Rogue Traders in Sale and Rent Back

Sale and rent back, also known as mortgage rescue, leaseback, and repossession prevention is not suitable for all people but it can offer a lifeline and the best solution for those in financial difficulty. Owner occupiers who are struggling to pay their mortgage and other debts may find sale and rent back as the best solution to get back on top of their finances and avoid eviction.

However, unfortunately some isolated instances where ‘cowboy’ operators have ripped off property owners have given the industry a bad name. Selling your home is a massive emotional undertaking and the threat of repossession can put a lot of stress on a home owner. The vast majority of sale and rent back operators try and reduce this pressure and offer the best solution for the owner even if it means not selling to them.

However, people in financial difficulty can also be exploited by those unscrupulous operators who see the opportunity to make a quick buck. There are a small number of cases where the transactions have run into difficulties which are either intentionally or unintentionally caused by the sale and rent back company. Some have gone bankrupt after buying and renting back several properties as they were ill prepared for the financial responsibility of owning the property. The result is that they lose ownership of their properties and their tenants may have to move if the new owners want to get new tenants in. Not an intentional outcome, but very stressful to the tenants who thought they could rent their house for as long as they want.

The other type of bad practice is generally lack of transparency through ignorance or telling outright lies. Some operators fail to explain the detail of the transaction so they are understood by the vendor. Fees many be added on to the transaction and a discount larger than that agreed may be taken of the market value of the property. On rare occasions, future rents have not been agreed before the transaction or the length of tenancy made clear.

Whilst these instances may be isolated, they are obviously terrible for those involved. They also do reputation of the industry a great deal of harm. So what can be done? Most people dealing with people who use sale and rent services, including charities and organisations representing tenants, acknowledge that rent back solutions can offer a viable alternative to repossession for some people in some circumstances.

Vendors need to know that the majority of operators are ethical and professional. However, they also need to make sure they look at the detail of the deal and seek independent advice if they are not sure. They should also check if the sale and rent back company is adhering to any code of practices as the one recently put together by the National Landlords Association.

The Growth of Sale and Rent Back

Sale and rent back, also known as mortgage rescue, leaseback, and repossession prevention is a small but expanding market. Its profile has grown rapidly over the last year due to rising repossessions (which increased demand for it) and the FSA study into whether it needs to be regulated. There are slight variations on what each sale and rent back company can provide but essentially their services are pretty similar.

How easy is it to rent back my home?

It is is pretty simple: a owner occupier sells their property but remains living there as a tenant. The company or individual who buys the property becomes their landlord on completion of the sale. Normally, the property is bought at a price below its market value (typically 15-20% although this discount has risen recently as prices have continued to fall). The future rent is also agreed before the sale and is typically close to the market rent of the property (i.e. the rent that could be achieved if rented on the open market).

From the sellers point of view they have several benefits from such an arrangement. Firstly, they normally chose this option as they are in some sort of financial difficulty so this option allows them to release equity in their house, pay off their debts and remain in their home. They avoid decreasing their standard of living by being forced to move into inferior housing and do not suffer the potential embarrassment of having to move home. The speed of the purchase means that those facing eviction can avoid repossession. Those with families can keep their kids in the same school and the parents do not have to change jobs. In all likelihood the money they lost selling their property at a discount would have been lost anyway if they had been repossessed and their property was sold at auction or on the open market by the mortgage company.

For the purchasers point of view they manage to acquire a discounted property with a tenant already living there. They do not have to spend money trying to get a new tenant after they buy. Many rent back tenants also tend to stay a long time so this further reduces void periods for the landlord. The tenant is also likely to treat as their own home and look after it.

Of course, the fact that properties are sold at a discount mean it is not the best option for all owner occupiers. However, they do represent a viable option for those who want to release the equity in their homes to overcome financial difficulties and repossession.

2 Situations When Sale and Rent Back Is the Wrong Choice

This article assumes you understand the sale and rent back process and will discuss 2 scenarios where selling and renting back your property is most likely not the best solution. If you are in these situations it is advisable you look at the alternatives which are suggested.

