The property title attached to a home can affect how you own it, what you can change, and even how a bank views your lending. In a recent episode of Cheques and Balances, Mike and James break down the different property titles buyers need to understand, from freehold and cross lease through to unit title and leasehold.
What Are Property Titles?
Before comparing the best and worst property titles, it helps to understand what a title actually means.
As Michael explains, a property title is the legal description of the type of property ownership. While there are different types of properties you can buy, the title determines how that property is owned and can come with different rights and obligations.
The main titles discussed were freehold, cross lease, unit title, strata title and leasehold.
And while freehold is often seen as the gold standard, Michael argues buyers shouldn’t automatically dismiss a property simply because it has a different title.
In fact, his preferred title for some first home buyers may come as a surprise.
Are Freehold Property Titles Always Best?
Of the different property titles, freehold is perhaps the easiest to understand.
You own the land and the title to that land. There may still be easements, such as a driveway or pipe running through the property, or an interest registered by a lender with a mortgage over it, but fundamentally, the land belongs to you.
There’s no shared ownership of the land and no ground rent to pay.
For property investors, Michael generally prefers freehold ownership because it gives the owner greater control over the property.
But for first home buyers, he believes another title can sometimes present an interesting opportunity.
Why Michael Likes Cross Lease for First Home Buyers
Cross lease properties can have a reputation that puts buyers off, and that can sometimes work in a first home buyer’s favour.
Rather than owning the land beneath each home separately, people on a cross lease share ownership of the overall block of land. Documents attached to the cross lease then determine how that arrangement works.
Michael believes some buyers automatically rule them out because they have been told they should only buy freehold.
That reduced demand can potentially create an opportunity to secure a property at a better price.
The catch is that not all cross leases are the same.
Some arrangements have clearly defined areas and relatively straightforward conditions. Others can have shared or less clearly defined spaces, and the cross lease documents may place restrictions around renovations or changes to the property.
That becomes particularly important if the relationship between neighbours breaks down.
So while Michael doesn’t believe buyers should be afraid of cross lease properties, they need to understand exactly what they are buying.
The Cross Lease Problem Buyers Need to Check
One of the biggest risks with a cross lease is what Michael refers to as the flats plan.
The flats plan records the layout of the properties sitting on the land. If an owner changes the footprint of their property without updating that plan, the title can become defective.
Something as seemingly minor as extending a deck by a metre could create an issue if the flats plan isn’t updated. Enclosing a carport to create a garage is another example.
A defective title can then cause problems when it comes to financing and potentially insurance.
There may be ways to resolve the situation, including updating the flats plan, obtaining written agreement around the defective title or returning the property to what is shown on the existing plan before settlement.
Even if the current neighbour is comfortable with the situation, Michael warns that a future neighbour may not be.
Banks can also become more cautious as the buyer’s loan-to-value ratio increases. That can be particularly relevant for first home buyers borrowing at higher LVRs.
Are Cross Leases Different for Property Investors?
Michael’s view on cross lease changes when the buyer is purchasing an investment property.
An investor may want to renovate, flip or make other changes to the property. Depending on the terms of the cross lease, neighbouring owners could have some say over whether those changes happen.
For an investor wanting greater control over the asset, that introduces another layer of risk.
A renovation could become considerably more difficult if the neighbours don’t want to live next to a construction site for months and the cross lease gives them the ability to object.
For that reason, Michael generally prefers freehold for an investment property.
What Is a Unit Title or Strata Title?
Unit titles are particularly common with newer townhouses.
You own your individual home while sharing ownership of common areas with the other owners within the development. Those shared areas could include car parks, footpaths and pipes.
Michael explains that “unit title” and “strata title” can be used interchangeably.
For buyers, one important consideration is the cost associated with that shared ownership.
Body corporate or residents’ association fees can affect how much the bank is willing to lend.
Michael gives the example of someone approved for $800,000 in lending with a $200,000 deposit, resulting in a potential $1 million purchase price. If they are already at the limit of what they can service and then choose a townhouse with a $1,200 annual body corporate levy, that additional expense could affect their borrowing capacity.
So the purchase price isn’t the only number buyers need to consider.
Why Leasehold Is Michael’s Least Favourite
Leasehold sits firmly at the bottom of Michael’s list.
With a leasehold property, you own the home sitting on the land, but you don’t own the land underneath it. Instead, you pay rent to the landowner, usually annually.
The initial purchase price can make these properties look attractive, but the ongoing land lease can become expensive.
Michael gave an example of a two-bedroom unit he had seen priced at around $75,000, with approximately $10,000 a year payable for the land lease. The property was returning around $800 per week in rent, meaning there can be circumstances where the numbers stack up for an investor.
But that doesn’t make leasehold suitable for everyone.
Michael’s view is that it shouldn’t be a buyer’s first or second property. He sees leasehold as something better suited to experienced property investors who understand the lease terms and the potential for those costs to increase over time.
When Should You Check the Property Title?
Buyers should know the title before making an offer.
Listings and advertising material will often identify whether a property is freehold or cross lease, and buyers can also ask the real estate agent for the legal description.
Once you know what type of title you’re dealing with, the next step is understanding what sits behind it.
For a cross lease, that means checking the specific terms and whether the title is defective. For a unit title, it means understanding body corporate or residents’ association fees. For leasehold, the terms of the land lease become particularly important.
Michael also recommends checking whether there are interests or easements registered against the property.
An easement could relate to a shared driveway or a pipe, while an interest could include a security interest held by a lender over the property.
Don’t Cheap Out on Property Due Diligence
Buying a property is expensive, particularly for a first home buyer watching legal, inspection and other costs stack up before they even own the home.
But due diligence isn’t where Michael recommends saving money.
He strongly advises buyers to use a solicitor to review the property rather than relying on AI to interpret the documents for them.
There can be issues that aren’t immediately obvious from the paperwork alone but could affect whether a bank is prepared to lend against the property.
The same principle applies to building inspections and other professional advice.
For Michael, there are better ways to save money on a property transaction. Buyers can prepare their negotiation, understand comparable sales and have clear reasons for making a lower offer.
The professional advice designed to identify problems before settlement is not the place to cut corners.
Key Takeaways
- Property titles determine the legal form of ownership and can affect your rights, obligations and lending.
- Freehold gives the owner control of the land without sharing ownership with another party.
- Cross lease shouldn’t automatically be ruled out and can potentially offer first home buyers an opportunity when other buyers overlook it.
- Not all cross leases are the same, so buyers need to understand the specific terms attached to the property.
- An outdated flats plan can create a defective cross lease title and potentially cause issues with financing and insurance.
- Michael generally prefers freehold for investment properties because investors often want greater control over renovations and changes.
- Unit and strata titles can come with body corporate or residents’ association fees that may affect borrowing capacity.
- Leasehold can sometimes work for experienced investors, but Michael doesn’t recommend it as a first or second property.
- Buyers should identify the title and understand any easements, interests or other conditions before making an offer.
- Getting proper legal and property due diligence is not an area where buyers should try to cut costs.
Next Steps
If you’ve found a property and want to understand how its title could affect your lending, speak with the Lighthouse Financial mortgage team before you make an offer.
If you’d like to watch more, check out this episode below.
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