Can You Make a Profit On Shared Ownership?

Many buyers hope to use shared ownership as a stepping stone to greater equity. But, can you make a profit on shared ownership?

In this insight, we will explore the question of whether you can make a profit on shared ownership, as well as provide an overview of shared ownership schemes, the different types of shared ownership, and the pros and cons of each type.

Key Takeaways

• Shared ownership offers profit potential as the property value increases, increasing the value of your share. However, fluctuations in property value can impact your share's worth.
• Various factors impact the profit you can make, including changes in property value, market conditions, ownership duration, and selling costs. The initial sale price is determined by the RICS valuation, and the housing association may have the first opportunity to sell the share.
• You can increase profit by making improvements, but approval from the housing association is necessary. Extensions or modifications that compromise the ability to sell may not be approved.

Can You Make a Profit on Shared Ownership?

You can make a profit on shared ownership. As the property value increases, so does the value of your share. When you sell your share, your profit is the difference between what you paid for it and what it has sold for. This is your equity.

However, like all property, if the value goes down, then your share will also be worth less.

Note that shared ownership properties must be sold at a price determined by a RICS (Royal Institution of Chartered Surveyors) valuation, rather than buyers making offers against an asking price. This means that any profit you make will be determined by that valuation, rather than by the negotiation process.

When you sell your share, it must be offered to other shared-ownership buyers before it can be sold on an open market.

What is Shared Ownership?

Shared ownership is a government-backed scheme aimed at helping buyers who cannot afford a full mortgage. The scheme allows buyers to purchase a share of a property, usually between 25% and 75%, but sometimes as low as 10%, and pay rent on the remaining share. The rent on shared ownership homes is generally lower than the market rate and is usually paid to a housing association or local council.

Let's say you want to buy a new flat that costs £300,000. With Shared Ownership, you can buy 50% of the flat, which is worth £150,000. If you have a 5% deposit, you'll need to pay £7,500 upfront, and get a mortgage for the rest (£142,500).

You'll then pay rent on the remaining 50% of the flat that you don't own. This rent is lower than market rate and paid to the housing provider who owns the rest of the property. Your monthly housing costs will include this rent and your mortgage payments.

Shared ownership properties are typically sold on a leasehold basis, meaning that the buyer will have a lease agreement with the freeholder, which is often a housing association, developer, or housing provider. As the leasehold owner of a share, you will have certain rights and obligations, including the right to live in the property for a fixed amount of time and the responsibility for maintaining communal areas.

How to Make a Profit on Shared Ownership

The profit you make on shared ownership can be influenced by various factors. These include changes in property value, market conditions, the duration of ownership, and costs associated with selling.

Initially, the RICS valuation determines the sale price that is offered to other Shared Ownership buyers, and you may have to wait for the housing association to attempt selling the share first at this valuation before it can be offered to an estate agent. 

If you disagree with the RICS valuation provided by the housing association, you can challenge it and seek a reassessment. This allows you to ensure that the sale price accurately reflects the market value of your share.

Making More Profit on Your Shared Ownership Property

You can make improvements to increase your profits with shared ownership. However, you need to consult the housing association beforehand. For instance, if you plan to build an extension, it cannot compromise the property's re-sell value. Some extensions may not be approved if they significantly alter the layout or make it less desirable for future buyers. Be sure to follow any guidelines and restrictions to ensure your modifications positively impact the property's value.

Pros and Cons of Shared Ownership

There are several pros and cons to consider when deciding whether shared ownership is the right choice for you:

Pros of Shared Ownership

• Shared ownership allows you to get on the property ladder as an owner-occupier, offering long-term stability without overstretching yourself financially.
• Deposits are generally lower than buying on the open market.
• Shared ownership makes mortgages more accessible, even if you're on a lower wage.
• Your monthly repayments can often work out cheaper than if you had an outright mortgage or rented privately.
• You have the option to buy more shares of your home in the future through a process known as 'staircasing', which can lead to lower rental fees on the remainder of the property.
• Buying a shared ownership property without a mortgage is even possible. So you are able to buy without the additional mortgage costs, allowing the monthly costs to be used elsewhere.
• You can spread your shared ownership stamp duty across the lifecycle of your staircasing, reducing upfront costs.

Cons of Shared Ownership

• Not all lenders offer mortgages for shared ownership, although the majority do.
• You have to pay 100% of the peppercorn rent, ground rent, and service charge on your property, regardless of how low your share is.
• Shared ownership properties are sold on a leasehold basis, which may have certain restrictions and obligations compared to freehold properties.
• While you can decorate and make some improvements to your home, there may be restrictions on more significant structural alterations.
• You may have to divide or forgo potential tax benefits when you have shared ownership.

How Does Shared Ownership Work When You Sell?

When selling a shared ownership property, you typically must transfer the lease to a buyer approved by the housing association or developer, often a first-time buyer in a similar situation. Alternatively, some may allow you to sell on the open market. The sale price is based on the property's current market value.

Selling a shared ownership property can be a more complex process than selling a standard home, particularly if you own less than 100% of the property. Here are the steps to follow when selling a shared ownership property:

• Inform your housing association or provider that you wish to sell your home.
• Obtain a RICS valuation to determine the market value of your property and your share.
• Approve the valuation and instruct the housing association or provider to start marketing your home.
• Once a buyer is found, ensure they meet the eligibility criteria for shared ownership.
• Complete the conveyancing process, including the exchange of contracts and completion of the sale.

Is Shared Ownership Hard to Resell?

Selling a shared ownership property can be more challenging than selling a regular home because there are specific rules and restrictions. You might have a smaller pool of eligible buyers, limitations on the selling price, and involvement from the housing association. While it's not impossible, it can be a bit more complex.

Final Thoughts: Can You Make a Profit On Shared Ownership?

Shared ownership can be a viable option for those looking to get on the property ladder and start building equity - making a profit. While there are some drawbacks to shared ownership, such as potential restrictions on home improvements and a more complex selling process, there are also many benefits, including lower deposits and more accessible mortgages.

So, can you make a profit on shared ownership? The answer is yes – if the value of the property increases, so does the value of your share. However, it is important to be aware of the potential risks and challenges associated with shared ownership and to carefully weigh up the pros and cons before making a decision.