House has 'Local needs'- surely a slight risk?

Special_K10

Hi,
My friend is currently renting a house with his girlfriend. They have around £20,000 in savings and want to buy the house from the landlord.

Unfortunately, the house has a 'Local needs' restriction on it which, from what I understand, means that to rent or buy it, you need to either work in the local area or be a local resident (I know very little about this...or most things).

My friend has found that of all the banks in his town, only one is in the position to offer them a mortgage due to the restriction.

Now, I have suggested to him that the reason for this is because of the fact that the other banks see such a restriction as a negative being as when it comes to my friend selling the house, the amount of potential buyers is hugely reduced. Plus, the local town/area is one of high unemployment with, seemingly, not much chance of it changing.

The other concern I have raised is that because there are far less banks that are willing to offer him a mortgage, this may well result in the interest rate he will be offered being not as low/competitive as if he was buying a 'normal' house with no local needs restrictions.


So, my concerns for my friend are:

• That by buying a house with this restriction, when the time comes when he will want to sell (maybe when he starts a family and needs to get a bigger house) he will be restricted to who he can sell his house to so obviously will be at risk of either not being able to sell it and/or having to settle for a lower price than he will want, thus potentially suffering a loss/shortfall and all the years of paying X amount a month potentially wasted.
• He has only considered the banks that are on his high street of his town.
• He has no idea of what exactly the 'local needs' restriction is and what restrictions it includes.
• I have recommended that he go to an IFA to help widen his search for a deal (If he has to buy this house) but he is reluctant to pay an outright fee no matter how much I explain that, previously, there was never such thing as 'free' advice from an IFA and that any deal taken for 'free' was actually perhaps not the 'best' deal out there but was the preferred deal of the Financial adviser because it would have earned himself a fee from it.

Please can I ask am I being overly cautious with my advice to him?

Thank you all.

moneyistooshorttomention

I don't think you are being overly cautious at all.

There has to be a reason why "local needs" houses are so much cheaper. I was surprised to find I could afford one in one of the dearest places in our county (a place I can't even sniff at normally because of the level of their house prices:eek:) and I "think" I was just about eligible to count as a "local" (because I'm in the same county and I am a "local"). From memory - I think the price of this house was about 50% or so of what I would expect a semi-detached to be minus that restriction.

I'm not sure how big a distance from the house concerned "locals" can live to count as eligible for a "local needs" house. As I said - I think I was okay if I had decided to purchase this house - being about 30 miles away, but I'm not totally sure. I didn't proceed anyway because it's not the detached house I really need - so thats as far as my investigations went.

So - the distance between would-be purchaser and house concerned that constitutes being eligible to have it would be my first thought.

Incidentally, I fully agree with houses being designated "local needs" houses and only wish a lot more of them were (80% of housing being "local" would sound good to me in my area but we've already "lost" much of our county housing stock now....).

Davesnave

Local authorites all have their own definitions of what local needs housing is, so the first task would be for your friend to gain sight of what the exact restrictions are on this property or development. It is one thing to rent and another to buy!

Clearly, if he has been renting it, he & his landlord must feel he already meets the criteria laid down.

There is a financial effect on the resale of local needs or affordable housing, as it is the intention to keep these properties in the local housing stock and not lose them to any Tom, !!!!!! or Harry with the money. As your friend will pay less than the unfettered value of such a house, I can't see where the problem is with this. It should get him a better house than he'd otherwise be able to afford.

As regards getting a mortgage, it may well be that some searching will be necessary, especially if your friend has only a low % to offer as a deposit. Lenders are generally being very cautious at present. However, there may be no need to employ an IFA if he is willing to do some internet research. He could start by looking for lenders who will consider properties with a Section 106 agreement in place.

Special_K10

Hi,
Thank you both, I have learnt a lot from your posts.

Davesnave, I see your point about not neccessarily losing out financially but surely my concern stands regarding the possible difficulty he may experience when selling the house due to those restrictions and the fact that the area is an area of low employment and little prospects?

Also, he has around £20,000 and the probable cost would be £118,000 so is this a reasonable deposit?

The only other possible concern is that my friend's girlfriend has only fairly recently (last 8 months) been given a full time employment contract. Is this a slight concern regarding the banks' tightened criteria?

Silverlegs

He can also check the position if he defaults. There is normally a clause in the lease that states that the local occupancy restriction will be lifted if the bank comes into title. Also check if any grant has been paid and that takes second charge to the bank debt.
This makes it a much less risky proposition for the bank.
Local housing associations are generally very helpful in giving out lists of banks who are easier to get non mainstream mortages from.

Special_K10

Silverlegs wrote: »

He can also check the position if he defaults. There is normally a clause in the lease that states that the local occupancy restriction will be lifted if the bank comes into title. Also check if any grant has been paid and that takes second charge to the bank debt.
.

Thank you for that, much appreciated.
Apologies for this but please could you explain a bit more about what would happen if my friend would default?

Silverlegs

If the bank has first charge and there is a clause that says the Local occupancy clause (LOC) is removed if the bank takes title then it would be exactly the same as normal defaut.
However if there is grant in the property the Homes & Communities Agency can and does put a clause in the grant agreement that protects the grant debt as first charge. In practice what happens is the debt transfers to a housing association who pays the bank the remaining cost of the property. In this case it may be possible for the householder to remain in the property. However the banks are more cautious about lending on properties where their debt is paid second.
I'm off to enjoy the snow but will check back later

Furts

Hi Special K10
I congratulate you on putting a logical, well reasoned post.

A snippet that might help: some years ago I was involved in building new houses in the centre of a lovely village. There had been a lot of opposition to the big "executive" houses so a local clause had been applied to include a terrace of stone houses - aimed at first time buyers. Two years on these remained unsold because there were no young people eligible, or interested, in these houses. The exception was one young lady was very keen and quizzed me on details etc. Ultimately her solicitor convinced her to pull out of the sale because when she out-grew the house she would not be able to find a purchaser for it.

Ultimately the clause was removed because the empty/derelict houses became a bit of an eyesore.

Special_K10

Furts wrote: »

Hi Special K10
I congratulate you on putting a logical, well reasoned post.

A snippet that might help: some years ago I was involved in building new houses in the centre of a lovely village. There had been a lot of opposition to the big "executive" houses so a local clause had been applied to include a terrace of stone houses - aimed at first time buyers. Two years on these remained unsold because there were no young people eligible, or interested, in these houses. The exception was one young lady was very keen and quizzed me on details etc. Ultimately her solicitor convinced her to pull out of the sale because when she out-grew the house she would not be able to find a purchaser for it.

Ultimately the clause was removed because the empty/derelict houses became a bit of an eyesore.

It is people like you, Furts, who I think are wonderful and who (hopefully) keep people from making incorrect decisions and I thank you for posting that example. I will show my good friend this thread and hopefully he will take on board all the comments.

Thank you Furts, I am trying to help my friend and you have helped me.

Special_K10

Hi,
So can I please ask has anyone else come across this problem before?

Davesnave

I think the devil is in the detail. Without knowing exactly what restrictions there are on this property, we are unlikely to know how it compares with others which may be raised as examples.

It is rather like the situation with agricultural occupancy conditions, where some are much more restrictive than others.

Nevertheless, individual experiences are worth hearing. Also, some of those involved professionally in the mortgage market may be more likely to read this and comment after the weekend!

You could look at what the Council of Mortgage Lenders has to say in general terms here:

http://www.cml.org.uk/cml/policy/issues/166#five