Property management companies query

[RossP]

Moderator Message:
Better suited to Property Investment Discussions - moved from DAK (chas49)

Hi all,

My first post on The Lemon Fool and I really wasn't sure what board it should go on ( I vaguely remember a practical property board but didn't feel this came under the DIY board) - please redirect as necessary.

My colleagues was letting off some steam over a beer last night about the awful experience he has had with his flat's management company over the last year - over 85 emails (with responses) but no actual improvements to damaged gates, broken security lighting, bins issues and they have failed to provide any sort of statement regarding what service charges get spent on.
Recently he has started to organise efforts with other owners in the block and even managed to get through to the freeholder company (though with little success yet). I was suggesting to him that he could form a management company with the other owners and I believe force the current management company out; does anyone have experience of doing something similar? Browsing a couple of websites, it seems like a fairly in depth, potentially expensive procedure which may scare a lot of people off (possible exactly why the current management company have taken so little notice of complaints to date).

Apart from looking for other experiences and maybe a useful link or two to pass on to my colleague, I was wondering about the potential for a lifestyle-business venture in this space; the basic premise is that I would invest in a flat in a block with known management issues, empower other owners to set up a management company, improve the building upkeep, encourage investment in communal areas etc. which would hopefully improve other owners standard of living, may even save them on service charge fees, perhaps pay me a small income (to cover costs) and have the overarching goal of improving the value of the property I bought in the first place.

Can anyone see any major flaws in the premise?

RossP

[Clitheroekid]

Can anyone see any major flaws in the premise?

Unfortunately, yes, quite a few.

For a start, there are many reasons why a block of flats have `known management issues', and many of these stem not from the manco but from the individual tenants.

This is particularly the case with cheaper flats. Many of the people who buy such flats have little or no idea about what they’re buying, largely due to the appalling standard of leasehold conveyancing at the bottom level. They don't understand concepts like ground rent and service charges, and sometimes don't even realise they are going to have to pay them at all - this may sound incredible, but I've actually come across such situations.

This situation has been made worse over recent years by the entry of unsophisticated - or in some cases just plain stupid - people into the buy to let market. Unlike someone who actually lives in the flat and can be assumed to want a pleasant and efficient place to live the only thing many BTL investors are interested in is maximising the return on their purchase.

And even worse are those flats that are bought by mug punters at auction sales. Many flats in blocks with management problems end up being sold at auction, with the naive buyer having no idea what they've let themselves in for.

The one thing that this type of owner has in common with each other is that none of them wants to spend any money.

The net result is that service charges can become difficult or sometimes impossible to collect. I've acted for a large management company and where owners live overseas or the flats are registered in the name of an offshore company (remarkably common nowadays, even with bog-standard flats) it can be exceptionally hard to recover payment.

This can very easily have a knock-on effect. If a significant proportion of tenants don't pay then the manco can't carry out its tasks, as the only income it has is the service charge.

This in turn means that the tenants who are paying will start getting stroppy, asking why they should pay for inadequate services and in particular why they should have to pay an increased service charge for the next year to cover the deficit from non-payers - perfectly legitimate objections.

At this point the directors, who are nearly always tenants, start getting fed up with what's a thankless task, and resign. Sometimes they all resign, and nobody wants to take on the poisoned chalice of replacing them.

This leaves the manco rudderless. In some cases, particularly at the bottom end of the market, management is effectively abandoned altogether, or carried out on a very ad hoc basis, and the manco is eventually struck off the register.

This makes the flats very difficult to sell, so the situation is made worse by the fact that an increasing number of the flats are owned by people who really don’t want to own them – hence the auction sales.

Sorting out a situation like this can be a total nightmare, largely because the cash just isn't there to fund what needs to be done. It's amazing how selfish and short-sighted many flat tenants can be, and trying to persuade sufficient of them to stump up what may be quite a serious amount of cash is a Herculean task.

So for someone like yourself without any experience to walk into a situation like this would be potential financial suicide. And you can't even pay yourself for all your efforts unless the leases specifically allow it (which most don't) or you can persuade the various tenants to pay you voluntarily (good luck with that!)

