How To Value A Freehold
If you’re shopping the UK property market, you’re likely to see many different terms floating around. Two opposite terms you’ll see again and again are leasehold and freehold. These are both ways of getting on the property ladder in the UK, but they affect how you buy a home, own it, and sell it. Understanding the difference between the two and how you can actually place a value on a freehold is absolutely essential in the world of property.
Freehold vs. Leasehold – Terms Defined
A freehold is when a person owns a property completely, even the land that it is built on. When you buy a freehold, you are completely responsible for maintaining both the land that you’re on and the property itself, so it can be a bit more expensive. There are many benefits to a freehold property, though. You never have to worry about your lease running out because you actually own the property. You’ll never have to pay any ground rent or other service charges.
A leasehold works a bit differently, though. In this situation, you own the property only for the length of the lease the freeholder has granted you. When the lease ends, the ownership of the entire property goes back to the freeholder unless you can extend it.
How To Calculate The Freehold Value Of A Property
Wondering how to value the freehold of a leasehold property? It’s a bit more complex than you might expect. Unfortunately, there’s no calculator that can tell you exactly what a freehold is worth because valuing a freehold isn’t a perfect science. There is some guidance, though, that can help you establish the value of a freehold. Released by the Leasehold Advisory Service, this service offers quite a bit of guidance. Keep in mind, though, this is not a task you have to tackle by yourself. Instead, you can actually locate a valuer in your area through the Leasehold Advisory service, and they will help you better understand and move through the process of negotiating and buying a freehold.
If you have already approached your freeholder informally, but you haven’t yet created an initial notice (which is a requirement under UK law), you can’t do a lot to push your freeholder to move forward. You will have to have an initial notice created, as it creates the statutory process of you actually purchasing the property. Once you serve that notice, your freeholder will legally have to reply with a counter notice by the date stated (which must be at least two months from when the initial notice is given). It’s important to note, though, that you don’t want to do this until you actually have a value on the freehold.
If you don’t want to go through a professional valuation on the freehold, there is one way that you can come up with a value on your own. The investment value of a freehold with a long lease is what’s used to determine the overall value. If you want to calculate that investment value, you need to factor in the term and reversion. That is calculated by multiplying the ground rent figure by the year’s purchase, which is determined by the valuer using a yield rate assumption. The reversion is calculated based on the sale value when the current lease term expires, assuming the most favourable leases will be granted for a maximum of 999 years. The valuation of a freehold takes into consideration only the current state of the property, so no real improvement value is actually part of this equation. The sum of the term and reversion represents the investment value of the freehold, which in turn represents the sum that the interest is likely to achieve in an open market sale.
Is the Freehold Value of Commercial Property Different?
If you’re thinking about freeholds in terms of commercial value, understand that things are completely different. Learning how to value a freehold commercial property requires specialist help. Type “how to value a freehold commercial property UK” into any search engine, and the advice you get will quickly be to work with a professional valuator. This is because commercial property values differ so greatly from residential property values, so you’ll want to work with someone who has experience in the area and can help you better understand all of the factors that go into valuing commercial properties to help you come up with the right value.
Should You Buy Your Freehold?
Is it really worth it to take the time to buy your freehold and figure out what the valuation might be? If you have less than 80 years left on your lease, it’s absolutely worth it to figure out how to buy the freehold of the property. It helps put you in the driver’s seat when it comes to all of the outgoings on the property. Sure, it can be a bit daunting to take over the management, but it helps put you in complete control of costs. There’s no reason why you wouldn’t want to be your own freeholder because the reality is that it’s a far better financial proposition. If you own a flat instead of a house, understand, though, that there are many complex issues involved with buying and owning the freehold on your property, so you may want to chat with a property expert to learn more about what those might be and how to actually execute the purchase of your freehold property.
The Bottom Line
While it may seem complicated to value a freehold before you make an offer, the simple reality is that it’s not quite as complex as you think. Instead, it’s a fairly easy process that can net some real benefits in the end.