Touted as a way to allow aspiring homeowners without the means to pay a full mortgage or a large deposit to access their dreams faster, the government-backed shared ownership scheme lets you buy 25% to 75% of a new build or resale home whilst paying rent to a housing association on the rest. To buy the remainder of the property, you must undergo a process called “staircasing” for which the housing association will perform a property valuation, and you’ll have to remortgage your home.

The shared ownership scheme is designed for households earning £90,000 a year or less in London, or £80,000 a year or less elsewhere in the country. To participate, you must be a first-time buyer or someone who previously owned a home but is not currently able to afford one. Existing shared owners are also eligible. Notably, shared ownership properties are always leasehold as opposed to freehold, which means that you only have the right to the property for a fixed amount of time, after which it belongs once more to your landlord.

Shared ownership: pros

The main advantage of the shared ownership scheme is essentially what it says on the tin: the scheme makes it easier for certain types of households to achieve full ownership due to smaller deposit requirements (5-10% of the price of your ownership share rather than of the property’s market value). Under shared ownership, if the property value of your home increases, the portion that you own will also increase in value. In this situation, the scheme has an advantage over renting, as you’d have equity in the property.

Other perks of shared ownership include the fact that the rent you pay can be less than the market rate, most often 2.75% of the property value each year. Additionally, since a certain number of shared ownership properties must be present for developers to receive planning permission, these properties are often located in private developments, which, depending upon your preference, might be a big plus. Shared ownership is particularly attractive for those 55 or older, as the Older People’s Shared Ownership (OPSO) scheme allows you to stop paying rent on the remainder once you own 75% of the property.

Shared ownership: cons

If, like me, you’re someone who baulks at the thought of payment plans and would rather purchase outright whenever possible, you might already see some downsides to shared ownership schemes. However, even I was initially drawn in by the scheme’s promises of easy access to the property ladder. While the shared ownership scheme might be a great option for some, it’s important to remove one’s rose-tinted glasses and examine the truth of the matter: there are a variety of reasons that, even if you qualify for the scheme, you may want to forego the opportunity and save up to put down a full deposit the old-fashioned way.

First, there are the limitations. In addition to the limits on where you can live, given that only certain properties qualify, there is the fact that you can only staircase three times. Also, if you decide you’d like to sell your home before you own 100% of the property, the housing association has the right of first refusal aka the right to buy it first or to find a buyer for your home. The leasehold aspect is another disadvantage, especially for those who aspire to one day own a home with no strings attached. Regardless of your aspirations, participating in the scheme means that you essentially remain a tenant until you graduate to full (temporary) ownership, which means that you have to deal with all of the stressors, bureaucracy, and interpersonal strife that often come with renting.

The financial uncertainty of shared ownership is another major drawback. For instance, when you staircase, you will be buying new shares at the current market price for properties in your area, which might well be more than you paid for your original share. You will also have to pay the valuer’s fee on behalf of the homeowner’s association so that they can tell you the cost of your additional share. Furthermore, the necessity of remortgaging will likely mean higher monthly payments on that front. In the long run, this may well mean that your rent and mortgage repayments combined will equate to as much as or more than the repayments on a full mortgage would be. Finally, first-time buyer exemptions to Stamp Duty Land Tax (SDLT or “stamp duty”) do not always apply with shared ownership.

The post Is shared ownership worth it? appeared first on The Motley Fool UK.

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If you’ve seen the hit HBO show Succession, you may remember the plotline wherein (spoilers ahead!) the Roy family receives an offer to take over their company at $140 per share, far above its valuation at that time. This manoeuvre is called a bear hug. In finance and investing, this refers to an unsolicited offer to buy a significant number of a company’s shares at a price much higher than their market value.  

The bear hug acquisition strategy is so named because, from the perspective of the acquiring company, it is a soft and cuddly advance. Imagine the fuzzy arms of a teddy bear enveloping a stuffed rabbit. After all, they’re offering to buy the shares at a premium; what’s not to love? 

Pros and cons of bear hugs in finance and investing

For the target company, the bear hug presents a unique opportunity to offer shareholders an accelerated payout at a desirable price. Moreover, additional incentives may be involved that would not come with a regular sale. If the target company is struggling, this offer might be particularly attractive. 

However, in many cases, the target company may view the bear hug as akin to a hostile takeover. From this perspective, it feels more like an attack. Like hikers cornered by an angry mother bear, the target company’s board of directors may be forced into a sale against their wishes. 

For the acquiring company, the advantages of a bear hug include eliminating competition and avoiding confrontation with a target company that may be hostile to their takeover attempt by making an offer the target company can’t refuse. However, it is a very expensive acquisition strategy.

Why would a company pass on a bear hug?

The fact that they are unsolicited raises a number of red flags. At the time of the bear hug, the target company might not be planning to sell in the immediate future and likely wants to do so on their own terms. The company’s management may want to offer employees a formal stake in the company, sell shares to individuals outside the company, or attract angel investors, but relinquishing control entirely is another story altogether.

What happens if the target company rejects the bear hug?

In the case of rejection, the acquirer is likely to approach the shareholders directly with an offer to purchase their shares above the market rate. This possibility makes it very difficult for the target company to evade a takeover.

Furthermore, if a company were to pass on the bear hug without a good reason, they would risk incurring a lawsuit from their shareholders. Since the company is legally obligated to act in the shareholders’ best interests, having a fiduciary duty to maximise shareholder value, the shareholders have a right to demand that they do so. 

This is why, at the beginning of the second season of Succession, patriarch Logan Roy had to move forward in naming a successor. With the bear hug offer on the table, he had to provide Waystar Royco’s investors with a credible reason that he wasn’t selling. In other words, he had to prove that his plan was more financially beneficial to the shareholders than selling would have been. 

Are bear hugs common?

Not only do bear hugs make for great television, but they are also increasingly common in the real world. While they remain the purview of a certain class of company, within the world of mergers and acquisitions, bear hugs now account for nearly half of unsolicited offers to publicly traded companies! 

What are some examples of bear hugs in recent memory?

Perhaps the most famous one in recent history was Microsoft’s acquisition of Yahoo in 2008. After giving the board a 24-hour advance warning, Microsoft made public their bid of $44.6 billion, which represented a 63% premium on the shares’ valuation.

Facebook has also been known for giving bear hugs. For instance, they famously overtook Instagram in 2012, a $1 billion purchase that resulted in a gradual ousting of Instagram’s founders over the course of the ensuing years. Their acquisition of WhatsApp in 2014 constituted another successful bear hug.

The post What is a bear hug? appeared first on The Motley Fool UK.

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