If you can reduce your monthly outgoings

Some people may find that they can reduce their monthly outgoings by consolidating their debts to a rate that is more affordable. This does not mean taking out more debts to pay off existing ones but getting all existing debts onto the best interest rate possible. If financial difficulties are causing you to consider sale and rent back it is often worth while looking at loan consolidation as a possible alternative.

This may allow you to keep ownership of your house but it does not guarantee that your future outgoings would be less than if you sold and rented back. If you are not sure what to do, it may be worth getting a rental quote from a rent back specialist (the good ones will give this free) and compare it to your potential outgoings if you consolidate your loan. This way you will be able to make a more informed decision.

When you want to get full market value for your property

If you want to get the best possible price for your property then selling and renting back is most probably not for you. Sale and rent back companies are not able to offer you 100% of the market value of your property due to the costs they incur buying it and the profit margin they need. Those companies that say they will offer 100% of the market value and rent your property back to you are most likely not telling the truth. They are trying to get their foot in the door and then will offer less. If they did offer 100% of the market value they could not survive as a business as they would incur a loss for every property they bought. Reputable sale and rent back companies normally offer up to 80% of the properties value.

You need to make sure you sell to a company that (1) is honest and upfront with you and (2) has a sound business model because if they go out of business there are going to be complications with you staying in your house.

If you want the best price possible for your property and do not need to stay in it then selling via an estate agent is the best solution. If you want the best price for your property, do not want to rent back and need a quick sale then a cash buyer is often the best solution. Many rent back companies can offer this ‘quick cash sale’ service (including us).

The bottom line is: sale and rent back is not the solution for those wanting full market value for their property and beware of companies that say they can offer this.

2 Reasons Why Selling and Renting Back May Not Work

It is often difficult to get properties of a high value to work with sale and rent back. A high value in this case is difficult to quantify due to the differences in property prices nationwide but anything over about ¨£250K outside of London may not work as a rent back.

This is due to the fact that the monthly rent for higher valued properties is often low compared to the properties price. This means that the sale and rent back company would not be able to receive enough rent to cover the financing required to buy such an expensive house. Therefore, the only option for the rent back company would be to buy the property at a lower price so that the rent covered the cost in buying it.

This is very mush dependant on the area you live in so please contact the rent back company to discuss. Once again, you should never pay them anything upfront so any advice they give is free and without obligation. It is therefore always worth asking questions.

If you plan to use Housing Benefit to pay your rent

If you sell your property and receive a cash lump sum as a result of this sale, any housing benefit you were previously entitled to may be reduced or taken away altogether. As far as the council are concerned, they will not keep paying the rent if that person has a lot of money in the bank. Different councils have different rules on this so you need to check before you do the deal if you plan to claim housing benefit after you sell and rent back. For example, some councils have a higher threshold than others (i.e. some will reduce housing benefit for any savings over ¨£8,000, some will be higher and some lower).

Some councils also stipulate that previous house owners are not entitled to claim Housing Benefit for a property they have owned in the past 5 years. This could leave you unable to pay your rent and in danger of being asked to vacate your property. Councils will often waive this rule if you are in danger of repossession and can prove you had no choice but to sell your home. However, once again it is important you check this before entering any agreement. A good sale and rent back specialist will be able to help you in this as it is in their interest to know their future tenant will be able to pay the rent.

10 Questions You Must Ask A Sale And Rent Back Company

If you are thinking I want to ‘sell my home and rent back‘ you need to find out the following:

1. How long can I stay?
It is extremely important that you receive confirmation about how long you can stay. If you have no set timeframe and want to stay for the long term it is important that you receive confirmation in writing to this effect. This needs to be in both a letter of intent and the tenancy agreement must include a right to renew clause.

2. Will the rent rise and if so, when and by how much?
It is important you get the answer to this question in writing. It is common for landlords to raise rents every year or two but some sale and rent back companies may have longer fixed rent periods in exchange for a lower sale price. Matching annual rent rises with inflation or a small percentage (i.e 4 to 5%) is common. Be wary of a company that says it will never raise rents as they are likely lying (unless they have bought your property for a very small percentage of its market value).

