shared ownership: good or bad?

June 6, 2012 10:56 AM

How do shared ownership schemes work when buying a property? Are they a good idea or not? I am based in London, UK.

I'm at the point now where I want to start thinking about my future, and what I'd really like is a place to call my own - no landlord, being able.to decorate with paint and pets as much as I like. I have.no interest in "the property ladder", I just want some autonomy and security.

My credit rating has improved in recent years, but the problem with getting my own place is the deposit - at 30% of, say, £150k, (the cost of a flat way out of town, or that will need a lot of work doing to it)that's about 175% of my annual salary. (I will hopefully be getting somewhere with my current partner if we stay together and happy in the future, but he earns considerably less than I do. I don't plan to change jobs for a number of reasons, so let's assume I don't suddenly start earning tons more.) Getting help from family isn't an option, neither is moving to a different part of the country right now. I'm working on paying off.my consumer debt, and am saving a little too, but this isn't enough to produce the seemingly enormous sum required to get started. The thought of having to deal.with the insecurity and expense of renting is a less than pleasant one. In a couple of years, I'll be debt-free, have hopefully a good chunk of.money saved, a happier credit rating and a good idea of whether the boyfriend and I would be wise to buy together, so the impossibility of it is really discouraging.

I have read about shared ownership schemes, where you essentially buy a part of a property and rent the rest, with the possibility of increasing your share later. This seems like a far more attainable future goal, but I wonder if these are the wisest choice - is there a catch? I would probably qualify for the schemes where you have to have below a certain household income, and it seems like a good idea for someone in my/our position. Is it? Any experiences?

posted by anonymous to work & money (3 answers total)

See First Steps (I am assuming you are in London.) It explains all of your options, including shared ownership, and has example properties. If you look at individual properties, it sort of makes it clearer how it works. I think it's a great scheme and I wish it had been available to us before we moved out of London just to buy a home.
posted by DarlingBri at 11:39 AM on June 6, 2012

Most new shared ownership schemes are open only to certain 'essential service' professions - teachers, police officers, health services, etc. through housing associations. The ones that come onto the open market are re-sales by the original purchasers who are selling their share of the equity.

The way they work is that you start of buying an initial tranche of, say, 25% of the equity, and pay rent on the rest. Over the years, as your finances improve, you can purchase additional tranches of equity (at a price to be agreed with the Housing Association, but I'm fairly certain there's a formula for assessing the correct valuation) until eventually you own the whole property.

The upside is that you have a nicer property than you can afford to buy outright.

The downsides are that, if you wanted to sell, you might find it difficult to find a buyer. I also know that some mortgage lenders, whilst willing to fund the purchase of an initial tranche, will only agree to future funding if you're buying out the entire remaining equity in the property.

They also tend to be 'starter home' types of property, usually one- or two-bedroomed flats in a large development, so probably not a long-term home, particularly if, in the future, you decide you want to start a family. Then you'd be in the position of trying to find someone to buy your equity share in the property if you wanted to move to a bigger place.
posted by essexjan at 11:43 AM on June 6, 2012

For those not familiar with the concept, shared ownership schemes or shared equity schemes are a mechanism for individuals who are unable to access the housing market via open market mortgages to acquire property. There are both public sector and private sector mechanisms. The Wikipedia article is a good start.

You should read this article. It seems that the courts aren't entirely sure how to treat this sort of hybrid estate. Specifically, what exactly is to be done with the "shared" equity if the tenant defaults on rent? It seems that they can be evicted and lose whatever equity they may have developed. This suggests an additional sort of risk not really present in straight-up rent or purchase situations.

I'd draw a comparison to the sort of "rent-to-own" or "land contract" arrangements which are common in the US. Sometimes these are entirely legit, and they can be a useful way of transferring distressed properties amongst savvy players. Or they can be a nefarious way of effectively cheating low income "buyers" out of their equity. Unlike a traditional purchase, in a rent-to-own situation, the landlord/seller keeps title to the property until the terms of the lease are satisfied. If they aren't, the tenant/purchaser basically forfeits any and all equity they may have built up over the lease.

Now the shared equity situation doesn't strike me as being quite as dangerous as the rent-to-own scheme, because there are at least four players involved, e.g., the seller, the buyer, and mortgage company for 75% of the value, and a third-party investor for the 20% "shared equity" these things normally have. I'd venture to guess that the sheer number of players makes this thing harder to run as a scam than the rent-to-own gig. It's just a really complicated arrangement. It's kind of cool that the legal system is robust enough to come up with something this, but but the fact is that "shared equity" is kind of a weird concept, legally speaking. So there's still some risk there.

All of that being said, it does seem to be a rather innovative way of expanding home ownership. So I don't see as much of a "catch," other than the possible difficulty of selling one's interest in such an unusual estate, as much as "This is still new and kinda funky, so there's more uncertainty here than there might otherwise be." But it's probably worth looking into.

But let's put the shared equity issue aside for a minute. Buying real property with someone to whom you are neither married nor involved in some kind of formalized business relationship is a bad idea. The reason is that relationships end. But when a marriage ends in divorce or business deal goes south, the legal system has very well-developed, unambiguous doctrines for figuring out what happens next and making sure no one gets screwed too badly. It's possible to waive one's rights in unpleasant ways, but there's still an orderly system for distributing property. But in a cohabitation situation? Neither party has any special rights, and the absence of a contract means that there's no formalized agreement for how that's gonna go down. So regardless of how you decide to buy a house, buying it with a non-spouse paramour is inadvisable at best.
posted by valkyryn at 11:46 AM on June 6, 2012