A word of warning for anyone considering buying a home/apartment using a private shared equity scheme. A friend of mine is a lawyer who is trying to help a young guy out whose about to lose everything.
A few years ago, he went to a “property seminar” where a developer was selling new apartments in Flat Bush off the plans. At the “seminar” there was also lawyers, real estate agents and an accountant. He decided to buy an apartment using a shared equity scheme, approved by the accountant and lawyer there…. I.e. no “independent” person to look over the deal.
It seemed like a great deal…. he would pay a 20% deposit (money he saved, from his parents and the balance as a small mortgage arranged by the developers “independent” mortgage broker”). The only mortgage he would have to pay was to the bank and was really manageable. The rest of the money (80% of the purchase price) would be left in the property by the developer and the buyer would pay him 80% of the capital gain when he sold it in the future…. seemed a great deal…. provided the property gained in value. He could live in it for say 10-12 years, wait while it doubled in value, sell it and with his share of the capital gain plus his deposit (he was planning to pay back both his parents and the bank before he sold), he would have a larger deposit for a better dwelling in a better area.
One catch that wasn’t explained to him properly was what would happen if the property decreased in value…. if sold before the property had gained enough in value, he would owe the developer the equity the developer had left in the property plus 20%… no matter what the current value of the property is worth.
Timing is everything!!!! He brought at the peak of the market when FOMO was about paying more than the property was worth because off the “short time” to secure the deal. He paid $800,000 (including the deposit for $200,000 from his savings, the bank and his parents), meaning the developer left $600,000 for the shared equity.
But, house prices in Flat Bush, like the rest of Auckland, has fallen, he’s lost his job and can’t pay the bank back so is being able to forced to sell. His father has past away and most of his parents money went in medical and other expenses, so his mother can’t give him more money.
His $800,000 property is now only worth $600,000 but the developer has warned him if he sells it or if the bank sells it as a mortgagee sale, he will own the developer not just the equity left in the property but also an additional 20%.
Poor guy stands to walk away from what should have been “the deal of a lifetime” with a debt of nearly $150,000 after the bank gets their money and he’s able to pay of some of the equity back to the developer.
www.nzherald.co.nz
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