If you have scrolled through UK property listings recently, you might have been surprised to see stunning brand-new condos in prime London locations for as low as £100,000 ($126,000). With a 10% down payment, the home could be yours for as little as $12,600 out of pocket (not including closing costs). It almost seems too good to be true.
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A closer look at the fine print will alert you to the term “shared ownership.” What exactly does that mean? That you’ll be living with roommates who own a piece of your home? Thankfully, no. The other owner in question is the local city authority and the shared ownership concept allows new buyers to get a foothold on the UK property ladder without a high down payment. So why has the US yet to adopt this scheme and what are the downsides, if any?
‘Rent to Own’ On Steroids
The concept works similarly to a ‘rent to own’ model that many real estate investors use privately in the US to allow their tenants to buy their homes one day. However, it is less widespread than the government-backed scheme in the UK. In London, a £125,000 purchase price displayed on listing sites is not the full cost of the home but rather a percentage of ownership, usually 25%. So, the full cost of the home would be £500,000, of which the buyer owns £125,000. But what about the other £375,000? The local housing authority owns that percentage and the owner pays them rent aside from the mortgage payment they make on the percentage they own.
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A Staircase To Full Ownership
A homeowner can buy increasing percentages of the home from their landlord in as little as 1% increments, a process called “staircasing.” According to the UK government website, there are two ways to “staircase”:
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Gradual staircasing: buying shares of 1% each year
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Standard staircasing: buying shares of 5% or more
Beyond these two amounts, there are no in-between percentages for staircases and strict guidelines govern how your home is evaluated when you wish to buy a greater ownership stake.
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The Downside: Increased Costs
Although “shared ownership” has been celebrated as a low-cost means of home ownership, recently, owners have complained about soaring service charges (management/maintenance, comparable with condo/HOA charges in the US), which have increased by as much as 40%, according to an investigation by the UK’s Observer. These charges have become more expensive than the rental portion of the owner’s monthly bills.