If you’re buying a city centre property, chances are that it will be an apartment in a shared block or a unit on some sort of gated site. These sorts of properties tend to be overseen by a management company that is responsible for the whole development, and are sold on a leasehold basis: i.e. you don’t actually own the land; you simply own the property itself.
One aspect of buying such a property that needs to be considered is the service charge. Sometimes referred to as a ‘hidden cost’ of buying a leasehold property (because it is an added extra on top of the purchase price), a service charge is a regular payment that those who own property on the site must pay to the management company for various services. Service charges tend to be paid monthly or annually, and are the responsibility of the owner of the property, rather than the tenant.
The thing about them is that they can vary widely: they can be anything from a few hundred to several thousand pounds a year. And they also cover different things, depending on the property in question. So, we’ve got some handy advice for you to help you to understand what you’re letting yourself in for when making an offer on a property with a service charge.
- Ensure that you receive a detailed breakdown of service charges: Your management company should provide you with a statement detailing exactly what is covered by your service charge. It might be that certain utilities are included, like water, electricity or a phone line. The service charge will also cover some aspects of general maintenance, like the upkeep of shared areas on the site. In some blocks, the service charge pays for the use of shared facilities like gyms, lifts, concierge services and swimming pools. Buildings insurance is also a factor that tends to be covered. Whatever the combination, the important thing is to know what you’re paying for. In part, this knowledge helps to protect you as a property owner: if you are asked by the management company to pay extra for some unforeseen cost, you can be well informed enough to know whether you need to challenge this new fee. Additionally, when looking to buy, this sort of information can help you to decide whether or not the service charge is worth it. A seemingly extortionate service charge just might be a deal breaker – you have to factor in what you can afford to pay when budgeting for your purchase.
- Know how much you’re paying: It might sound obvious, but every now and then, we hear of new property owners who are shocked when their service charge payments start coming out of their bank accounts – the fees might be much higher than they expected, or they might have owned freehold properties without service charges in the past (NB: some freehold properties also carry service charges; always check this out during the sale process). This is why you need to be sure from the off that you’re well informed about what you are expected to pay. Not only will this help you to budget; it will also mean you’re not accidentally paying twice for services you didn’t realise were already covered by the service charge.
- Find out about the ‘sinking fund’: Oh no, sinking doesn’t sound good, right?! But actually, a sinking fund is simply a reserve of cash held by a management company for use in unforeseen circumstances. For example, if major refurbishment was suddenly needed to a communal area because of some unexpected problem, then the sinking fund could be used. Many management companies therefore place a percentage of all the service charges they gather into a sinking fund to avoid leaseholders having to pay out large amounts of money suddenly for additional expenses. But it’s worth knowing exactly how much you are contributing to the sinking fund so that you can get an idea of whether or not this money is really likely to cover the cost of such unexpected events. A sinking fund of just a small amount each month is unlikely to be useful in helping to re-landscape a whole garden area or fix a damaged roof. You may need to keep your own ‘sinking fund’ aside just in case your management company suddenly requires you to pay out for maintenance that just wasn’t predicted.
- Be informed: Like with any other service, a management company is only as good as its actions and conduct. This is to say that not all management companies are equal! Some may charge the Earth and then offer their leaseholders little in return. Others will be fair, super responsive and willing to listen to the people who own and live in their properties. In other words, you should shop around before making an offer on a property to find out whether the management company for the development is reputable. Just because you fall in love with a property does not necessarily mean it’s the right decision, when it comes to financial sense. If you hit a sticking point with your property, life is going to be much easier for you if your management company is supportive, helpful and responsible.
- But how do you know if the management company is really looking after things? Look around you: If you’ve already done your research into the management company for a building and you’re still not sure whether to take the plunge, arrange another property viewing and have a good look around you. Are communal areas well maintained? Do utilities like heating and hot water seem to be working and managed well? Are any grounds staff working effectively and professionally? Even better, if you can, have a chat with some current owners at the development – strike up a conversation in the lobby or do some door knocking if you’re brave. It’s better to get clued up now, rather than regret it when you’re thousands of pounds into an investment that doesn’t turn out to be what you expected.