Mutual Home Ownership and its suitability for small co-operatives

Lilac housing coop

This post is about a new type of housing co-op, a Mutual Home Ownership Society (MHOS) only one example of which currently exists in the UK. That co-op is LILAC and I interviewed a member to find out more about it. I was particularly interested in whether it was suitable for small house-share co-ops, and whether it would make it easier for members of a co-op to invest in the co-op.

If you want to skip the details, here is a non-executive summary:

Pros: All the usual benefits of co-ops, members can acquire equity but cannot speculate on house price rises, early members do not support later residents to the same degree as a rental co-op.

Cons: The fewer members you have, the greater the risk of not being able to move equity around in a convenient way, and the greater the risk of a high percentage of members opting for or falling into low-income living.

Here are the basics of the model:

In an HMOS the properties are owned by a co-op but unlike in a normal housing co-op most of the tenant’s ‘rent’ money goes to building up equity that they can then withdraw when they leave. If the whole co-op were worth £1 million, with ten properties of equal value, the equity allocated to your property might be £100,000. You might buy in with, say, 10% of that, then you pay in until you reach your equity ceiling. The rent at LILAC is set at 35% of your net income until you have acquired all your equity shares, then it falls to 10% of your income. There is a minimum income level, though you could earn less and pay over 35% if you wanted. The value of individual equity is index-linked, not to the housing market but to income. You can move out if the co-op can fund the buy-back of your equity shares, or if other residents can take them on, or if you can find a replacement member who can buy you out (or some combination of these).

Some further information from LILAC:

The number of shares owned by each member depends on what they can afford and the cost of their home. The more they earn the more equity shares they can afford to finance. If their income falls, rather than lose their home, they can sell equity shares if there is a willing buyer or, in specified circumstances such as loss of employment or disability, convert to a standard rental tenancy.

If affordable payments (set at 35% of net income) is above the amount required to finance equity shares of the value of the build cost + 10%, the remainder will go into the contingency and future fund.

If a member moves out and sell their shares before they have lived in the MHOS for three years they will only be able to sell them at their original value. For members who leave after three years the value of the equity shares will principally be driven by references to increases (or decreases) in average incomes for the area. They will get the value of their original shares plus interest at half the rate of increase (or decrease) in average incomes for the area.

In case it isn’t obvious, there is an interesting advantage to an MHOS over a normal co-op. If you move out you have some equity to take with you. In a normal co-op if a job or life circumstances forces you to move out you are cast out onto the market to deal with it as you can. Given that the housing and rental market seems set to be insane for the foreseeable future this is not too appealing. In addition a rental co-op disadvantages those who start the co-op (having to spend more of their income on rent) and advantages those who join later, who will have lower rents without having to make much effort. It’s a bit of an act of altruism to set up a co-op you might leave – an MHOS doesn’t penalise those who start the co-op, or not so much.

I am interested in setting up a smaller co-op so I talked to Paul from LILAC both to find out more about the MHOS model and to find out how useful it would be in a shared-house type of housing co-operative. What follows are notes from the conversation, suitable for those with advanced-level curiosity about the model:

• About 10% of the monthly payment members make is going to maintenance and 90% to buy up equity shares. LILAC is a new-build so maintenance costs could be higher in older buildings.

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