Adeveloper’s guide to Intermediate Sale housing

This factsheet sets out how developers can deliver and sell discounted sale homes on their development sites. It covers:

  • An introduction to the Council’s requirements for affordable housing for sale;
  • An overview of housing market conditions;
  • The types of housing, and how they work;
  • Eligibility requirements;
  • Agreeing the mix and type of homes to be provided;
  • The sales process; and,
  • The role of Help to Buy South West.

Introduction

What does the Council seek from private developers? - The Cornwall Local Plan and emerging Affordable Housing SPD requires 70% of new affordable housing to be provided as affordable rented homes, with the remaining30% to be provided as intermediate housing for sale. This applies to new homes provided on sites permitted under both Policy 8 and Policy 9 of the Plan.

Affordable home ownership options - The Council supports a range of affordable homeownership options to meet the intermediate housing obligation. The main products currently delivered are:

  • Discounted sale homes (by developers);
  • Discounted sale homes offered on a shared equity basis (by developers);
  • Shared ownership homes (by Registered Providers); and,
  • Shared equity homes (by Registered Providers).

Further guidance on the inclusion of ‘Starter Homes’ will be provided once all details on this product have been confirmed by the Government.

Affordable homeownership options by Registered Providers (RPs) are described in the accompanying ‘Guide to Affordable Housing Tenures and Products’. Should a developer wish to work with an RP to deliver the rented and affordable homeownership requirementsofa site, the Council’s Affordable Housing Team will be able to facilitate discussions with the RPs currently working and developing in Cornwall.

The lending market for affordable home ownership - Since the market crash of 2008, mortgage providers have become more cautious about their exposure to lending. The most noticeable consequence of this is a requirement for significantly larger deposits, which now typically range from 10% to 20%.

In particular, lenders are wary of s106 provisions that restrict the ability of purchasers to sell on their homes. The Council has made changes to its template s106 terms to meet their current concerns andmake sure s106 agreements are fit for lending. This includes:

Removing the link between sale prices and local earnings - instead sales prices are calculated as a percentage of open market value;

Shortening the local connection ‘cascade’ periods for rural schemes. This allows purchasers with a County connection to be considered after just 56 days (8 weeks) of advertising. On resales, owners can sell to any purchaser (but still at the restricted price) after 90 days (3 months) of advertising; and,

Shortening the period before which a lender that has taken possession of a property can sell the affordable home on the open market.

Despite these changes, there is still limited interest by lenders to provide mortgage finance to purchasers, particularly in rural areas. Halifax and Nationwide are the main lenders for discounted sale homes in Cornwall at present. There is a larger pool of lenders for shared ownership housing as this is a widely recognised and supported tenure, with relatively less risk. Purchasers can also buy smaller shares which require smaller deposits. However, the Council appreciatesthat providing a range of affordable homeownership tenures can be beneficial, with some purchasers preferringto own the freehold of their home, rather than entering into a shared ownership lease with an RP. Developers are therefore encouraged to discuss provision of such affordable housing with the Affordable Housing Team prior to submitting an application, to establish the best options for theirsite. This will take into account the latest news from the lender market and the existing tenures in the town/parish where thesite is located.

Providing affordable homes for sale

Discounted sale - If a developer wishes to sell theaffordable homes direct to customers, providing them as discounted sale homes(but bearing in mind the above finance issues) may be the most appropriate option.

How does the discounted sale model it work? - The main principles are:

  • Homes mustto be sold at a price no greater than an agreed percentage of open market value, both on initial sale and on all subsequent sales. For example, if a purchaser pays £90,000 for a newdiscounted sale home worth £150,000 on the open market, this is equal to a discount of 40% (i.e. it is sold at 60% of its open market value). If the value of the property has increased to £160,000 by the time the owner looks to move on, the 40% discount would be passed on, resulting in a purchase price of £96,000 for the next buyer. However, as with an open market home, purchasers may lose out if the value of their home falls and they end up in ‘negative equity’.
  • The developer sells the home on a freehold or, in the case of apartments, a long-leasehold basis. Theobligation (and that of subsequent owners) to sell the home at the discounted price to qualifying persons will beset out in the s106 planning agreement, which must be completed before planning permission is issued.

Shared equity arrangements - If a developeris authorised by the Financial Conduct Authority, they may be able to offer housingon a shared equity basis. This can be beneficial as purchasers then only need a 5% deposit. In these cases, the developer provides an equity loan to the value of the difference between the open market value and the discounted sale price. This sits as a ‘second charge’ on the property behind the purchaser’s mortgage. Interest should not normally be charged on the equity loan amount; if it is however, the discounted sale price must be reduced by the sum of the capitalised interest accordingly.

