Should I be paying attention to service charges?
Q. I’m searching for a property and have noticed that a lot of brochures don’t confirm the service charge. Is that something I need to ask about?
A: Service charges are a really important consideration for any buyer because, once you own the property, you will need to factor these costs into your cash flow going forward. Some buildings don’t collect regular service charge amounts; instead, the owners run the building on an ad hoc basis, meaning that each owner is expected to pay out money as and when works need to be done. Other buildings, especially those which are larger, or have a professional management company in place, will usually collect service charges on a regular basis throughout the year from the owners. The money is then used to pay for the running costs of the building.
In some cases, a ‘sinking fund’ will be in place; this is essentially a savings pot for the building. With a ‘sinking fund’ a proportion of the service charge is paid into a separate account which builds up over time and then, when larger works need to be carried out, there is already money available to pay, or go towards paying, the full cost. This can be a less painful alternative to owners being hit with a large bill all in one go.
Service charge costs can also vary hugely among certain buildings. For example, a Victorian building consisting of four or five flats may incur an annual service charge of approximately £1,200 per resident and most of that would be buildings insurance. Other buildings, especially new developments, can have annual service charges which can be anything up to around £16 per square foot. If you’re buying a larger property, you can be paying £25,000 upwards per year. When you think about needing to earn this amount after tax, it can definitely put a lot of buyers off. In some of the more high-end cases, the service charge would be covering the cost of a fully staffed 24-hour concierge team, maintaining a swimming pool and spa facilities, weekly fresh flower deliveries for the lobbies, and so on, so they’re not to be underestimated.
Do remember that a service charge can increase so it’s important to keep an eye on them.
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