Post Purchase Video Series
Preparing for Exchange of Contracts
freehold, solicitor, property, lease, exchange, contract, buying, charge, communal, service, pay, rent, equitable title, peppercorn, money, address, lease holder, completion, signed, notices
Hey guys, so firstly, congratulations on buying a property reserving actually taking that step.
You know, it's a big massive thing. I think the amount of procrastination there is in the world right now. It's great that, you know, we can make decisions, which is fantastic. So, but anyway, that's not what this is about. But I just want to say that because I think is really important. We need more people around the world making decisions.
Right? So we're going to move into now where we need to reserve it, okay, been through reservation human allocating exchange, so what does exchange mean? They will, okay, so, exchange is exchange of contracts. Okay. And effectively, they will be done through a deed which effectively deed mean, signed, sealed delivered, it means it's virtually undeniable that you signed it that you are that person, okay. And in this process, because it's going to be, you know, eventually it's going to be registered on land registry.
You know, it's gonna be done through a solicitor. Okay. So, so the solicitor that you instruct, is really important, because I think, you know, you can go for a discount solicitor, who doesn't really understand perhaps Off Plan, if you buy an Off Plan, the new bill, you know, and the nuances that can come in with that, because there are separate searches that you need to do for this that aren't a normal real estate, solicitor or conveyancer.
And I think that's key, you know, so I think what you're doing at exchange, because if we're talking about Off Plan, you're exchanging and then completing at a later date. So there's two stages. If you were completing straightaway, then you'd be exchanging and completing at the same time. Okay, so let's talk right now, because this is what this is, is you're exchanging now, completing later. Now, what that means exchanging What are you exchanging, effectively, what you're exchanging is equitable title to the property. Okay? Not legal title, you're not taking ownership yet, you're taking ownership at the point of completion. But what you're exchanging is the the terms that are in that contract, okay. And one of the most important ones is that the price has been established. Okay. So it doesn't matter what happens between exchange and completion, that price is fixed, unless there is terms in there that allow for upwards revision or downwards revision or whatever, of the price of the property. But that's not normal. Okay. So effectively, what you're doing by changing now is you're locking in the price that you're buying for. And then we would hope that the market goes up over that period of time until completion, in which case you're buying a property that's worth this much, they've actually paid that much for, okay, that's the ideal. Okay, obviously, the challenge is with this equitable title is you're locking in the price. So if the market does this in between, or even if it does this, and then this, you still are buying at that price. So it's a double edged sword, double edged sword. Well, there's one side or, you know, the one side is the upside, the other sides of downside. So there is a risk, and there is also potential for what so
that's what the equitable title means. But effectively, whatever the terms that you exchange now on are the terms that you'll complete on unless you make an adjustment to that particular contract, in which case, both parties would need to be aware that both parties will need to consent. Okay? So you're pretty much Ad Exchange locking in the terms of the contract now. Now, in order to really understand what's going on here, so let's assume that you're not buying a freehold property, you're buying a freehold, it's slightly different in that you're buying the freehold or, and what that means is you control that property outright now for a house that you know, has, you know, fences around it, and it's a separate piece of land that you would normally be you'd own the freehold. If it's part of a development, even it might be a house but you if there's communal gardens, and this communal things, you may still be a lease holder. Yeah, of the property and the freehold, which might be the developer or they can sell that off, becomes a freehold and you would be required to pay them potentially a Grandmont and potentially a service charge. Okay, so this will depend on what you do. So you've got freeholder, in this case, ignore this video. See another one.
Even if your share of freehold yes you'll own the freehold but you'll still need to have a communal element to the thing. So if you've got an apartment with say, four apartments in it, or three apartments, or maybe it was one house is made up into two apartments, you would have a share of the freehold. So there's not going to be a freehold or the pay ground rent to, you know, it'll be the two parties, and there'll be an agreement between the two of how it will be run. Okay, so, but if you're buying an apartment, what you'll generally find is there'll be a freeholder and that will start off being the developer who bought the land, chopped land up into the into blocks, or potentially if you just buy one block
chopped it up into individual leases, okay. And those leases will have a term of might be 999 years, 125 years, whatever it is. And once you pay the freeholder for the privilege of that is a ground rent now that ground rent can be
peppercorn. Okay, in other words, you know, historically you had to if you think of a contract a contract needs
a offer acceptance and consideration, okay? Consideration can be anything. In this case, it could be a peppercorn, in other words, you give them the typical one every year, okay? There was no real money. Alright. So that's what a peppercorn means. It means nothing, you don't pay them anything up to probably about 350 pounds, and it can increase. Now, there's a lot of talk about this particular element, which is the freeholder, you know, having control over the lease holder and charging these ground rents. Okay. That potentially that whole system could be getting phased out and should be getting phased out. It is a horrific system, horrible system. But unfortunately, it's the system that we have. And generally the freeholders are the wealthy landlords land owners. Yeah. And we own the lease under those. Now, a lot of people say I, you know, I don't do free, I don't do lease holds, because they're terrible, and all that and they are, but you know, what, actually, they allow you to buy into property and they and you can make money out of as long as you go in with your eyes open. Okay, and you understand what is involved in being a lease holder. And the impact of the freeholder has, for the most part, all my properties, besides paying round rent each year, I don't have any idea who the freeholder is, I don't care who they are, that may just go to them. Now, the other side of this, so that's the freehold or in the leasehold, okay, as a lease holder. Now, there are some communal things that need to be dealt with, whether that be insurance on the whole building, whether that be the roof being replaced every 25 years. And therefore, we need to put money aside for that. So that even though I'm using it today, I might only own that property three years. Well, now there's another 22 years, that the next person is going to now we could not put any money aside into what we call a sinking fund. And basically, what would happen is in 25 years, or in 23 years, when that roof needs to be replaced, or 27 years, whoever owns it, well, you know, you roll the dice and loss, that doesn't happen, that shouldn't happen. And what so what we do is now we say, hey, let's the roof is going to cost this much. So we need to put aside X amount per month, you know, per year in our service charge, let's say to 1000 a year.
