How does shared ownership work?

by Mark Alexander

8:19 AM, 22nd February 2014
About 7 years ago

How does shared ownership work?

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How does shared ownership work?

Could a private landlord put together a shared ownership scheme similar to those offered by Housing Associations?

This question was raised by one of our members who came up with the idea of selling 10% of his property every year to one of his tenants. I explained that it would be incredibly difficult to make it work but I thought I would start a thread to share my own thoughts and to canvass the opinion of others.

My initial thoughts were that unless a landlord owned the property outright then offering any form of shared ownership scheme would be a complete none starter because no mortgage lender would ever agree to it. Do you concur that’s a fair starting point? If not how could a deal be structured which didn’t affect the value of a mortgage lenders security but still gave the all parties some security? How does shared ownership work?

If the landlord had no mortgage then I suppose he could sell the legal title and retain a share in the beneficial interests in some way. However, wouldn’t that make the scheme a “Home Reversion Plan” which is very highly regulated? I understand that on that basis no rent could be charged in respect of the beneficial interest either!

The only idea I came up with, which might be workable in theory, was for the property to be owned in a limited company and for the landlord and tenant to own shares in that company. However, I ran out of answers to my own questions and effectively gave up. Owning shares in a company would seem to offer both parties some form of equality; e.g. if the rent or values increased significantly then at least in theory all parties would benefit equally according to their shareholding. In theory, the property could still have a mortgage on it and some sort of share option contract could be agreed in respect of the sale of the remaining shares in the company, over a period of time and at an agreed price. It would be a very complicated contract though and what the arrangements would be if either side wanted/needed to get out of the deal would probably be an absolute nightmare.

I can still see problems with the financing based on the Limited Company route too. Would the lender have an issue with the landlord selling shares in a company to which they have loaned money? Given that the tenant would also become a part owner, would this become a regulated buy to let mortgage?

What if either party were to die or go bankrupt?

What if the shareholder with 51% of more decided to sell the property, increase/decrease the rent to a crazy or even to serve notice?

The bottom line for me was that shared ownership cannot work on any basis in the Private Rented Sector …. but maybe I’m missing something?

Thoughts anybody?

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Comments

Mick Roberts

8:33 AM, 22nd February 2014
About 7 years ago

It’s something I thought of years ago.

I would love to sell a load of my houses that way, they buy half, then rent the other half, so u get rid of the hassle, they look after it ‘cause they’ve got a big share in it, & u then get an income for a long time, with no phone calls, work etc.

Then I can live like u Mark & visit Russia with gorgeous blonde ladies ha ha.

And to plan for them to buy the other 50% in ten years time or so at the current value at that time-Be a big win for the Landlord I’d say.

Yes, your mortgage point for those with mortgages would be a stumbling block.

I’d want increase in rent in line with inflation.

I’d love to do it if anyone has idea’s. I get emails off that Guaranteed rent company thing, they seem to say they can do similar, but have to sell in approx 5 years or so, but I think that may be no capital outlay by tenants now, just reduced rent for them now, & they sign to say to buy in few years.

Industry Observer

8:41 AM, 22nd February 2014
About 7 years ago

Short answers:-

Badly

and No

Jeremy Smith

9:07 AM, 22nd February 2014
About 7 years ago

Reply to the comment left by "Industry Observer " at "22/02/2014 - 08:41":

Your answers (to which questions?) don't always reveal all that you are thinking, IO !

How does a housing association shared ownership scheme sell half a house to a buyer?
Could a landlord with a tenant not do the same?
If you can sell 50%, why not 10% each year ?

Yes, you would have to assume no mortgage on the property.

If it's possible, then you could sell as much as your CGT allowance covers each year, avoiding tax on the sale.

Colin Childs

10:07 AM, 22nd February 2014
About 7 years ago

Salient points have been covered already. For a single property the sheer expense of undertaking such a concept outweighs any benefit to the investor.

Roger Lancaster

10:43 AM, 22nd February 2014
About 7 years ago

Hi Mark/Mick
Shared ownership is fraught with dangers and opportunities for disagreements over all sorts of matters from maintenance to liabilities and neither have ultimate ownership. I can see the legal boys rubbing their hands at the potential for legal disputes. Have you considered doing Rent Now Buy Later which satisfies many of the requirements without losing the definition of who actually owns the property at any point in time. We do this all the time with our RNBL scheme and we have seven of our properties on such schemes at the moment . It needs a third party to operate it but has tremendous advantages to both tenant and landlord.

