Business proposal to help first time buyer - thoughts?

burnsy89

So....I have had this idea, and being a complete novice I would like the power of your combined expertise to decide whether it's a good one or not.

Basically, i'm a first time buyer, desperate to get on to the property market, but I'm struggling to get the deposit together (and nobody in the family can afford to help me out as a favor).

My idea is that an investor will give me £10k which will be used to secure the deposit of the property. This will give the investor a percentage share of the property value.

After a term agreed between me and the investor (i'm thinking 4 years at the minute), the house will be re-valued and I will be able to borrow against the equity for "home improvements", therefore buying the investor out with their share of the property value at that time.

Based on the prices of the houses I've been looking at, a £10k investment would get the investor a 15% share in the property so if 4 years down the line I have £20k equity on the property, the investor will get their capital back and a profit of about £3k.

Any thoughts on this would be greatly appreciated. Of course the interests of all parties involved will be protected by some sort of contract/agreement, everything will be legit. I just want your thoughts on the idea in general....

Doozergirl

And what happens if the price of the house falls?
And where does this 'investor' come from? Someone with enough money to form a 15% deposit would just buy a house themselves and keep any capital gains for themselves.
Even if the increase you want to happen, happens (which suggests a rise in property prices of 30% in four years?!) you've still only got £7k left on a property which is worth more than you paid, putting you in a position that you still can't raise a mortgage because you still don't have even a 10% deposit of your own.
At some point you have to put your own money in, you can't buy things entirely with other people's money.

Your plan is fundamentally flawed. Take it right back to the drawing board. I'd probably start with you having your own deposit.

Thrugelmir

An investor would wish you to have a larger stake in the property to have a vested interest.

Keep saving. Not necessarily easy but achievable if you put your mind to it.

burnsy89

Already considered that, draw your attention to the line that says "a contract will be in place to protect the interests of all involved" - this includes conditions for buy-outs. The investor would need to be aware of the risks of the property market, therefore being aware that a rise in the property value can't be guaranteed within a set period of time so it may take longer before they get their investment back.

Plus i'll be willing to negotiate a minimum return on the investment, and if i continue to save I may not need to rely on borrowing against the mortgage to support the buy-out

Again, any other flaws you can spot would be great, I think it has the makings of quite a good idea

burnsy89

@Thrugelmir - I was worried about that myself. I realise its a small return but it's a small investment. However, I have a few ideas in mind about potential investors and the investment opportunity still has the potential to get a better return than if they were to invest it into a fixed rate savings bond for example

Thrugelmir

burnsy89 wrote: »

Again, any other flaws you can spot would be great, I think it has the makings of quite a good idea

Your mortgage lender will not play ball. On two counts, source and terms of deposit, and granting of second charge on property.

Lastly even if it was possible. There's no guarantee that you would be in a position to remortgage and release funds.

Opinion

You know why more people don't do this?

As Doozer put it, Your plan is fundamentally flawed.

burnsy89

I work for the mortgage lender. As far as they're concerned the deposit is from personal savings with another provider.

Assuming everything did go ahead, the application for a second mortgage would be secured against the equity and the decision would be based on affordability, credit score and payment history. Assuming the credit score and payment history was good then the only other factor is affordability. As I work for the company, I know how they score affordability so it shouldn't be a problem getting around that.

DVardysShadow

In technical terms, what you are proposing is leveraging or gearing. Essentially on a 90% mortgage you are leveraging capital gains [and losses] by a factor of 10. ie on a £100,000 house, your £10,000 will purchase for you the benefit of all of the gains [or losses] on £100,000.

If you give your investor 50% of the house, his investment will be leveraged by a factor of 5. If he anticipates a loss of 3% on the house over the period, that is a loss of 15% of his investment due to leveraging. So he will not be happy to invest. If he anticipates a gain of 3% over the period, he will gain 15%. He still won't be happy to invest, because he could go out and buy his own house, have tenants pay the mortgage rather than you, be free to kick out the tenants, whereas you would want security and his investment would be leveraged by 10 rather than 5.

Or put another way, what you would have to give the investor to make it worth his while is the whole of the benefit to you of buying the property.

burnsy89

Well most of the flaws you've all pointed out so far are things which I've already considered.

At the end of the day it's an investment opportunity - with investment comes an element of risk. Given the current economic climate and the terms i'm willing to negotiate, the risk of losing money on the investment is minimal.

An investor will have to take all possible outcomes into consideration and make their own decision. If they want to negotiate terms I will make sure I don't agree to anything I can't commit to.

Could be a long shot and maybe none of the investors I have in mind at the minute will be interested but I'll be sure to let you know how the proposal goes down.

I don't think anybody should be too quick to write the idea off though - I'll come back in a few weeks to either gloat about pulling it off or to eat a slice of humble pie and thank you all for your opinions!!

Doozergirl

Ah, the eternal optimism of youth.

You clearly haven't considered the flaws otherwise you'd realise that nobody but a parent is going to support that kind of venture. This isn't Dragons Den. What about the small issue of defrauding your lender employer?