One subject that concerns many buyers is the hidden costs of acquiring property in London. Obviously you’ll have a budget in mind, but if you’re buying a home, and especially if you’re buying an investment, the additional costs can be significant and you need to factor these into your calculations.
Now the biggest expense, as you may well be aware, is the Stamp Duty Land Tax. This is a tax you have to pay on the purchase of any property in the UK. In a moment I’ll discuss this tax and ways to potentially avoid paying it, but first let’s go through the other major costs.
Solicitors and Searches
The most obvious one is the solicitor that you’ll need to represent you. The solicitor’s fee will vary depending on numerous factors. If you’re buying a house it will tend to be a fairly simple transaction, as it’s likely to be freehold so there will not be the complications of a lease, service charge accounts, and sinking funds. Consequently the solicitor’s fees should be less expensive than if you were acquiring an apartment at the same price.
However, if you’re buying an apartment they will have to look at the leases and there will be various potential issues, and if it’s a short lease then they will be looking at potential leasehold extensions as well. You can’t expect a fixed cost from solicitors until you know what type of property you’re buying. If there are complicated issues to resolve the solicitor may need to spend more time on the documents. For example, planning documents may be missing, or you may decide that you want to change the tax structure or financing terms.
Your solicitor will also need to ask you for extra monies for what are called ‘searches.’ Now these are searches to make sure the property is safe to buy, so you’ll have an environmental search, local authority search, a planning search (to make sure, for example, that you don’t have a huge block of flats being built right in front of your front window), and a chancery repair search, which is an amazingly ancient subject they have to search on. Two or three hundred years ago, churches were able to demand money from local homeowners to pay for church repairs. Now, if you consider the size of some churches, these fees could run into millions of pounds, so one has to make sure that one isn’t liable for that.
Another very important search is the London Underground and Cross-Rail Search. This is to ensure that the London Underground system does not run under or near the property. This is important because when you inspect a property you may only spend five or ten minutes there so it’s possible you may miss the fact that the tube line runs under the building. In some cases this isn’t an issue because the tunnels are so deep they don’t affect the building. However, some buildings can vibrate quite a lot and this can make properties much harder to sell on later. In addition there may be plans to extend an underground line or add a new route to Crossrail, so it’s essential you’re aware of what is happening.
When acquiring a house you’ll be liable to insure the home from exchange of contracts (when you pay the 10% deposit) and before completion. It’s possible to agree with the seller that they insure the property up to completion and that you will insure it from completion, but if it’s not expressly stated in the contract on exchange of contracts then you’ll be liable for the insurance. So should the house collapse or burn down, for example, between exchange of contracts and completion, you’ll be liable to reinstate the house.
With apartments normally the insurance is paid for in the service charge so this isn’t such an issue. However, your solicitor must ensure that the level of cover is adequate for the building.
Even if there is nothing valuable in the property and you’re leaving the property empty for any period of time, contents insurance is quite important. If a washing machine explodes and leaks through the house or apartment building (especially if you’re not there to notice the leak), because it was caused by the contents of the property, your building’s ordinary insurance will probably not cover the damage.
Service charges are the annual payments (sometimes split into quarterly or bi-annual payments) for the insurance and management of the building. Incorporated in this may be something called the sinking charge or reserve fund, which is money paid annually by the residents into a separate fund purely for the maintenance of the building. The advantage of this method is that you’re paying fairly small sums annually rather than receiving sporadic demands for single large sums (for example, when the roof needs replacing). Your solicitor will ask for the previous three years accounts to understand the costs and also to see how the money is spent.
It’s important that any building is managed properly, otherwise it can become dilapidated fairly quickly. Unfortunately there are still some rogue landlords who demand high service charges but do not deliver the required service, so it’s vital that you or your solicitor reviews these accounts closely. It may become obvious that there is not a reserve fund. This is not an issue in itself but you’ll need to enquire if extensive works are due to the building, as these could costs tens of thousands of pounds per apartment and may affect the price you’re willing to pay, not to mention the inconvenience.
You’ll also need to consider the surveys. Obviously when acquiring a house, and when you think that some houses in London are over 400 years old, you’ll certainly need some form of structural survey carried out.
There are various levels of survey. There is the basic valuation survey, which the mortgage companies and your banks will ask for. This isn’t adequate for your purposes, as they want the valuation survey purely to ensure that if you fail to make your payments they can sell the property and get their money back quickly. As you will probably need to put down at least a 25% deposit they just want to ensure that the property is worth 75% of the asking price. Consequently, you’ll need to have a more robust survey that checks the stability and quality of the house. This will be either a full structural survey or a homebuyer’s survey, which is not as in depth as a full structural survey but is adequate for most properties built after 1950. This is something you should discuss with your surveyor in advance.
In the next email, I’ll look at the various taxes that you need to consider, including the Stamp Duty Land Tax.
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