So put aside 1000 years, 25 years, you're contributing 25,000 to the roof over that you've owned three years. So there's 3000, your money gone into that. But what it means is when it's replaced, your 3000 can get used towards that roof. And whatever else it might be, it might be, you know, the security systems, it could be any of those sort of communal assets. So sinking funds are an important part, and they are part of what the what you're going to do. So I think it's, it's, it's wrong to say that, Oh, you know, service charge is, you know, 2000 a year, actually, it may be 2000 year, but what you're actually doing is you're setting money aside for these type of things. Whereas if you're a freeholder, you probably aren't going to do that. So it may appear cheaper, but then you get the big wall, stonking bill for the roof and 25 years. Okay. And that was where it presents a problem. Okay. Now, obviously, if you sell it after three, well, you haven't put any money aside for that. Right. So that's that side of it. Now, the service charge. What generally happens is the freeholder will appoint a management company, and that management company will then manage the service charge now, here's the raw, okay. And this has been going on forever, and it's getting no better. But there's lots and lots of talk about how do we get rid of a lot of the abuse that happens in this process. You have a management company, they can charge their fee, they can take backhander commissions, they can charge stupid amounts of things, they can do things that perhaps don't need to be done right now. But, you know, somebody who's on the thing who lives there makes it done such as repainting, you know, the hallways because, you know, there's some scuffs or something when they don't really need to be done, you know. So, you know, there's all this sort of stuff that can go on the reality is, the service charges is whatever the costs are, plus the sinking fund. Plus, there's obviously a management fee that the managing company levies, okay, so all these things go into your service charge. Now,
as we know from anyone who's been buying insurance, or any of these sorts of things, prices have been going up so your service charge has been going up. Now, what should happen is the rents should go up in line with all this sort of stuff so you can maintain a profitable
situation, the challenge is if something like 911 happens, and insurance goes through the roof, or perhaps COVID. And you know, these claims are made, and they weren't, you know, so all these sort of things can happen. And that can mean that costs can go up quick. But the rents don't necessarily because they're separate parts of the market. So you got to be aware of this. But look, the bottom line is the how I handle service charges, ground rent, not so much ground rent is generally a couple of 100 bucks, I just pay it when I paid for the service charge, what I do is I have a separate account, which I just put the money into the account
each month. So I've worked out what my man is, and that just goes in the account. So when the bill comes in, I just pay the bill. Okay. And practically, that's how I did it. For years and years and years now changed a little bit, I have the money on account. And actually what happens is when the bill comes in, because I've got enough property now. And generally what will happen is I've got enough rent. So there'll be a couple of months a year where I don't get paid any rent, but I'm okay with that. Alright, so how you deal with it is up to you. Obviously, if you're using EZ track for your management, one of the services we can provide the top tiers is that we can pay your bills for you. So we can do this and manage this for you. Okay. And I think sometimes that's important to do. All right. So that's the sort of freehold of the lease holder.
And understand the lease holder is that lease that you signed? That's what your responsibilities are, what the freeholders responsibilities are. So it's a contract, and it outlines all the sort of things. So it may say things like, you know, you can't use it for service departments, in which case, if you use it for service departments, you're likely to get in trouble, right? Or it may not be mentioned, in which case, you can use it for service departments. And there's no restriction on that. Now, sometimes the concierge will say, No, you can't use for service apartments. But if it's not in the lease, then it doesn't exist. All right. So there's no reason you can't say this to stop you from doing that for the service partners. But the other thing with the lease has in it, okay, let's, let's talk about the lease, because there's a couple of things that really you need to understand with this.
The lease is a pretty, it's a legal document. Now, we all know, solicitors learn a different language in university that makes them not human anymore. They literally forget English. And what they learn is speaker legalese, the language. Yeah, and most of us don't understand it. And the reality is, is that's how it's written.