3. Will there be a tenancy agreement?
If you are not offered one consider walking away. Having an Assured Shorthold Tenancy Agreement signed by both parties is very important to protect your rights as a tenant. Without this you may be classified as a squatter and forced to leave your property after the sale.

4. Do you intend to sell the property in the future?
If you are hoping to stay for the long term, obviously you want this answer to be no or not until you decide to leave. A good sale and rent back company will intend to rent out the property for the long term (even if you decide to leave and they have to get someone else in). They will have a buy and hold strategy and should not rely on selling their rent back properties to make their money.

5. Who will be responsible for repairs?
This should be clearly stated in the tenancy agreement but as a general rule the landlord (sale and rent back company) is responsible for all maintenance issues (i.e. broken boiler, leaking roof). This should all be made clear in the tenancy agreement.

6. Can I redecorate?
Most sale and rent back companies (and landlords in general) are okay with their tenants redecorating as long as they do not devalue the property in any way. It is in their interests for their tenants to feel like it is there home. You will need to get permission before you do any work.

7. Can I chose my own solicitor?
The sale and rent back company should allow you to chose your own solicitor and most of the good ones will pay the first £500 of their fees. However, they will normally suggest that you chose one that they recommend. This is because they know they will do the job properly and quickly. One of the main reasons property purchases take so long is because of delays with solicitors so if you do chose your own the sale and rent back company are unlikely to guarantee the completion date.

8. Will any fees be payable upfront?
A good sale and rent back company will not charge you any fees up front. They should pay for any valuations and surveys necessary. If you are asked for any money up front refuse and use another firm. Some less reputable companies ask for a valuation fee and then make a ridiculously low offer.

9. Does the company have references?
A good reputable sale and rent back company should be able to provide you with testimonials from current clients.

10. How long will the process take?
A good company will be able to complete the sale in a timeframe that suits you. If you are not in a repossession situation they should have the ability and experience to complete quickly and stop the eviction (in 1 week or less if necessary). Normally the sale will take about 4 weeks but can be delayed if necessary (i.e. until the redemption penalty on the current mortgage expires).

Sell House & Rent Back

8 Steps To Selling and Renting Back Your Home

You contact a sale and rent back company via phone, email or online form and give them information about your property and situation.
They research your property based in the information given which may or may not include a visit to your property. If a visit is required then this will be free and arranged at a time to suit you.

They contact you to make you a formal sell and rent back offer. This offer is normally made within a day or so of researching /visiting your property. This offer should include a purchase price as well as a monthly rental figure and should be confirmed by the company in writing.

You decide to accept or not accept the offer. If you accept the offer the Sale and Rent Back Company will ask you to sign an agreement confirming that you will go ahead with the offer they have made you. They should also provide you with any documentation you would like to see (i.e. the tenancy agreement detailing the rental figure, how much rent will increase each year, how long the tenancy is for). See a detailed list of the things you need to check at the end of this report.

The Sale and Rent Back company will instruct their solicitors and the ones acting for you (chosen by them or by you if you request a particular company). You will then receive a Sellers Information Pack from the solicitors acting for you.

A building surveyor will normally visit your home to check the condition of the property a few days after this. They will make sure they come at a convenient time for you.

Solicitors send you a tenancy agreement and other legal documentation to sign within next 3 to 4 weeks (quicker if a quick sale is needed such as in a repossession case).

When all documentation is signed and completed by the solicitors the sale will complete and your solicitor will pay off all your secured debts and release the remaining balance to your bank account. You will become a tenant of the property on that day and the sale and rent back company will become your landlord.

Note that you should not be asked to pay for any valuations or fees during this process. If they are requested it is suggested you look for another firm – the majority of good firms will not charge for valuations. They should also pay the first £500 of your legal fees which in the vast majority of cases will be enough to cover the total costs. Remember, that the solicitor you choose will be acting for you impartially (even though the sale and rent back company may pay for them). Therefore, get them to check anything you do not understand.

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