FTB negotiations on new build

Incisor

piefacerecords wrote: »

Sorry, the only reason I'm being "shirty" is that I have to keep justifying my position which I find tedious and frustrating! I understand why people are giving that advice, but I had specifically asked in original post for ideas on price negotiation, not to be told it's a bad idea- I already know the risks and that most people on this forum wouldn't buy now.

Nobody here is asking you to justify your position. Perhaps it is that inner voice?:D As most people here regard Shared Ownership as Snake Oil, effectively you come across as asking how to negotiate with a snake oil salesman. Does that explain the reaction you see?

From your earlier post:

... The mortgage, rent and service charge combined is lower than our monthly rent, and the property is in such a great location compared to where we are currently. When we come to remortgage or move in 3 or 4 years time, I will have graduated and qualified as a teacher so will be in good a financial position to pay off the loan part, so that doesn't worry me too much either.

I missed that bit. In terms of your month to month financial position, of course you are right, it looks a good deal. BUT the premises under which you take this deal are wrong. I would like you to explain your situation in 5 years time and show how you will be better off. You would either have to sell your half of the property for 35% [say] of the full market value at the time, or buy the other half and then sell at market value. If your mortgage would higher than 70% LTV on your half share, then you would be in negative equity and unable to finance the purchase of the other half of the property with a mortgage. In other words you would enjoy 5 years of lower housing costs on a month to month basis, but you would have accumulated a debt it might be very difficult to get out from.


I would want to pay more in rent to avoid exactly that scenario

tootiefrooties

Incisor wrote: »

Nobody here is asking you to justify your position. Perhaps it is that inner voice?:D

Maybe!

Incisor wrote: »

I would like you to explain your situation in 5 years time and show how you will be better off.

Well I'm just going into the final year of an English degree, which will be immediately followed by a PGCE. So in two years I will be a qualified teacher, and three years after that I should be on around £24k as the pay scale goes up each year (my estimate doesn't include cost of living increase because I don't know what it will be). And my husband graduated and began work as a video games programmer for a big studio this year. His contract involves a pay rise each year and he is currently on £21k. Also in 5 years he could potentially be a lead programmer which is £30+.


On the negotiation side of things, I've taken 8 screenshots from rightmove and printed them to take with me to the meeting. 4 of them are other properties in the area of the same asking price (with more bedrooms/ bigger gardens) and 4 of them are similar properties in the same area with much lower asking prices (140ish). I will bring these out if negotiating proves slow moving! Having found these, I surprised myself, and will be going to the appointment much more determined to get a good chunk off. I hadn't seen how much prices really have dropped in the last 6 months even, and the properties I found at 140 would have been about 190 at the beginning of this year.

tootiefrooties

Oh, it's a 30% share which is for sale - don't know how that affects the negative equity potential?

Incisor

me,_earlier wrote:

I would like you to explain your situation in 5 years time and show how you will be better off.

piefacerecords wrote: »

Well I'm just going into the final year of an English degree, which will be immediately followed by a PGCE. So in two years I will be a qualified teacher, and three years after that I should be on around £24k as the pay scale goes up each year (my estimate doesn't include cost of living increase because I don't know what it will be). And my husband graduated and began work as a video games programmer for a big studio this year. His contract involves a pay rise each year and he is currently on £21k. Also in 5 years he could potentially be a lead programmer which is £30+.

[from subsequent post]Oh, it's a 30% share which is for sale - don't know how that affects the negative equity potential?

Very telling, if you don't know how it affects the negative equity potential. Never mind negotiating with these people, please understand how this deal might work in respect of negative equity.

You are looking at say £100/month less to pay each month [I won't call it saving] with your Shared Ownership deal. So over 5 years, that would give you £6,000. But suppose you buy a 30% share of a "£333,333" property for £100,000, with a mortgage of £90,000 and you put in cash of £10,000. Now, suppose that in 5 years time, prices generally have dropped 10%ish, so your property would now be worth £300,000 and your share would now be worth £90,000. You are just about to enter negative equity. This is without taking into account the likely current overvaluation of the property you intend to buy.

