The disadvantages of purchasing a Shared Ownership property only become apparent in the longer term.
Restrictions on Selling
Shared Ownership Leases contain restrictions on the sale of the property. When the owner wishes to sell their shares in the property, they cannot simply sell them on the open market straightaway but instead have to follow the Housing Association’s “nomination procedure”. Under the nomination procedure the owner has to inform the Housing Association of their intention to sell their share in the property and pay the costs of having the property valued to calculate the value of the share being sold. Once the property has been valued, the sale price of the owner’s share in the property has to be agreed by the Housing Association. The Housing Association then has 8-12 weeks to nominate a purchaser of their choice. Once the Housing Association has made a nomination the owner has to sell the property to person nominated. The property can only be sold on the open market if the Housing Association is unable to nominate a suitable purchaser within the nomination period, waives their right to nominate or if the nominated purchaser is unable to complete.
Another common cause for complaint, are the administration fees charged by the Housing Associations when the share in the property is sold. Typically between 1%-1 ½% of the sale proceeds or the open market value of the share in the property (whichever is greater), the administration fee is charged when the property is sold to a purchaser chosen through the Housing Association’s compulsory “nomination procedure”.
The Right of First Refusal
Once the owner of the property acquires 100% of the property, there remains a restriction on the sale of property, this being the Right of First Refusal. Under the Right of First Refusal, the property must be offered to the Housing Association before it can be sold on the open market. This restriction remains on the title to the property for 21 years after the date on which the owner has acquired 100% of the property.
Not all Lenders will lend on Shared Ownership Properties
The restrictions on selling the owner’s share in the property have adverse effect on the value of the property as these restrictions are not accepted by all mortgage lenders, thus limiting the pool of potential buyers.
Difficulty moving from a Shared Ownership property to the open market
As mentioned above, Shared Ownership properties have a limited market in which to sell due to the restrictions imposed on their sale and on the use and occupation of the property within the lease. The fact that Shared Ownership properties are more difficult to sell, means that as a general rule, a Shared Ownership property will not achieve as high a sale price as a wholly-owned property in the private market making it difficult for a person or family to move from a Shared Ownership property to a property on the open market and this may limit the choice of areas in which the person or family can move to. Thus a young couple starting out by purchasing a small Shared Ownership flat may find it more difficult to move to a larger property should they wish to start a family.
Negative or ‘Neutral’ Equity’
The fact that Shared Ownership properties do not increase in value at the same rate as properties on the open market, it is often the case for owners to find themselves either in negative (meaning that the owner owes more under their mortgage than can be achieved from selling the property) or neutral equity (meaning that the sale proceeds chief selling the property equate to the money owed under the owner’s mortgage).
Prohibition on Secured Lending Over and Above Mortgage Finance
Shared Ownership Leases which are governed by the Home and Communities Agency (“HCA”) (these are generally the Housing Association Shared Ownership properties) have what is known as a “Mortgage Protection” clause which essentially protects any mortgage lender against any losses incurred as a result of lending on a Shared Ownership property. The Mortgage Protection clause only covers finance which is used for the actual purchase of the property and it is for this reason that lenders will not allow the buyer to raise any further mortgage funding or other secured loans for purposes other than purchasing further shares in the property; this means that the owner of a Shared Ownership property is unable to raise money for example, to consolidate debts, purchase car or for a holiday.
Prohibition on subletting
A further disadvantage of a Shared Ownership property is that as a general rule, until the owner owns 100% of the value of the property they are unable to sublet the property. This means that should the owner have difficulty in affording the mortgage and rent, they do not have the option (which is available to those who wholly own property) to rent either a room in the property or the whole of the property out to a lodger or tenants to raise the money needed. This also becomes a difficulty if the owner of the property has to work away from home for an extended period of time.
Extra costs on staircasing
When the owner of the property wishes to purchase further shares in the property, they will have to go through the Housing Associations procedure for having the property (and therefore their share the property) revalued. The costs involved in this procedure will always have to be paid by the owner, and this may make the process of gaining further shares in the property expensive.
Shared Ownership properties are leasehold properties until the owner is able to purchase 100% of the value of property. The Housing Association as landlord is usually responsible for ensuring the property and maintaining the property structure and the grounds of the development in which the property is situated. To enable them to maintain and manage the property and the estate, the Housing Association will charge a Service Charge which will be payable in addition to the rent. If the Shared Ownership property is a house the Service Charge is usually relatively low however in the case of a Shared Ownership flat the Service Charge may be between £1000-£2000 per annum. The addition of the Service Charge means that the owner has three payments to make each month these being mortgage, rent and service charge.
Upwards only rent reviews
Although the rents charged on Shared Ownership properties are generally lower then rents in the private sector (between 1%-3% of the value of the Housing Association’s share of the property) they do have an automatic rent review mechanism which means that the rent increases annually by a minimum of 0.5% of RPI. There is no provision with in the Shared Ownership schemes for rents to go down.
Increased danger of repossession
If the owner of a property falls behind in their mortgage, there is always the risk of repossession by the mortgage lender, however it may be up to the year before the lender begins repossession proceedings. Once the lender has repossessed the property and taken account of their costs and monies owed to them, any residual value (if there is any) is paid to the owner of the property.
In the case of a Shared Ownership scheme, the un-owned part of the property which is rented is governed under the Housing Acts in the same way as an Assured Shorthold Tenancy which means that if the rent is two months in arrears, the Housing Association may seek possession under the Housing Acts. If the Housing Association repossesses the property under the Housing Acts, the owner of the property may not be compensated for the value of the share in the property that they own.
As a safety net, the standard HCA Shared Ownership lease puts an obligation on the Housing Association to alert the owner’s mortgage lender of the rent arrears 28 days before commencing proceedings and it is usual for the mortgage lender to then pay the rent (to prevent the loss of the property) and seek recourse from the owner.