Neither can you just set up a new manco. The lease will have specified a particular manco to manage the block, and you would therefore need to arrange a formal transfer to the newco, which would be complicated and expensive - and again, who’s going to pay all the legal fees etc?

There are plenty of ways to make good money in property, but I very much doubt that this is one of them.

[JonE]

The net result is that service charges can become difficult or sometimes impossible to collect. I've acted for a large management company and where owners live overseas or the flats are registered in the name of an offshore company (remarkably common nowadays, even with bog-standard flats) it can be exceptionally hard to recover payment.

Some idea of the scale of owwnership by offshore entities (and a handy resource for research into neighbouring properties of a specific prospect if one is looking to buy a property or lease) can be found here:
http://www.private-eye.co.uk/registry

Just out of interest one could use the map interface and search on one's own postcode or place name to get a feel for the level (noting time-frame covered) in one's own area.

Neither can you just set up a new manco. The lease will have specified a particular manco to manage the block, and you would therefore need to arrange a formal transfer to the newco, which would be complicated and expensive - and again, who’s going to pay all the legal fees etc?

I don't recollect seeing a particular ManCo being specified in ordinary leases and have held leases in a block where the freeholding company changed their ManCo. No tenant (to avoid confusion arising the term refers to the lease-holder in this context ) in their right mind would have wanted to kick-off the Right To Manage process for that massive block (due to the sheer scale of the operation rather than dissatisfaction with the quality of service) but I'd understood that the incumbent Manco could be kicked-out by that route without costs running too high (though probably still too high for the downward-spiralling situation described).

Come to think of it, I believe even Peverel/FirstPort have faced RTM at some McCarthy & Stone retirement developments. That must have surprised M&S as the high-ish turnover of their tenants is reasonably predictable and they probably expected their tenants to be fairly compliant rather than get sufficiently fired-up to launch RTM (especially as it's their beneficiaries rather than the tenants themselves who will feel most financial pain when trying to sell a retirement-property lease).

Cheers!

[RossP]

Thanks for the detailed response! Its really interesting to hear from someone on the other side of the fence as it were. Lots of food for thought.

A couple of follow up questions if you don't mind:

And even worse are those flats that are bought by mug punters at auction sales. Many flats in blocks with management problems end up being sold at auction, with the naive buyer having no idea what they've let themselves in for

Q - If flats are bought at auction what happens to any outstanding service charge debt? Does it go to the new owner or is the seller still liable?

Q - Are there no formal mechanisms within standard leases for the Management Company to follow if tenants (meaning the leaseholders) don't pay services charges? Like stopping any tenants (meaning those actually living in the flats) from having access to communal facilities etc?

And you can't even pay yourself for all your efforts unless the leases specifically allow it (which most don't) or you can persuade the various tenants to pay you voluntarily (good luck with that!)

Q - Surely if you set up a new company and took over from the existing management company you could then pay yourself a salary? Or did you just mean for the effort involved in getting enough owners together to kick the old management company out?

Lastly, by way of a bit of background into the business opportunity discussion, I lived in Brisbane for a year and a lot of the complex's out there had a live in building manager. They had to own at least one property in the complex and were responsible for all communal areas, maintenance etc for which they charged a minimal service charge to all the other owners. Being on site 24/7 however gave them a USP for then effectively acting as an estate agent/property manager for any other owners who wanted to rent their flats out with obvious benefits for the building manager (commission), tenants (onsite support for all issues) and flat owners (building manager is clearly motivated to handle all issues quickly). On top of all that, the building manager "business" could be sold along with the building managers flat for a considerable amount upon retirement.

RossP

[DiamondEcho]

Neither can you just set up a new manco. The lease will have specified a particular manco to manage the block, and you would therefore need to arrange a formal transfer to the newco, which would be complicated and expensive - and again, who’s going to pay all the legal fees etc?

FWIW I have never seen a lease that specifies the manco.
I assume you mention it as on the leases you see it's typical. Doesn't that conflict with 'Right to appoint a manager'/'Right to manage' or what ever it's called in it's current form?

@OP - I'd also have a dig-around at http://www.lease-advice.org/ [as a statutory body the info on their website is dependable].