The following is a worked example of the equity loan model:

Open market value: £150,000

Discounted sale price (based on 40% discount): £90,000

Equity loan: £60,000

Deposit: £7,500

Mortgage: £82,500

Purchasers have the right to buy-out theirequity loan, through a ‘staircasing’ payment(s).If the purchaser buys out the equity loan in full, the property becomes an open market home. However, to accord with national planning policy, staircasing receipts paid by the home owner to the developer as second mortgagee must be ‘recycled’ into new affordable housing. Where shared equity arrangements are proposed by the developer the s106 agreement will require the staircasing receipts to be paid to the Council for reinvestment in other affordable housing provision. Where an owner does not staircase-out, they sell the property to the next purchaserat the relevant discounted price to a qualifying person, with the equity loan still in place.

Eligibility and requirements

Who can buy the homes?

  • Affordablehomes mustto be sold to households thathave a local connection tothe town or parish in which the property is located. There are standard ‘cascade’ provisions in the s106 agreement which allow the homes to be sold to households with a connection to the adjoining parishes (and ultimately the County) should primary parish or town applicants not be identified within a certain time frame.
  • Purchasers also need to demonstrate that they arein housing need. This is a broad definition, but typically includes: first time buyers; people living at home with relatives/friends; people in short-term private rented accommodation; people living in accommodation thatis in disrepair or otherwise not suitable for their needs; and, people coming out of a relationship breakdown. It can also include existing home owners if there is strong enough evidence of the unsuitability of their existing homes. In all cases households must be able to demonstrate that they cannot afford to purchase a suitable home on the open market.

What standards will be required? - The Council expects affordable housing of all tenures to be built to a high standard of design and amenity. If a scheme includes both open market and affordable housing, it should be provided ‘tenure blind’ such that the tenures cannot be readily identified bythe design, quality and location of the homes within the site. Discounted sale homes should be of at least similar size and quality to the equivalent open market units, and meet the new Nationally Described Space Standards, as outlined in the Local Plan. With the exception of sales incentives and market upgrades,discounted sale homesshould also be equipped to the same standard as the corresponding open market units (e.g.,have the same number of kitchen worktops and cupboards; same number of electrical sockets; have similar floor coverings and garden treatmentssuch as turf/seeded grass).

Agreeing a proposal with the Council

There are several stages to delivering discounted sale homes.

  1. Agreeing a property mix - The mix of property types and sizes should be agreed with the Affordable Housing Team at the planning application stage. This will depend on:

Local demand;

Existing affordable stock in the area;

Other developments in the area which have recently been granted planning consent or are under construction; and,

Recent sales experience from similar schemes in the area

  1. Agreeing the discount percentage - The Council has adopted ‘average’ discount percentages within its emerging Affordable Housing SPD, which are calculateddepending on the value of homes in the housing market area (Zone) where the site is located. Details of the settlements included within each of the Zones are specified in the Affordable Housing SPD, and can be found overleaf.

Zone area (ranging from 1 – higher value area to 5 – lower value area) / Average discount from open market value
Zone 1 / 65%
Zone 2 / 55%
Zone 3 / 45%
Zone 4 / 40%
Zone 5 / 30%

These discounts have been calculated based on average market values across different property types and local average purchasing power. They provide a guideonly to developers on the expected discounts in broad market areas. To take account of site/property specific values a ‘sense check’ is applied for each individual development. At the planning application stage developers must submit RICS (or equivalent)open market valuations of theaffordable homes. A deeper discount may be required to ensure that the discounted sale prices are within the purchasing power of local people as set out in the Affordable Housing SPD.

  1. Agreeing a scheme - In many cases the detail of an affordable housing scheme will be contained in the s106 agreement and planning consent, e.g. location of the units; the property type and size; and, the discount percentage. Before commencing developmentdevelopers will need to agree any remaining elements through submission of an Affordable Housing Scheme for the Council’s approval. Importantly for discounted sale homes the Council will need to understand:

Service charges – it is important that the services and facilities provided are of a nature and to a standard reasonably required in connection with the Affordable Dwelling such as: maintaining, repairing and keeping secure the relevant Affordable Dwelling and its common parts; the cleaning and lighting of common parts; and, the maintenance of any communal gardens or landscaping areas that directly benefit the Affordable Dwelling.

Equipping of units – with the exception of sales incentives and market upgrades, the Council will require a commitment to providesimilarly equipped homes to the corresponding open market units

Selling affordable homes

Ready to sell? - Developers can start to sell theiraffordable homes at any time once planning consent is issued. However it should be remembered that mortgage offers on new build schemes are generally time-limited to 9-12 months. To avoid purchasers having to reapply for a mortgage (and hence the potential for a sale to fall through)it is advised thatsales are timed in line with these lender requirements.

Developers must notify the Council as soon as they are ready to sell their affordable homes. The simplest and quickest way to do this is to contactthe Affordable Housing Team by email: providing the relevant details about the site.

