The Unbiased side of Title Splitting

It has been a little while since I did a mammoth post! However, as I have my title splitting podcast coming out on Wednesday and this is very much flavour of the year at the moment, it most definitely warrants one. I wanted to explore whether title splitting is as good as it sounds, or if it is potentially being sold as a strategy that isn’t all it is cracked up to be.

Of course, much of this is covered in the podcast, but this will give you a flavour.?

What is Title Splitting??

If you haven’t come across title splitting as a strategy on social media recently, then you have most definitely been living under a rock. Title splitting is the strategy of taking a Freehold property (normally a block of flats) and ‘splitting’ the units into individual leasehold properties, normally on to leases over 125 years. The idea behind this strategy is that by splitting the title, you increase the value of the property as a whole. The reason why this would increase the value is explained below.?

You may find that these opportunities become easier to find, as large portfolio landlords exit the market due to increasing costs, and accidental landlords begin to head out of the market too. The reason I believe that accidental landlords may be key to these opportunities is because someone experienced in property, would likely know to split titles in order to maximise value, however an accidental landlord may not be aware, and so would have likely held everything on the same freehold.

How does Title Splitting add value??

Many Investors, whether they are new to property, or extremely experienced, tend to look at title splitting and question how on Earth it works as a strategy and how the values can increase so dramatically in some scenarios.?

Well… I am about to bust a Myth for all of you…

The reason for the increase in value, is that the value isn’t actually increasing at all. Title splitting adds no value to the property whatsoever. All it does is unlock the value of the property that is already there.?

This comes down to what Valuers call a ‘block discount value’, however it can be called any number of other things. A block discount value is the value that a Valuer assigns if the property were to be purchased as one freehold block in one go. As the purchase will be of multiple units in one go, they often believe that an investor would only purchase if there were to be a discount in place. This value has been seen to be anything from 10% to 20% lower than the Aggregate Value of the property. The Aggregate Value is the value if all of the units were to be split and sold individually. This is also the case for Lenders as well. They will ask the Valuer to assign a block value if the properties are all on one title, and they will then lend a % of that block value.?

So by splitting the title, you are not adding any value at all, you are just making the Valuer and the Lenders assess the properties on an aggregated basis, rather than a block discount basis. The Value of the bricks and mortar haven’t changed at all, it is just a clever way of accessing it all, rather than just some.

Now you may look at this and think “why wouldn’t the Vendor just split the titles and refinance/sell based on the higher value?”. The answer is time. They will likely want a quick sale, or they just cannot be bothered with the effort of splitting the titles, and the Legal work that comes with that. They likely can’t be bothered with the opening of a Management Company, and the hassle that comes with operating one of these when you have sold the units. So more often than not, they will take the hit and move on.?

How do Lenders look at title splitting??

Lenders are a complicated Beast. One moment they love a strategy and they will pour all of their resources in to that strategy, creating products specially for it. The next moment, they cease lending on it, and move on to the next strategy.?

It is incredibly fun to try and keep up with, and makes the job of a Broker rather interesting.?

However, when it comes to title splitting, the key product you need in your toolbox is a bridging loan, and there is only one reason for this, and it is that a Bridging loan can go off of Market Value rather than Purchase Price.?

For example, if I have a block of flats that when split are worth ￡1m, then they are likely going to be purchasable for approximately ￡850,000 based on the average block discount that we see at the moment.?

So if you were to go for a commercial mortgage over the block of flats, then it would look something like this: -?

I HAVE LEFT FEES OUT TO KEEP IT SIMPLE

Purchase Price - ￡850,000

Market Value when split - ￡1,000,000?

Mortgage at 75% LTV - ￡637,500?

Deposit - ￡212,500

So in the scenario of taking a standard mortgage, you need a deposit of ￡212,500. You also have to wait until the title is split and your fixed term is over before you can refinance to 75% of the ￡1m and access the further ￡112,500 tied into the deal.?

If you take the same deal, and use a Bridging Loan, then you would potentially be looking at figures like this: -?

Purchase Price - ￡850,000

Market Value when split - ￡1,000,000?

Bridging Loan at 75% LTV - ￡750,000?

Deposit - ￡100,000

As you can see, using a Bridging loan significantly reduces the deposit that you need to put into the deal. The plan would be to hold on a bridge until the titles have been registered as split, which could be 6-9 months, and then drawdown on the commercial mortgage, which should replace the bridge like for like.?

Obviously I have left out fees in order to keep this simple, but you would need to take into the account the fees for the bridge and the cost of the interest for the bridge (however, the property should be cash flowing, so this should ease the burden of the bridging loan interest), and assess the deal based on what suits you best at the time.

In order for the Bridging Lender to use the split value as opposed to the block value, they will require your Solicitor to provide an Undertaking to the Lender’s Solicitor to confirm that they will register the leases immediately on completion. This should not be an issue for your Solicitor to provide.?

What are the downsides of this strategy??

The biggest downside is the potential risks and stresses on refinance. Many lenders have a cap at 4 units in one block on a refinance, so if you have a block of 10 flats, you may need to use 3 individual Lenders in order to refinance, which can cause more hassle. You can use one Lender to refinance the whole block in some scenarios, but you have to make sure that they are going to lend off of the split values and not the block value, as some lenders may use the block value, even when the units are split.?

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Land Registry delays are a huge risk. You need to ensure that you are all over the Land Registry and that your Solicitor are pushing them as hard as possible. The backlog at the Land Registry is only getting worse, and until those Leases are registered, there is a huge risk that you may not get the finance drawn down. This can get VERY expensive if you are on a bridging loan.?

Management Companies are the forgotten element of title splitting. If you split the properties and create a Leasehold then you will need to create a Management Company in order to keep the Lender happy for refinance, or the Purchaser happy if you plan to sell. If you plan to refinance and retain the units, then the Management Company is a simple thing, and will likely not cause you any hassle other than a Solicitor setting it up for you, and the costs of it running in the background each year. However, if you plan to sell off the units and retain the Freehold and the Management Company, then expect hassle. The hassle of having to approve every sale that happens of that flat, any works to the property, or maintenance of the communal spaces. It really can become a huge hassle, and is very often overlooked.?

Company structure is again a huge downside of this strategy. As many of you will know, you cannot retain the freehold and the leasehold in the same company and so you will need to create a separate company for them both. This can create issues on the refinance as some lenders are not keep on this structure

Group Company LTD (Holds the Freehold)

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SPV LTD (holds the Leaseholds) - SPV owned 100% by Group Company LTD

Some Lenders may not be keen on this, so ensure that you speak to a Broker and an Accountant in order to create a company structure that can work. We have seen an increase in people retaining the leaseholds in a company that is owned 100% by individuals rather than another company, and then either retaining the freehold in their personal names or selling the Freehold on. Again, get the right advice for your circumstances

What are the benefits??

When it comes to benefits, there is none bigger than the fact you can reduce the deposit that you put into the deal. You can also make decent profits via this strategy if worked in the correct way. For example above where there was a purchase price of ￡850,000 and a split value of ￡1m, there is decent profit to be made from just purchasing, doing the splits and then selling the units on (subject to wanting to deal with the Management company set up)

Separate mortgages are also a benefit, because it gives you flexibility. If you have a block of 10 flats, and you have one mortgage over them all, then trying to sell off individual units becomes troublesome and difficult. Whereas mortgaging them individually allows flexibility and the ability to sell off individual, or small groups of units.