Buying land from neighbour who has equity release issue

Danien

Grumpy_chap said:

I am not sure this will ever get the neighbour much by way of additional funds.

AIUI, the neighbour sold % of the property for ER in 2018.  That % has dropped by 5% or £50k.  That would mean the ER acquired a share of the property worth £1m, but will only have paid a fraction of that, say half (assumption).

Before anything can happen, the ER company want their £50k (5% loss) making good.

What proportion of the property now belongs to the ER company?  Is it a £2m property, so the £1m acquired by the ER company represents half?

Then, the idea to sell a part of the garden for £40k.  But the same proportion of that garden belongs to the ER company as the rest of the house, so the ER company get £20k and the couple living there get £20k.  Is that enough to make it worth while for the couple living there?

Who will pay all the legal fees, purchaser, tenants, ER company?

If the couple living in the property got, say £500k (half of the £1m house value) in 2018 and already burned through cash so they need to raise more funds now, another £20k or £40k is not going to last them long.  (This might not be extravagant spend if there are care issues or similar to fund.)

Wouldn't it be 5% of the total drop in value? So 5% of 50k?

Elmroad82

MeteredOut said:

Elmroad82 said:

Hoenir said:

Are her neighbours trying to raise money without recourse to the ER company.  Othertwise the exercise is of no benefit to them. Who is going to pay all the associated legal charges ? 

I cant seem to redeit the original post... but yes they were trying to raise money. My mother had got the land valued and the valuer said due to the overall size of the garden and the small piece being sold, that selling it would have no impact on the value of the neighbours house. The ER valuer  verbally agreed.... but subsequently in writing then said the house had fallen by 50k in value and that's the issue.

Is the ER saying the house has fallen in value by £50K since purchase (or since the ER was made) or that the neighbour selling the land would reduce the value of the house by £50K below its current value?

Some posts are assuming the former (as what is written across posts is a bit ambiguous) but I'm wondering if it’s actually the latter.

The house has been owned for 20+ years - what I’ve been told is that the ER company have revalued the house since the ER was taken out in 2018 and have valued it as 50k less. They require a payment of 50k to let the neighbour sell the land. I’m not aware of the amount that ER own. My understanding is that selling the garden won’t devalue the house as the garden is so big. My mum was also assured of this when she had an independent valuation done. 

Elmroad82

To clarify... Ive deduced its a 5% reduction as the house is probably worth 1M and the ER are saying there is a drop in price since 2018 of 50k i.e 5%. Can the valuation be challenged? Its in the best street in the town and as far as I know, prices have at best stagnated - certainly noit reduced.

peterhjohnson

housebuyer143 said:

The way equity release works is that the company own a percentage of the house so as the value increases they will actually be asking for more for the land. You don't know how much they own, it could be a large percentage.

No,  ER does not work that way. The ER doesn't own own any percentage of the house. The owner/occupier owns 100%. The owner does have a debt of whatever cash they released plus rolled up interest. The ER company like that debt to be (considerably) less than the value of the property. If selling off the land significantly reduces the value, it reduces the ER company's security so they want some money in compensation.

Elmroad82

peterhjohnson said:

housebuyer143 said:

The way equity release works is that the company own a percentage of the house so as the value increases they will actually be asking for more for the land. You don't know how much they own, it could be a large percentage.

No,  ER does not work that way. The ER doesn't own own any percentage of the house. The owner/occupier owns 100%. The owner does have a debt of whatever cash they released plus rolled up interest. The ER company like that debt to be (considerably) less than the value of the property. If selling off the land significantly reduces the value, it reduces the ER company's security so they want some money in compensation.

I see …. But the valuer verbally said that selling the land would have no impact on the house valuation and it wouldn’t be a problem. Only when the official letter came did it mention the 50k “hole”  which I presume is due to market forces driving house prices down… although I don’t see how they have valued it less than in 2018. Oddly the ER company also asked for a DS3 form from the sellers solicitors prior to sending out their official letter.  Surely this knowingly incurs solicitors fees when they had already decided that 50k needed to be paid without notifying the neighbour. 

Maybe their plan of remortgaging might fill the 50k gap

peterhjohnson

Elmroad82 said:

peterhjohnson said:

housebuyer143 said:

The way equity release works is that the company own a percentage of the house so as the value increases they will actually be asking for more for the land. You don't know how much they own, it could be a large percentage.

No,  ER does not work that way. The ER doesn't own own any percentage of the house. The owner/occupier owns 100%. The owner does have a debt of whatever cash they released plus rolled up interest. The ER company like that debt to be (considerably) less than the value of the property. If selling off the land significantly reduces the value, it reduces the ER company's security so they want some money in compensation.

I see …. But the valuer verbally said that selling the land would have no impact on the house valuation and it wouldn’t be a problem. Only when the official letter came did it mention the 50k “hole”  which I presume is due to market forces driving house prices down… although I don’t see how they have valued it less than in 2018. Oddly the ER company also asked for a DS3 form from the sellers solicitors prior to sending out their official letter.  Surely this knowingly incurs solicitors fees when they had already decided that 50k needed to be paid without notifying the neighbour. 

Maybe their plan of remortgaging might fill the 50k gap

Assuming a very ordinary ER (not "Home Reversion" or some other schemes) 

• The original 2018 loan would have been at a low rate fixed for life, maybe 2.5%
• In 2024, ER interest rates are higher (guess) 7%
• The ER company has reassessed the situation on a 2024 basis
• Higher interest rates will have reduced the acceptable LTV so reducing the maximum amount they will be happy having outstanding on this property
• Normally, the ER company is stuck with the situation
• BUT because the borrower is considering a change, they are trying to improve their security.

Elmroad82

Ahhhh now that makes sense! I assumed (foolishly) that ER is agreed on a fixed interest rate but it makes sense to track base rates. So if it’s 50k today it could go up to 55k in December due to basic compounding?

Elmroad82

Essentially there is no round this issue though?

user1977

It's up to the neighbours to find a solution if they want to sell, not you or your mum. Ultimately a lender has absolute discretion about whether to consent to a sale of part (unless something pretty unusual had previously been agreed) so if the borrower doesn't like their decision, their only solution is to refinance.

Elmroad82

Thanks - we know it’s up to the neighbour but all the way along my mum has been suggesting ideas to help expedite the process as they’re rather slow and find this kind of stuff stressful. Just signing up their solicitors was an ordeal….