CHECK OUT THE SERVICE CHARGES WHEN ADVISING BUY TO LET INVESTORS

warns Chris March, director of Countrywide Property Management

Today’s new developments offer a variety of challenges for any management company negotiating a service charge with a developer or Residents Management Company, and all too often, the winning agent can get his sums catastrophically wrong! But, because he’s the cheapest, he wins the deal, leaving owner occupiers and landlords to pick up the inevitable extra tab.     

Too high a service charge, especially if it doesn’t produce value for money, or if it involves hidden future charges, will impact on yield. And investors need to know that before they buy.

   Consequently, agents who are advising residential investors should be especially careful when recommending what appears to be the ideal purchase in a desirable new development (or existing block of flats). First, check that the service charge is actually correct, with a detailed budget showing a breakdown of the cost of each element; if a developer doesn’t provide this information, there is a much stronger likelihood that the budget and the future management of the scheme has not been carefully thought through.

   Then check that the service charge is fairly allocated. A one bedroom apartment without a parking space shouldn’t be charged the same as a two bedroom apartment with parking!

   It’s also worth checking that planning conditions (such as a green travel plan) have been met; if they haven’t, you need to ask when and how they will be – and if their implementation will involve any extra costs to residents.  

So, what should the service charge actually cover?

-                     Repairs, maintenance and cleaning of all common parts;

-                     Lift maintenance contract;

-                     Buildings insurance;

-                     Security, including door entry phone system and lighting;

-                     Grounds maintenance, and monitoring car park abuse;

-                     Safe waste disposal and monitoring fly tipping, graffiti etc.

-                     Keeping the site clean, tidy and accessible for all new residents and potential buyers during the course of construction and phased selling;

-                     Maintenance of detailed accounts;

-                     Regular meetings with residents’ groups to address any issues of concern; and

-                     Setting up the Residents’ Management Company when a scheme is completed and the developer leaves the site.

There should also be a separate ‘sinking fund’ for future major repairs (such as roof repairs, replacement windows, and regular redecoration inside and out, as well as replacement of carpeting in common parts etc.).

   Adding to the complexity of modern schemes are such things as boat moorings, gyms, swimming pools, and cinema rooms. Is access charged separately, per visit, or included in the service charge? Are they for residents only, or do the general public have access; if yes, on what terms?

Even brownfield sites can be designated as wildlife conservation areas, perhaps as habitat for a rare orchid, bats or slow-worms; if this is the case, what are the arrangements for monitoring and preserving populations? An annual bat survey can be very expensive!

   Today, a lot of schemes have a concierge service, which needs to be accounted for, and a buyer would want his or her terms of reference. Is it 24 hours, and how is it charged?

   Finally, social housing is usually fully integrated into new developments, rather than in separate blocks, and any buyer needs to know how this is managed. It is commonplace, but by no means obligatory, for housing associations to pay an annual fee to delegate day to day management to the scheme’s designated single management company, whilst retaining all responsibility for lettings.  If this is not the case, buyers need to know because it may take longer to deal with any unacceptable behavioural issues which would be addressed quickly elsewhere on the site.

   If all the answers are satisfactory, then do enquire how the service charge is collected, and what measures are taken – and how quickly – if someone fails to pay. Budgets can be tight, and regular non-payment by just one person can have a serious negative impact.

   Under legislation, Residents Management Companies do have the right to get rid of a managing agent who does not deliver, so it’s worth asking how long the contract is for, and if there is a break clause. Regrettably, not all managing agents live up to expectation, but it can be difficult to get rid of them.

   Readers may think I have rather over-egged the pudding with all this information, perhaps raising unnecessary concerns. However, as our expert team, which only deals with tailoring service charges to individual developments, can tell you – we have picked up the pieces on rather too many occasions to treat this subject lightly!

Comments