Ground Rent Scandal Affects UK Real Estate Buyers
On its surface, the process of purchasing a flat in the UK from the Taylor Wimpey property development company appears straightforward enough: Under most agreements, a person will buy property from the company with the assumption that their "ground rent" fee will double every few years; under a "leasehold" system, moreover, buyers can potentially save money on their purchase by giving up certain property rights traditionally connected to "freehold" purchases. In the past, this system was viewed as an acceptable alternative to outright property ownership because fees tacked to a leasehold contract were largely negligible in their cost.
In recent years, however, it has become clear that the "leasehold" provision in such contracts has enabled the Taylor Wimpey company to earn massive profits from real estate buyers who do not understand the fine print on their mortgages. The ground rent policy has also essentially made the flats purchased by these individuals worthless: Many buyers are finding that flats said to be worth over £100,000 are in actuality unsellable.
Without question, the distinction between "leasehold" and "freehold" purchases on real estate investments are a major factor in the problems new owners are seeing. Under the ground rent system, buyers who purchase "leaseholds" on properties do not actually purchase the property around the buildings themselves. Under this agreement, leaseholders can be charged for everything from painting a wall to building on the property.
This all comes as a double-blow to real estate buyers who see the purchase of a starter property such as a flat as an investment that can be used towards a larger property or house at a later date. Inundated with extra costs, however, these buyers feel stuck with properties that they can no longer manage or afford.
Even worse, they're also finding that the properties may never sell: Because of the expense of maintaining leasehold properties with high ground rent fees over time, banks are reluctant to provide mortgages to buyers who are interested in purchasing flats with such agreements already in place.
For the time being, many would-be property investors will now have to give up on their dream of homeownership or begin the process of climbing the property ladder all over again. According to The Guardian, the number of people affected by the scandal could be as high as 100,000 within Britain.
Whether government investigators will bring unscrupulous property companies to heel in coming years remains to be seen, but many would-be homebuyers already feel skeptical about the real estate market as a whole. That lack of public faith in the system could affect the real estate market for the foreseeable future.