Would you invest in property using JOMs / SOSs?

[tichaonampofu]

Quick definition of JOMs and SOSs as I did not have enough room to write them in full in the subject heading.
JOM - Joint Ownership Mortgage
SOS - Shared Ownership Scheme
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With the downturn in the current economic climate and financing still being difficult to achieve it seems Property Investors are stuck when it comes to investing, even though there are apparently good property deals on offer (the largely advertised "20%" discount – I have a personal view on this, but that is for another post),but in the current economic climate how do you raise the finance? Banks / Building Societies and Mortgage Lenders have all tightened up their purses, likewise other Property Investors have had their fingers burnt terribly by buying at the peak so have run for cover. So what other methods of raising finance are available and what solution can be offered to the Property Investor who has bought at the peak, is in negative equity, and the rent is not covering the mortgage payment? Likewise First Time Buyers do not have the required 25% deposit saved up and what little they have saved, lets say 10% will not earn them a better return in the Savings Account, now that interest rates are so low. So what solutions can be implemented to help?

I suggested the idea of Joint Ownership Mortgages (JOMs) / Shared Ownership Schemes (SOSs) to several Investors and have got mixed reviews. I am therefore looking to get a further consensus and opinion from the mass Property Investors and have decided to pose this question on various property investing forums to see what feedback I get.

As we all know, the basis of JOMs / SOSs is largely targeted towards a select market i.e. Key Workers / FTBs, largely people who would struggle to raise the required deposit and buy a suitable property because of affordability multiples. Notably, this target market will be largely assisted (hopefully) by the Government through various policies and incentives, because this market is the majority and it helps keep the market fluid. I doubt the Government will start to “bailout” BTL Investors who were doing deals on a “No Money Down” basis. So my logic is this, by bringing FTBs and BTL Investors together via a web portal matching service both parties benefit. The FTB gets their first foot on the property ladder by having a share in a property and an Investor reduces their capital investment, whilst also have a guaranteed “tenant” in the property and therefore a guaranteed “yield of sorts” (I can explain this in more detail if you wish),both parties benefit from capital appreciation in the medium to long term. The Joint Ownership Mortgage means both parties are ‘Jointly and Severally Liable’ for whatever loan is given. We are currently exploring various other legal challenges and performing “What If” analysis, but what we want to know is, would Investors be interested in such a scheme if it were to go live?

 

[Former Member 1]

Personally I wouldn't invest from either side of these schemes...

Having been brought up in council housing. And knowing how dictatorial landlords (both private, corporate and social) can become I wouldn't want to live in or near property where such a scheme operated. What's more, if such schemes became popular they would only help sustain the unfeasibly and unnaturally high property prices (note the use of the word prices and NOT values) which are stalling both the property market and finance markets.

What's more such schemes are socially divisive. At the lower end of the market you would see ghettos created and sustained as resource is diverted to those who can essentially afford to bribe the social landlords into allowing them to jump the que... So-called 'key worker' schemes for instance. There should be no need (for instance) for a nurse or a police officer to have to be entrapped in what is essentially social housing. That's a backwards step for society and de-values the professions and trades which operate at that level. Which, actually is most people!

As I suggested, my view is that these schemes would exist only to try and buoy up a market that is currently sitting at an artificially high level. Such schemes are akin to using fibreglass to patch a rust hole in a car. Sure; they'll cover up the hole and can be made to look good for a while. But the 'repair' has no real strength and the rot carries on underneath. And for that reason not only would I not want to live in a house purchased under such a scheme,nor would I want to invest in any company that operated such schemes. For, like the sub-prime and BTL markets they are doomed to fail in the medium term. And in social terms unethical, not least because of the way property pricing is distorted. And this is the crux of the matter. There is a certain desperation in these schemes. Rather like a child who has blown a giant soap bubble and is desperately blowing at it and wafting it away from things that might burst it the only inevitability is that it WILL burst some time.

The painful truth here is that the correction that needs to happen means cutting out the rot and welding in fresh steel. That means a MASSIVE fall in property prices. Raising finance, by whatever method, in order to pay more that something is actually worth is a fools game.

 

[tichaonampofu]

Matt,

Thank you very much for your feedback and opinion, much appreciated. I am curious though in that (if I understood you correct) your view is, property prices need to drop significantly more to be affordable for the man / woman on the street? My question then is, would that also be sustainable? The principle of supply and demand springs to mind here, where the situation would end up Many People chasing Few Houses (as there is only a limited amount of houses),and as a result property prices will once again increase. As I mentioned in one of my other posts on SBF, economies are cyclical, and as we both know a circle can go on forever pretty much non stop. As Mark Twain said “buy land they are not building it any more” suggests that there are only so many homes that can be built and with the demographics of peoples living arrangements changing vastly it seems more homes will be needed i.e. people getting married later now, people choosing to remain single for longer etc.

Your point on “dictatorial landlords” is very true, which is why the suggested Shared Ownership Scheme would be viewed more as a partnership rather than a Landlord / Tenant scheme, similar to buying shares in a listed company. Of course like all things there would be challenges, but it would help the man / woman on the street get on the property ladder which is most peoples ambition, I presume or am I just naïve? I personally believe “value” is a personal perception and the saying of “someone will pay what they think its worth” holds true.