However, there is some things you need to do now, as a good solicitor, what they will do is, they will read the lease, and they will report on the lease to you. So they'll give you the basic summary of what's in there, and points that you need to know. So when they give you that, you need to read it. And that's you need to understand, okay, you don't need to go through and read every single page. But there's a couple of things you need to point out. For instance, if you bought parking, you need to make sure that that is on there. And it's you know, that it's there. Because if it's not, well, then you could sign the lease. And actually, that becomes the guiding document. So you don't want to be going back afterwards and saying holiday, I bought parking and now signing the lease, because that's going to cost you more conveyancing to fix up. And potentially, they may deny that it was ever there, because it's not in the lease, and you signed the lease. And that's considered to be the contract. That is there was the contract. That's it. So things like that. So parkings, but it could be extras you could have made, you know, for instance, done a deal to have a specific type of furnishing put in and you paid extra on the price. Okay. That's the sort of stuff you need to make sure is in the lease in the contract. And your solicitor addresses that. But also things like, and this is a really important one. Yeah, your solicitor will generally use the property address as the default, because what happens is, the contracts come from the developer, the developers, the contracts, puts all the details in there, then it gets given to your, your solicitor, who then goes backwards or forwards between the two. And they literally have a discourse between them talking about, well, this, we need to change this, this isn't right. That's not right. We don't agree with this can be changed this, some of those things, they won't change, but one of them is the notices. Okay, so when that original contract comes from the developers solicitors across to your solicitor, it will have the property address in there now, if that stays any notices. So for instance, if a bill has to go to the property, or if a bill is to be thing, it'll be sent to that address. Now, if it goes to the property, you don't live there and the tenant doesn't pass it on. Nobody knows that bill went. So then they may actually issue legal proceedings against you go to court or it could be the council. Yeah, they do this or without your knowledge, you get a CCJ 30 days goes past. The only way you can undo that now is by going back to court, and 324-434-4244 come in which one is now to try
Don't get it unwound, there's no guarantee that I'll be unwell. The judge may say you're stupid, you should have in your notices, put your address, or, for instance, someone like our address if we're managing the property, because then if that's there, then that notice has to come to us
or to you. The other thing is in land registry, if you register a email address, yeah, then you can get this information by email as well. So you know what's going on. And that's one of the keys to this to making sure that you don't have, you know, ccjs and all that and put yourself at legal risk, because now some of these councils are able to go to court get judgments in record time. Yeah. Because literally, it's just a, you know, they do a download of who owes the money. They said that the court the court goes, this case, this case, this case, it says, you know, issue, issue, issue issue, and it's done. And you haven't even notice there. Okay, so that's why the notices is a key thing there. All right.
One of the other things to note too, is that you're gonna have two addresses, alright. So when you first buy the property, it's going to be a marketing address, it might even have a postcode of the site office there, okay. So that could end up in your contracts, then what's going to happen once it's complete, and hopefully, and normally it is beforehand, before it completes, Royal Mail is going to give an address with a postcode, and that's the official dress address. So you may find that starts off being a marketing name ends up being something totally different. It could also be where the fire brigade comes in and says, Hey, you call this you know, Mayfair house. And actual fact Mayfair house is only kilometre down the road, we're not allowing that name, so you need to rename your block. So then all of a sudden, now there's get renamed to something else. So what started with one name may become a different name. Alright, so you just need to be aware that that sort of stuff can go on, and it may change the address may change the name of your property. Okay. So that's just one thing to consider.
So, I guess the
Yeah, so So this whole exchange this whole legal, this whole process, and for the most part, it is a pretty set process. And you know, what your solicitor will have the checklist, they will know what they need to do, they'll need to know what they need to justify, they will General Act for your lender as well. So your lender will bring in criteria they need. So all this sort of stuff happens in the background, you don't need to know the intricate detail of that. Basically, solicitors have PII insurance, so if they stuff up or they miss something, you can make a claim against them. And even if they go bust, they generally have a run off period, where they need coverage for like seven years. So
the reality is, for the most part, you're pretty much covered, as long as your stuff that your solicitor gives you, you read that is a requirement 100%. And if you don't understand it, you're paying that solicitor to explain that to you. So go back to them, get them to explain it in layman's terms. Now, obviously, we're a team here, and they can help you out jet in general stuff. But we can't offer legal advice. We can't, you know, say, Oh, don't worry about this, or yeah, this is this or that. We're not legally trained. Okay, nobody is. That's why we outsource that, you know, we don't get kickbacks or commissions from our solicitors, none of that sort of crap. They are totally independent. And they are, effectively they have to be instructed by you. So even though we may have referred them, or the developer may have referred them, they still have to act in your best interest. And if they don't, then obviously they open themselves up to potential litigation. But the the thing that you need to do accept responsibility, anything you receive from them, you need to understand fully before you sign it before you proceed. Okay? That is the key to getting a successful exchange. Because really, you need to know what's going on with that, that upfront, Ad Exchange not completion. Because completion is just a, you know, the next step, you can't actually pull out after exchange, you are legally required to complete that property. And if you don't, the potential the developer can potentially sue you. They can keep whatever money you've paid deposit. Okay? And potentially they could sue you for losses or damages. Okay. So just be aware of that, you know, and make sure that exchange any questions you get, you ask before you exchange, not before completion, it's a little bit too late then. Alright guys, hopefully that gives you a bit more understanding of that.
So here's to a successful exchange of the property and obviously, successful completion.
Alright guys, see you later. Bye. Bye.
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