At this point, you decide to move, but inflation has risen, salaries too and property is much more affordable. So no one wants to buy resale Shared Ownership and you are forced to sell your 30% share for 20%. You now get £60,000 for your share of the property, which gives you £30,000 of negative equity.

So, you will have gone in all guns blazing, armed with advice from here, got what you think is a good deal which saves you £150/month ie £9000 over the 5 years, you will be pleased as punch, but you will have accumulated a debt of £30,000 which you will only discover 5 years from now. This is why people don't want to give you negotiating advice - which will cost you £21,000 - they want to stop you accumulating the £30,000 debt. And you do now admit you don't understand the negative equity potential - please, please make sure you do understand it - there is more to this than what goes out each month.

Some of what will happen depends on the terms of the shared ownership deal and particularly on the options you have for selling on, or buying out the other owner. Cancel your sales appointment and post details here - including your scenario like I have attempted to show it above. People will pick holes in your understanding - but grin and bear it for the sake of avoiding making a mistake which could cost you £10,000s

chewmylegoff

piefacerecords wrote: »

I asked for advice on getting the price down actually, and specifically asked not to be nagged by people who wouldn't buy a shared ownership- so not quite right i'm afraid

But thank you to people who have offered suggestions - we do have an agreement in principle to take with us, so hopefully that will help. And I was thinking of starting with a low offer and ending up somewhere about 10% below asking price (or better, you never know...)

Cheers everyone!

you don't need to come up with reasons to offer a lower price.

just say "my offer is X" and leave it at that. reasons aren't going to help you - at the end of the day they will have a figure in their mind of what they are prepared to sell the place for and nothing you say to them is going to alter that.

regarding your point with F&F - it is possible to structure the sale so that some of the price covers movable white goods (i.e. not fitted units that are integral to the kitchen and can't just be pulled out) and carpets etc, but this must be done legitimately you can't just assign a ridiculous value to them so that you don't pay stamp duty as this would constitute tax evasion.

tootiefrooties

Incisor wrote: »

Suppose you buy a 30% share of a "£333,333" property for £100,000, with a mortgage of £90,000 and you put in cash of £10,000. Now, suppose that in 5 years time, prices generally have dropped 10%ish, so your property would now be worth £300,000 and your share would now be worth £90,000. You are just about to enter negative equity. This is without taking into account the likely current overvaluation of the property you intend to buy...

At this point, you decide to move, but inflation has risen, salaries too and property is much more affordable. So no one wants to buy resale Shared Ownership and you are forced to sell your 30% share for 20%. You now get £60,000 for your share of the property, which gives you £30,000 of negative equity....

...post details here - including your scenario like I have attempted to show it above. People will pick holes in your understanding - but grin and bear it for the sake of avoiding making a mistake which could cost you £10,000s

Sorry, I made myself look like an idiot (not difficult, i realise... :rolleyes: ). I realise how negative equity works, but I hadn't thought about if it would be better/worse in proportion what % was owned by us. I had, though, already calculated how we would be affected if we sold up for 20% off the price we would have (potentially) originally paid and it wasn't too major. Will paste your example as above with specific figures.

*DH and I have decided that on the back of this advice, and looking at other property prices in area, 155 will be our offer.

"... 30% share of a "£155,000*" property for £46,500, with a mortgage of £46,500 and you put in cash of £0. Now, suppose that in 5 years time, prices generally have dropped 10%ish, so your property would now be worth £139,500 and your share would now be worth £41,850. You are just about to enter negative equity. This is without taking into account the likely current overvaluation of the property you intend to buy..."

OK. Have used this repayment calculator to see what capital we will have repaid after 5 years on these figures: http://money.guardian.co.uk/calculator/form/0,,603156,00.html
Based on a repayment mortgage of 30 years at 6.6% (this is what we have an AIP for). It says we'll still owe 43,579 after 5 years, which is only a difference of £2000 if prices drop 10%. The mortgage allows us to overpay by up to 20% a year, so we could do this once I start work full time, in preparation. If the price drops 30%, however, our share will sell for 32,550 and we will owe a more sizeable £11k.