Agreeing an advertising scheme - Advertising is key to ensuring that as many local purchasers as possible are aware of the newaffordable homes. At the same time as notifying the Affordable Housing Team that the properties are available for sale, developers must submit an advertising scheme, setting out how they propose to reach this local housing market.

An advertising scheme will need to be tailored depending on individual properties and locations. However, in general, the following methods should be used:

  • Advertising board on at thedevelopment site
  • An advertisement on the Help to Buy South West website
  • Notification to parish councils (this will be undertaken automatically by Help to Buy South West)
  • Placing an advert with local estate agents
  • Placing an advert with online property websites(to include an advertisement on the main agents, e.g. Zoopla or Rightmove)
  • Social media including Twitter and Facebook
  • Community websites
  • Community/parish paper magazines
  • Village shops/post offices
  • Local newspapers.

Submitting a sales notice and agreeing the sale price - Once the advertising scheme has been agreed, a formal sales notice will be required. The form of the sales notice is annexed to the s106 agreement. It includes details of the properties beingreleasedfor sale including:

  • Scheme name
  • Plot numbers/postal address
  • Property types and sizes including parking / garages /garden
  • Heating type and other services/ facilities
  • Service charges/management fees
  • Selling agent contact details

It will also include the proposed sale price. This must be no greater than the percentage of open market value specified in the s106 agreement. A formal open market valuation of the affordable homes, undertaken by a RICS (or equivalent)valuer,will be required to support this and must be submitted at the same time as the sales notice.

Advertising the homes - Once the advertising proposal and sales price have been agreed, and the sales noticehas been received,advertising of the properties can begin. The Affordable Housing Team will agree with the developer a date,which will mark the formal start of advertising. This will be the date from which the last element of the advertising scheme is in place. This date is important as it represents the trigger for whenhouseholds with a local connection to the surrounding parishes or County may be considered eligible.

The role of Help to Buy South West (HTB SW)

Who are Help to Buy South West? - Help to Buy South West (HTB SW) are the Government appointed Help to Buy agent delivering a one stop shop for Government-backed affordable home ownership in the South West. HTB SW have entered into a contract with the Council to deliver a comprehensive service for households seeking all types of affordable home ownership in Cornwall, including discounted sale homes delivered by private developers.

HTB SW will advertise homes on their website and ensure that all potential purchasers meet the eligibility criteria (housing need and local connection) set out in thes106 agreement. HTB SW have a dedicated team dealing with the sales of discounted homes in Cornwall and provide a fast and efficient service to developers and purchasers. This is currently a free service to private developers and purchasers.

Helping to advertise your homes - To begin this process, developers must submit a ‘Request to Advertise’ form and submit digital images or layout/street scene plans. Once HTB SW have placed theadvert they will:

  • inform the relevant parish / town councils and send them a link to the website advert
  • send a mailshot to all applicants on their register who want to live in the relevant town/village and who have indicated they have a local connection with the town/parish.

To see how properties are advertised developers can visit the HTB SW website (details below) and performa property search. Tick ‘other’ to search for discounted sale homes.

Checking the eligibility of potential purchasers - Purchasers must be in housing need and have the relevant local connection to the town/parish where the properties are located. HTB SW ensure that purchasers meetthe eligibility criteria in the s106 agreement and hence ensure that there are no last minute hold-ups in the sale process. The process is outlined below:

  1. Potentialpurchasers (including any that have approached the developer directly) must register with HTB SW, if not already registered. Purchasers can do this on line at the HTB SW website (details below). Purchasers will receive a letter confirming that they have been registered. This does not constitute approval for a specificdevelopment. Potential purchasers will need to provide further evidence as set out in 3 below.
  2. Potential purchasers will need to tell HTB SW that they wish to be considered for the relevant property(ies) on adevelopment.
  3. HTB SW will collect evidence from the purchaser that they meet the local connection and housing need criteria specified in the s106 agreement. E.g. a purchaser can demonstratethat they meet the current residency criteria by submitting relevant documentation showing their address for each of the required number of years. They could alsoobtain confirmation of residency from the Council’s electoral office.
  4. Once HTB SW have received and checked the evidence documentation they will issue the purchaser and their solicitor with a letter of approval. To ensure a smooth sales transaction HTB SW will ensure that the purchaser’s lender is aware that the property is subject to a s106 agreement.

Prioritising purchasers-Where there are more eligible purchasers than homes available on adevelopment, HTB SW will exercise the Council’s nomination rights in the s106 agreement and prioritise purchasers according the Council’s adopted Affordable Home Ownership policy. Details of this can be found on the Council’s website. In these cases a list of nominees for sale will be provided, in priority order. Developers must then consider the purchasersin the priority order stated and only go to the next on the list if the first priority purchaser is unable to proceed to exchange of contracts.