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Developer Giving 25% Interest Free & Risk Free Loans


Dylan
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I was chatting to a colleague at work today and she mentioned that she's buying a new-build 2 bedroom flat (I'm not sure of the exact development, but it's somewhere just outside Windsor). She's got a deal with the developer whereby she buys 75% of the property and when it's sold she gives the developer 25% of the proceeds, whether the value goes up or down. I had to double check with her, and it's definitely the developer who's hanging on to the other 25% and not a housing association (or so she thinks).

Is this practice normal? It seems to me that the developer is effectively admitting that it's over-valued by a 1/3 and this is the only way they can get rid of them. It's also a very good way to keep the Land Registry prices artificially high.

Edited by Dylan
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I was chatting to a colleague at work today and she mentioned that she's buying a new-build 2 bedroom flat (I'm not sure of the exact development, but it's somewhere just outside Windsor). She's got a deal with the developer whereby she buys 75% of the property and when it's sold she gives the developer 25% of the proceeds, whether the value goes up or down. I had to double check with her, and it's definitely the developer who's hanging on to the other 25% and not a housing association (or so she thinks).

Is this practice normal? It seems to me that the developer is effectively admitting that it's over-valued by a 1/3 and this is the only way they can get rid of them. It's also a very good way to keep the Land Registry prices artificially high.

I looked into a shared buy scheme with a developer, but the biggest issue I had was this.

I buy a large house 4-5 bedrooms on a 50-50 shared buy. The house costs the developer £30k for the land (for the one house) and the house costs them £100k to build. So a total cost of £130k. So I think great - 50% is £65k. Noo! 50% of the houses valuation, which is £250k. So Basically I have to pay (or borrow) £125k to own 50% of the house - the developer pays £5k for his half.

If you have to sell the house. If the house increases in value to say £300k (ignoring any expenses, etc..) I have £25k equity and the developer has £145k equity.

Lets say the house drops to £130k after a HPC. Now im in trouble - I have £60k of negative equity. The Developer still has £60k of equity, even though the house has dropped to the cost of building it.

These schemes seemed designed to offer a decent house for a reduced amount, but you are taking on a huge amount of risk compared to the developer. He sells the house, makes a profit from building the house. The regardless of what the market does, he is still likely to make a profit from you selling the house.

This didnt seem like a good deal to me.

The above may be completely messed up, but this was the impression I got from someone I was discussing it with.

Oh and if you add stamp duty and expenses onto this, the deal really turns sour.

Edited by Adrian Allen
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