I think I know whats coming next...

Incisor

piefacerecords wrote: »

... I think I know whats coming next...

Ow, you have done my head in :eek:. Was that it?

Incisor

piefacerecords wrote: »

Sorry, I made myself look like an idiot (not difficult, i realise... :rolleyes: ). I realise how negative equity works, but I hadn't thought about if it would be better/worse in proportion what % was owned by us.

With Shared Ownership, you need also to take into account how the losses are shared. If when you sell, the co-owner expects you to sell 100% and clear the exact £108,500 then you end up bearing the losses on the whole property. But you could end up taking the profits. A deal like this would be an indication that your co-owner expects losses and is bumping them onto you.

I had, though, already calculated how we would be affected if we sold up for 20% off the price we would have (potentially) originally paid and it wasn't too major. Will paste your example as above with specific figures.

*DH and I have decided that on the back of this advice, and looking at other property prices in area, 155 will be our offer.

"... 30% share of a "£155,000*" property for £46,500, with a mortgage of £46,500 and you put in cash of £0. Now, suppose that in 5 years time, prices generally have dropped 10%ish, so your property would now be worth £139,500 and your share would now be worth £41,850. You are just about to enter negative equity. This is without taking into account the likely current overvaluation of the property you intend to buy..."

That is negative equity of £4650 on interest only - it begins to wipe out the "savings" from not renting...

OK. Have used this repayment calculator to see what capital we will have repaid after 5 years on these figures: http://money.guardian.co.uk/calculator/form/0,,603156,00.html
Based on a repayment mortgage of 30 years at 6.6% (this is what we have an AIP for). It says we'll still owe 43,579 after 5 years, which is only a difference of £2000 if prices drop 10%. The mortgage allows us to overpay by up to 20% a year, so we could do this once I start work full time, in preparation. If the price drops 30%, however, our share will sell for 32,550 and we will owe a more sizeable £11k.

Overpaying knocks a hole in the negative equity, but then you are increasing your shared ownership costs towards the costs of renting.

Can you tell us a little more about the shared ownership scheme, because this affects your resale capabilities.

[My gut feeling now is that if you wait 2 years you will begin coming close to the top of the pile to buy 100% of something similar.]

tootiefrooties

OK, this is me faced with all the maths- :huh: I'm an english student, I can barely count to ten...

My husband has got home from work and we talked about how there are a lot of really nice flats for a lot less money than we thought. I hadn't looked at that kind of property for a while because had been keeping my eye on 3 bed out-of-town terrace type things (had resigned myself to the fact we couldn't afford to live inner-city) which haven't been so representative of the housing crash- at least not in this area it seems. When I looked today as a point of comparison, I found several amazing flats directly on the seafront, as well as some in seven dials (very nice area) which had gardens. We both prefer homes with a bit of character so we are scared by the thought that in a year they will be even cheaper, but we wouldn't be able to move from the new-build because the slump will be at its worst and we could face negative equity.

So in that light, we're going to cancel the appointment and keep saving in the hope that in one or two years we can get something a lot nicer and a lot less riskier. Deep down everybody would be happier owning 100% of a house, and I would much prefer this... I'm just incredibly impatient. But I wouldn't want to be kicking myself a few years down the line.

Thanks for your input everyone... I can't believe you changed my mind! Haha.

Chris2685

Shared ownership schemes like these are usually over-valued...

However, if prices do drop 30% and you are in a position where you own 60% of the property, and the other 40% is owned by the shared ownership people, then (at least with all the deals i've seen) when you want to repay they require you to get a new valuation and their share is then worth that.
So if the 40% share was worth 100k when you bought it, it would now be worth 70k. This means you buy it back for 70k, not 100k. Your share of the property will also have reduced in value, so it's hardly a huge influence, but it is worth thinking about.