The principle objective behind schemes such as the one proposed is to help rather than hinder, and whilst no scheme would ever be perfect and without its issues, better a scheme that helps people progress rather than keep people in limbo, I personally feel. The BTL market is only 12 years old, as an “Investment” mechanism it is still in its infancy. If we look at stocks and shares that have been around for several decades, they still have major flaws and still have their cycles. We live in a capitalist society were money makes the world go round. People need to be financially and economically literate. SOSs / JOMs, if administered correctly could help in providing the much needed financial education for people.

 

[Former Member 1]

Matt,

Thank you very much for your feedback and opinion, much appreciated. I am curious though in that (if I understood you correct) your view is, property prices need to drop significantly more to be affordable for the man / woman on the street? My question then is, would that also be sustainable? The principle of supply and demand springs to mind here, where the situation would end up Many People chasing Few Houses (as there is only a limited amount of houses),and as a result property prices will once again increase. As I mentioned in one of my other posts on SBF, economies are cyclical, and as we both know a circle can go on forever pretty much non stop. As Mark Twain said “buy land they are not building it any more” suggests that there are only so many homes that can be built and with the demographics of peoples living arrangements changing vastly it seems more homes will be needed i.e. people getting married later now, people choosing to remain single for longer etc.

Your point on “dictatorial landlords” is very true, which is why the suggested Shared Ownership Scheme would be viewed more as a partnership rather than a Landlord / Tenant scheme, similar to buying shares in a listed company. Of course like all things there would be challenges, but it would help the man / woman on the street get on the property ladder which is most peoples ambition, I presume or am I just naïve? I personally believe “value” is a personal perception and the saying of “someone will pay what they think its worth” holds true.

The principle objective behind schemes such as the one proposed is to help rather than hinder, and whilst no scheme would ever be perfect and without its issues, better a scheme that helps people progress rather than keep people in limbo, I personally feel. The BTL market is only 12 years old, as an “Investment” mechanism it is still in its infancy. If we look at stocks and shares that have been around for several decades, they still have major flaws and still have their cycles. We live in a capitalist society were money makes the world go round. People need to be financially and economically literate. SOSs / JOMs, if administered correctly could help in providing the much needed financial education for people.

Obviously we have to agree to disagree on this one. I take a more cynical view of the mechanism, and that's perhaps bourne more of my personal experiences and consequent attitudes.

Elsewhere (in other posts) I've suggested that the BTL market (in terms of the investment mechanism you speak of) has failed because it has depended on 'the greater fool' principal. It's not the only mechanism to have failed though. And the net result is a gross distortion of the market. As I said previously raising finance, by whatever method, in order to pay more that something is actually worth is a fools game. And the reality of what property is worth relates to how it can be afforded by its end users.

Again, I've more or less posted this elsewhere. But you only create wealth when you make something, or dig something out the ground, or facilitate that happening. Value is a very real and very tangible thing linked closely to worth. Twain's famous observation was of course well-placed. What it doesn't take account of though is that people and therefore ownership are transient things; regularly taken out of circulation and replaced. The value in land is in its usefulness to people. And mechanism that place land beyond the reach of the people are is essence sociopathic.

The current crisis is essentially about land. It's about mechanisms that have sought to filter out the value of land. To place it beyond the practical reach and control of people. And thus, in many ways to entrap and 'enslave' people to those filter mechanisms. The current crisis is essentially due to the fact that the natural 'laws' of supply and demand have been perverted by mechanisms designed primarily to strip value.

One of two things have to happen. Either wages and benefits across the board have to double overnight while property prices are frozen. Or property prices have to collapse. Finding new ways to circumvent the natural functions of supply, demand, price, market position and credit regulation can only prolong the chaos. Which of course is in some people's interests.

It's unfortunate that we're forgetting many of the lessons that can be learned form the Wall St Crash. One key contributor to that was the fact that 'investors' could borrow up to 110% of a share's buy price on the basis that the bid would soon outstrip that debt. And even AFTER the first tremblings mechanisms were STILL found to circumvent the natural laws of supply and demand in an effort to sustain the 'value bubble'.

As you say, economic phenomena are perhaps cyclical. I believe history will give us some idea of what happens when a spoke breaks.

 

[davidc]

I agree with Matt I'm afraid. The global market is going through a price correction at the moment, and will continue to do so for the next few YEARS. For people to consider property as an investment, the bottom has to be reached. For years property prices around the globe have completely outstripped earnings, with all banks trying to get bigger and lending to such a degree that it was foolhardy. I know of many places that are better value now compared to a year ago, but just wait another year or two and see the prices then. I know what you are saying Tichaona, but my main business for the past 4 years WAS property. Not just for myself, but other people. I stopped people a year ago buying for investment, as the global markets were going pear shaped. I will only advise people for relocation. I hope this time people will have a more educated, and carefull approach to property in the next few decades.