75% Shared Equity with Developers: Good idea?

biggerthed

Idiophreak wrote: »

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

I like the plan, just not sure of the odds

PasturesNew

Idiophreak wrote: »

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

A developer is sitting on a house at £100k - it's not shifting. Each month he holds onto it, it is worth £1000 less + the developer has borrowed the money and needs to pay staff/insurance/security for it, so there's another £1000. Total cost per month £2000.

The developer wants his £100k for the house though. He doesn't want to sell it for less, but each month that passes it is costing him money AND losing him money - to the tune of £2k/month.

So he needs to shift it quicker.... but at £100k nobody's biting.

But, if he can sell it for £75k now, then he knows he has £75k - and that portion of the house's current value is then locked in for him. He is then ONLY gambling a maximum of a £25k loss, but in reality a lot lot less.

Left to sell, the house could be worth £85k in a year's time - and he'd have spent £12k holding onto it. So he'd only achieve £85-12=£73k for it.

Better to sell it at £75k now and bank that - then, sometime in the next 10 years he will receive amounts of up to £25k from the buyers, when they sell - or - in 10 years' time.

If the market falls he stands a smaller risk of losing a portion of that amount if a buyer sells.

If the market rises, he will get his £25k. Whether he'd actually get more if the house was valued at more, would be in the individual contract.

But he's passing the risk on.

If he sold it at £85k in a year, HE's made the whole loss.
If it's bought now for £100k (£75k+£25k deferred) and sold for £85k in a year's time then he'd only lose 1/4 of £15k - the buyer would "lose" the other 3/4s.

Developer: win:win
Buyer: beware.

brit1234

biggerthed wrote: »

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.
:rotfl:

Prices are dropping, it is pointless developers having properties they can't sell as they have bills to pay ie wages, pensions, current building costs.

This whole credit crunch was caused by ramping property prices above sustainable levels, the credit crunch is just the correction and should be welcomed.

Prices are to fall at least another 20% and the government have finally realised this and cut their funding for their 2 most popular schemes.

poppysarah

House prices still too high.

It'd be insane to join in at this part of the game.

Idiophreak

PasturesNew wrote: »

A developer is sitting on a house at £100k - it's not shifting. Each month he holds onto it, it is worth £1000 less + the developer has borrowed the money and needs to pay staff/insurance/security for it, so there's another £1000. Total cost per month £2000.

The developer wants his £100k for the house though. He doesn't want to sell it for less, but each month that passes it is costing him money AND losing him money - to the tune of £2k/month.

So he needs to shift it quicker.... but at £100k nobody's biting.

But, if he can sell it for £75k now, then he knows he has £75k - and that portion of the house's current value is then locked in for him. He is then ONLY gambling a maximum of a £25k loss, but in reality a lot lot less.

That's a bit of a closed-minded argument, tbh and all hinges on the supposition that a) nobody's willing to pay "normally" for the property and b) the FTB in question will pay over the odds for the property...

Do you really think FTBs see the equity loan as free money? If the house is worth 75k, people will pay 75k for it, not 100k...How that 75k's made up may vary, but not the amount. I'd be surprised if anyone really thought that buying 75% of the equity for 100% of the price was a good idea.

I've said time and time again that buyers might feel they've less force to negotiate if using these schemes, so could end up paying more than they would if buying outright, but that's a very individual thing, specific to both the buyer and the seller and you can't assume it will always be the case -and you have to credit people with some common sense in that they don't end up paying (in your example) 30% extra for their property...

I don't dispute that there's value to the developers in these schemes. Obviously, as you say, it will help them to shift homes faster, which at the moment means they get more cash for them...but to see it quite so bleakly I feel is a little harsh...

If you assume that the SE buyer pays the same as a "normal" buyer, most of your argument falls away - the only downside from the buyers' point of view is if the market strengthens substantially before they settle up, they'll end up paying more for the 25% they have to repay. (although, of course, the other 75% of their home will also be worth more to compensate).

So, if their £100k house rises in value by 10%, they'll end up repaying 27.5k, making the total purchase price effectively 102.5k...but the whole thing will be worth £110k, so they're still up on the deal...

Your whole argument seems to be against buying in a falling market, more than against SE schemes, which obviously is a good argument to be had and, once more, is a personal decision as to whether you think it's a good time to buy or not. But, to be honest, anyone that sells in a falling market "passes the risk on", of course they do, except they pass on 100% of the risk, not 75% as in this example.

Run your figures again assuming someone's paid £100k cash...

In a years time, when it's dropped to 85k in value how much do they lose? 100% of 15k, not 75% as under SE.

How that adds up to "buyer beware", I'm not so sure?