024, 3:24 pm

I have only just seen this topic and I am surprised that there has been reference to the Leasehold and Freehold Reform Bill which is currently going through Parliament. This likely to have a largely negative effect of the freehold value of ground rents. Two of the proposals are for abolition of marriage value and for cap on the maximum ground rent. Currently the government is consulting on the maximum ground rent, a figure of 0.1% of the total freehold value has been suggested.

The full details will not known until the Bill becomes law, even then secondary legisalation. will need to be passed. There is also doubt as to if this will become law before an election is called.

Labour has already said that it wishes to abolish the leasehold system of ground rents and promised this for the first 100 days. Incidentally, Michael Gove the Minister responsible this area, originally said he wanted to abolish the leasehold system of ground rents as well.

Therefore, there is conderable uncertainty about the value and indeed the future of ground rents. This may account for the original apparently attractive offer to sell on a 9% yield. The freeholder has seen the future and just wishes to dump his interest for what he can get.

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Re: Freehold investement: Scam or legit?

#641983

Postby Dicky99 » January 22nd, 2024, 11:08 pm

Peter Rachman was the bloke responsible for the term Rachmanism relating to the mal treatment of his tenants.


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