75% Shared Equity with Developers: Good idea?

biggerthed

Hi,

A new development has been completed that I'm interested in, the developers are wanting a 25% deposit. To help first time buyers the developers have come up with a shared equity scheme: they own 25% of the property for upto 10 years at that point you have to pay the 25% back, if you sell before they get 25% of sale.

What are the pro's and con's of this deal? Can someone also help me understand why the developers want the initial 25% deposit - what difference does it make when the captial is coming from a mortgage-via a bank as opposed to full buyers savings?

Cheers,
Phil

brit1234

biggerthed wrote: »

Hi,

A new development has been completed that I'm interested in, the developers are wanting a 25% deposit. To help first time buyers the developers have come up with a shared equity scheme: they own 25% of the property for upto 10 years at that point you have to pay the 25% back, if you sell before they get 25% of sale.

What are the pro's and con's of this deal? Can someone also help me understand why the developers want the initial 25% deposit - what difference does it make when the captial is coming from a mortgage-via a bank as opposed to full buyers savings?

Cheers,
Phil

At the time of the housing boom buiders use to give gift deposits to allow people to buy over valued properties. When the crash happened the banks realised they had been duped and banks banned them with their loans. So for the builders to keep the prices overvalued they came up with this shared equity scheme.

Last week the Director of a giant building supply company said new builds are well over valued, poor quality and too small compared to conventional properties.

I would just watch the prices fall and buy a conventional property instead, just save a deposit and avoid these schemes like the plauge.

Trollfever

What will happen if the developer goes bust?

Idiophreak

biggerthed wrote: »

Hi,

A new development has been completed that I'm interested in, the developers are wanting a 25% deposit. To help first time buyers the developers have come up with a shared equity scheme: they own 25% of the property for upto 10 years at that point you have to pay the 25% back, if you sell before they get 25% of sale.

What are the pro's and con's of this deal? Can someone also help me understand why the developers want the initial 25% deposit - what difference does it make when the captial is coming from a mortgage-via a bank as opposed to full buyers savings?

Cheers,
Phil

I just bought on a Shared Equity scheme, so feel free to PM me if you have any specific questions.

Just a correction to your OP, however, in that you own all of your property from day 1 - the developer will end up with a second charge, but technically the house will be owned by you from day one.

People, like Brit1234 will tell you these schemes are a way of keeping house prices artificially high, that you should avoid them and so on....which, obviously, is their right, their opinion etc..but personally, I'd apply my standard mantra which is "just use common sense". You know better than us what the going rate for properties is round your way, you know how these compare, so you should be able to work out if the asking price is fair.

If the price is fair, I wouldn't let the SE scheme worry you too much. You don't want to overstretch yourself in the long term, so don't "just forget" about the 25% - you do actually need to pay that at some point.

In response to Trollfever, if the developer goes bust nothing of any consequence happens - they can't call in the loan etc.

Idiophreak

Sorry, just to actually answer the question in the OP (woops)

Pros: Smaller mortgage in the short term.
Certain lenders will use the 25% as "true deposit", so better rates than you'd get with 10% "normal" deposit.
Mortgage often cheaper than renting - so can easier save for deposit.
Oops...the most important one - don't need a deposit now...

Cons: Stigma attached to schemes.
Feeling of "it's not all mine" (to be fair, don't think this is any worse than anyone buying on a mortgage).
Sometimes hard to negotiate price if using scheme.
Usual issues associated with new builds - quality, price etc.

Cidersid

Have heard today that the government are pulling the plug on these schemes???

Idiophreak

Not heard anything - are they pulling the government owned schemes, or trying to shut down all the private ones too?

PasturesNew

Basically they are passing the risk of a falling market on to you - and hoping to cash in on their profits that never materialised at some future point. This is bad for you really.

However, putting that aside, 10 years is a long time .... if you sell before then and move on with your life, that might be fine. If you move you'll have rid yourself of this sword of damocles hanging over your head and the builders are happy because the 'negative equity' only hit them on 1/4 of the property.

Now let's explore other scenarios if you STAY in the house for the 10 years:

1] Everything is fine, you're happy to buy that final 25% and feeling smug that you managed to effectively get the house you wanted with an interest free loan

2] You are now earning less than you were, your health is bad, you cannot raise any kind of mortgage for that 25% at all. Nobody will lend it to you. Your circumstances have changed (maybe other half left or something). Stuffed - do you have to sell it and move out?

3] The recession/depression was worse than ever predicted. You've managed to hold onto your job, although your salary's not actually gone up ... but the house is STILL not being valued by a mortgage valuer at today's prices, so you can't raise a mortgage on it. As you bought it brand new and it's now 2nd hand you're still short of a big chunk of cash - and it never occurred to you over those 10 years to save towards this eventuality ... so what now ....? Do you have to sell it even though you don't want to?

So, are you feeling lucky?

biggerthed

Thanks for everybody's input, certainly opened my eyes a bit and made me think. Firstly I don't expect to live in this property for 10 years. Is the 25% I payback relative to a current valuation of the property or the original value?

brit1234 I understand what you are saying but the entire housing market is over priced IMO so it's all relative, and relatively speaking these new builds are going for around £30k less than the average in my area (due to slightly awkward transport links). If these schemes disappeared the prices wouldn't drop - developers need to meet profit margins based on overpriced land they bought back in the boom.

Idiophreak what do you mean by 'the developer will end up with a second charge'?


PasturesNew I can see that you believe these schemes to be quite a gamble and I can now see why. 'Basically they are passing the risk of a falling market on to you ' you can also spin that on it's head and say they are passing on the chance of profit from a rising house market onto you. Scenario 2 cheered me right up :rotfl:

Mmmmm still undecided, just fed up of bad house shares and making someone else richer at the end of the month and with a 10% deposit and above-the-average salary I should be able to buy somewhere nice - credit crunch sucks :mad:

Idiophreak

PasturesNew wrote: »

Basically they are passing the risk of a falling market on to you - and hoping to cash in on their profits that never materialised at some future point. This is bad for you really.

Can you elaborate on that a little? Not sure what you mean...

Idiophreak

biggerthed wrote: »

Thanks for everybody's input, certainly opened my eyes a bit and made me think. Firstly I don't expect to live in this property for 10 years. Is the 25% I payback relative to a current valuation of the property or the original value?
...

Idiophreak what do you mean by 'the developer will end up with a second charge'?

You'll pay back 25% of the current valuation (normally the average of two independent valuations - both of which you have to pay for )

I have fingers well crossed for a *massive* slide in the next couple of years, I'll buy the 25% for £75, then things can recover to 2007 levels as soon as they like

Have a look at something like this for second charge:
http://www.any-loans.co.uk/blog/2007/04/second-charges-and-second-charge-loans.html