Recently I went found a property (2 bedroom unit to be exact) whose asking price was $90.000. No big deal right? Except that it was in St Johns, Central Auckland.
In fact, the location is 1/14 Abraham Place, Saint Johns.
Why is it only selling for well below the Auckland median house price?
Because it’s a leasehold property.
This means the unit owner does not own the land and has to pay ground rent.
According to the information provided by the agent, the ground rent is $16,500 per year. So every year, the unit owner has to pay $16,500 per year of ground rent to the land owner.
After 10 years, you would have paid a total of $165,000. Wow. You could have a bought a Maserati for that money.
Typically ground rent is paid in six monthly instalments. Imagine paying a lump sum of $8250 for the right to live in the house you bought! And above that, you have to pay the council rates too. Not so keen now, right?
And if you accidentally bought this property not understanding the nature of leasehold property, you’ll be in a surprise if you were hoping for a quick exit. The leasehold St Johns property was listed in January 2016. Three months later, it is still on the market. Compare that to the average time to sell a house in Auckland of 30-45 days, and you can immediately see the risks of buying a leasehold interest.
And you can’t just walk away from the home. Because a lease is a legal document (in this case, it has a term of 21 years with 14 years remaining) the terms are legally binding on you. There was a high profile case where Cornwall Park Trust Board chased Yong Xin Chen for back rent and repairs when she left her leasehold house after the Cornwall Park Trust Board increased her ground rent from less than $10000 per year to $70000+ per year.
For those who studied economics in university, you would know a Latin term called “caveat emptor”. It means “let the buyer beware”. Before purchasing a home, check if it’s a leasehold or a freehold (fee simple interest). Check with your lawyer if you are not sure.