Turning Leasehold Land into Freehold?

[Josko]

Hi all,

I looked at an interesting opportunity that I'd like to share with you and hopefully get some comments, others experiences.

A 4 Bedroom House advertised for 150k (leasehold), so I thought I'd hone my negotiating skills and in little time found out about the selling range, and the name of the land owner.

I suggested to put an offer in on the land and would the agent be willing to get the offer to the land owner. 200k. It was a 1700m2 block.

The opening to the land is just a driveway enterance with the house smack in the middle of the land.

Any ideas/suggestions on what would make this a great investment? Would you be bothered and why/whynot?

What costs/processes does it take to turn Leasehold into Freehold?

Do you buy the Land first or House, how do you tie the two together?

[LondonKiwi]

Ivi

Shouldn't you have your buying criteria in place first and then look to purchase properties that fit that criteria rather than the other way around? This is what it appears to be the case here where you have identified a property and then trying to work out what you can do with it?

Stick to your criteria if you have it, and that will help in the decision!

Cheers


LK

[CJ]

Freeholding a leasehold should be as easy as buying the land under the lease. At that point you are both the lessor and lessee of the land. By mutual agreement with yourself, you shoud be able to terminate the lease. Might cost a little in legal fees to terminate properly and ammend the land office records but I would have thought it would be cheap (less than $500).

Even if you dont terminate, you are only going to be paying yourself. I would only accept cash though as you never know if the cheque will bounce. Dont want to have to take yourself to the tenacy tribunal.

[Josko]

Shouldn't you have your buying criteria in place first and then look to purchase properties that fit that criteria rather than the other way around? This is what it appears to be the case here where you have identified a property and then trying to work out what you can do with it?

I am trying to learn something about Leasehold/Freehold, there is still so much to learn before I can call my rules to be set in stone.

You are right I have been looking at all sorts of opportunities now that I have the 1st IP out of the way, not necessarily ones that fit my current rules.

Might cost a little in legal fees to terminate properly and amend the land office records but I would have thought it would be cheap (less than $500).

Thanks CJ, these sort of little tid bits help with the picture.

[pixie]

We recently looked at a similar investment. Couldn't buy the land though - what a shame.

But anyway - we decided to put 3 relocatable cottages on the land (an older home there already) because they would instantly (as near as) create rental income. We looked at 2 bedroom cottages. It stacked up as a good investment, easily covering the land rental and producing a good quality return.

We decided not to proceed because of the risk of the land rental getting out of control in the future (what if the lessor decided the land rent should be tied to the number of dwellings instead of simply land value?)

[DepositBondNZ]

We get quite a number of applications for people buying leasehold. There is quite a variance in the terms of the leases. The key things to look for are: When are the reviews? How is the value of the underlying land to be determined for the "new" rent. What I mean by this is that some take the value of the land as an undeveloped site, ie by this they mean as if is was bare land and not developed with the building(s) above it. Thats the cheapest and fairest. Some I have seen take it on the value of the (now) developed site. I dont like these because it means the unit youve paid for in turn adds to the value of the land and therefore you pay more just because you have increased the value by buying it! Some view leasehold as just like havng a mortgage on land you'll never own. Some of the council leases around Auckland (and elsewhere) have provision for the lease to be freeholded. Usually the formula to do that is expressed in the actual lease. Typically both parties get valuations and they split the difference but once you start you have to go through with it. I hope this is of use.

[fudosan]

Hi DepositBondNZ,

How is the value of the underlying land to be determined for the "new" rent.

How can I find out this information? Leasehold is something very new to me. Currently I'm looking at a number of properties in the Viaduct Basin and neighboring areas, and they are all on leasehold land with rent review every 7 years. Any help will be much appreciated.

[Julian]

Best thing to do is get a copy of the land lease and read it thoroughly. If there are aspects you do not understand then discuss these with someone who does.

A couple of things worth noting - one negative, one positive:

Banks can be less receptive to lending on leasehold property, because, quite rightly, they see the security primarily in the land and your loan is secured against the buildings. They may require a bigger deposit and possibly will stipulate a shorter loan period.

One hundred percent of the purchase is depreciable - as land is the only thing that you can't depreciate.

Julian

[fudosan]

Hi Julian,

Thanks for the tips. I'll be very cautious when looking at the LVR and my desposit.

[Glenn]

I have purchased leasehold land and then at a later date freeholded it.
Most leasehold land as far as I am aware is generally only available to be freeholded to the leaseholder. so buying the thing like a motel freehold with business tenant in place is generally not an option.

When you buy a leasehold property you pay for the improvements and a licence to occupy. This licence to occupy obviously disappears into nothing when you freehold it. I guess there are several ways to work out the value of a licence to occupy. Simply put you should workout the present worth value of the land as apposed to paying full price in say 15 years.
A "good" valuer or a "good" accountant should be fully conversant with these calculations. Design Project Engineers have these skills also.

So say you have a house worth $100,000 and a bit of leasehold land that has a normal FH value of $200,000. Well you might find that this would be worth say $100,000 for the improvements and say $20,000 for the land.
Now when you freehold it in say 5 years you might need to pay say $250,000 for the land and the total value of your investment is now $350,000 being the value of the land plus the improvments and not the $370,000 that you have paid for it. In other words you loose the $20,000. However you have had the benefit of the property for the last 5 years. Generally you will find the cost of the land lease will not be as much as paying interest on that $200,000 that you did not need to stump up in the early days.

There are several buts in all this though
You do not know how much the land will be worth in 5 years.
You do not know what your financial position will be in 5 years.
Even if the owner says they are will to sell in 5 years when you buy it they might have a change of plan brought about by polictical, economic, or board member changes over that time.
Sometimes it is possible for both parties to enter into an agreement to do something in 5 or what ever years. These sorts of agreements often disadvantage the vendor so it is not a smart move for pudent trustees to enter into these types of deals today.
You do not know what the interest rates will be over the years, and you do not know will great certainity what the landlease will be.

I came to the conclusion as a property investor that it did not make much sense in the long term for me to be paying someone else rent. I am in the business of making others pay me. So this is why I freeholded it even though at the time it did not make a great deal of sense.
However it did help me get into a nice industrial property at a low price that has paid fairly well over the years. In hind sight it would have been better to freehold it at the same time I purchased it. This is because the land increased in value by 20% over the three years I held it as a leasehold. I did benefit because the owner (the local city council) forgot the review the landrent when they were entitiled to and they sold at a time they were keen to help their balance sheet so sold on a great deferred settlement plan.

Hold this is of some help to someone.

Glenn

[Josko]

Thanks all,

When are the reviews? How is the value of the underlying land to be determined for the "new" rent.

WOW, $11,000 pa Lease currently, youd want the review procedure to be efficient.

Magic, thanks Glenn.

Seems to me that going that extra mile on Leasehold sales by asking if the Land owner is willing to sell the land might uncover an investment opportunity worth investigating.

Can you recall the costs involved in Freeholding it? Is CJ right <$500.00?

[Glenn]

I do not recall the cost of freeholding the property being anything special.
Just the normal stuff re the refinancing and so on.
Glenn