Tenant and landlord agree a price that the tenant can purchase the property in five years time and a binding agreement is signed based on the tenant paying the normal commercial rent but in addition a an additional sum aimed at building up a 10% deposit or bigger in those five years. During that 5 years the 'deposit' money is paid in to a secured trust fund administered by a third party, in our case Ewemove.com, and cannot be accessed by either party until the deal is completed and the fund is passed to the solicitor as the deposit or if either party default on the agreement in which case it is passed to the other party. All maintenance other than that statutorily required is down to the tenant who must not default on either rent or deposit or risk losing the funds built up in the trust fund.

If you want to know more email me at **MODERATED - sorry but to links or contact details are to be posted for commercial reasons. If you are a business sponsor you may refer people to your Property118 business member profile ONLY - see http://www.property118.com/business-sponsorship/ **

This way the landlord never relinquishes the ownership of the property until the sale completes but the tenant has the security of a contractual agreement of the landlord to sell at a fixed price in 5 years time. There is facility to extend to 10 years if the tenant so desires. Just working on two where the RNBL tenants want to complete the deal earlier than the 5 years. The agreement must be drawn up properly to secure the interests of both parties so make sure you use a reputable organisation with experience.

Mark Alexander

10:49 AM, 22nd February 2014
About 7 years ago

Just though of this analogy ...

Imagine buying a 50% stake in a car from a person who took finance to buy the car. This person then charges you rent to use the other half of his car.

What happens if he doesn't make the payments and his car finance company repossess the car?

What happens if this man goes bust or dies?

What happens if you crash the car?

What happens if you don't pay the rent you agreed?

What happens if you want a different car?

What happens if the other person wants to sell his car?

If anybody can answer all of these questions in a way that makes sense to both parties then maybe, just maybe, there's scope to make shared ownership schemes a reality for private landlords - but I doubt it will ever happen.
.

Jeremy Smith

11:01 AM, 22nd February 2014
About 7 years ago

Reply to the comment left by "Mark Alexander" at "22/02/2014 - 10:49":

"If anybody can answer all of these questions "
- ALL of them !! 🙂

1. no mortgage - no repossession
2. seller gets house back
3. insurance pays out for repairs
4. renege on agreement? - seller gets house back
5. buyer sells his share, same as in "shared ownership schemes"
6. don't know !

-well, 5 out of 6 ain't bad.

Mandy Thomson

11:05 AM, 22nd February 2014
About 7 years ago

Reply to the comment left by "Industry Observer " at "22/02/2014 - 08:41":

I agree, IO!

I'm sure, at least theoretically it could work - you could register the title as tenants in common, though it's my understanding (but I don't know much about this) that there's normally a trust. However, if I were to do it, even allowing for due diligence, I would only want to do this with people I already knew and trusted - and then we're into the thorny area of a property transaction with friends - NO! Certainly, after my experience of renting from a friend, I would be very wary!!
For the record, shared ownership schemes are not favoured by buyers as they can become trapped - unable to move, as it's hard to find buyer and they're often unable to acquire more shares, as they have the expense of rent, mortgage payments and maintenance charges. The Guardian covered this recently - http://www.theguardian.com/housing-network/2014/feb/19/shared-ownership-first-time-buyers-property-ladder?CMP=twt_gu.

Mark Alexander

11:06 AM, 22nd February 2014
About 7 years ago

Reply to the comment left by "Roger Lancaster" at "22/02/2014 - 10:43":

Hi Roger

Sorry but I had to moderate your post as it does not comply with our house rules.

A few questions regarding the Rent Now Buy Later scheme if I may please.

What happens if the landlord dies?

What happens if the tenant dies?

What happens if the tenant defaults?

What happens if the landlord defaults on his mortgage payments or become insolvent?

I believe the excess payments which are used to build up a deposit are held in a client account which has client money protection associated with it. However, wouldn't the tenant be better of controlling their own money and taking advice on where best to invest it, e.g. in a tax free ISA account?
.

Mark Alexander

11:12 AM, 22nd February 2014
About 7 years ago

Reply to the comment left by "Jeremy Smith" at "22/02/2014 - 11:01":

Can you honestly imagine any decent solicitor advising the buyer that he's got a good deal on that basis?

Who is responsible for the insurance premiums and what if they don't get paid?
.

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