House & Home Guide
Although they can seem an appealing way out if you're struggling with your mortgage but don't want to move, sale and rent back schemes aren't always the knight in shining armour they appear to be - we explain why.
Most of would consider the idea of selling our home for £50,000 below its value as lunacy. This is the kind of loss that participants in Sale and Rent-back schemes regularly suffer. These schemes offer the householder a pared down percentage of their homes’ value in return for allowing them to stay on as tenants.
What's the appeal?
On the face of it the principle behind the Sale and Rent-back idea is not totally unsound. For homeowners hard-pressed by mortgage arrears, other secured or unsecured debts and haunted by the spectre of repossession it can seem like an easier solution to their problems than bankruptcy.
Sale and Rent-back schemes offer quick access to a portion of the equity in your home without the lengthy and disrupting process of selling up properly and moving. The finance raised by the transaction can be used to pay off mortgage and other debts. However the dubbing of sale and rent-back as ‘mortgage rescue’ can mislead customers as to the true nature of the commitment they are making.
Sale and Rent-back companies are also able to offer their customers a great deal of discretion. Friends, neighbours and even family need not know that the ownership status of your residence has changed.
Sale and Rent-back companies highlight the fact that they will cover all legal fees associated with the sale – an offer that already debt-burdened customers may be eager to take advantage of. Some companies even offer to help their customers settle their other outstanding debts as part of the service.
What's the problem?
The major problem with most Sale and Rent-back schemes is the way that they are operated. There has been a boom in the number of companies offering Sale and Rent-back schemes – many of which have been accused of being at best unscrupulous and at worst mere cowboy operations preying on the vulnerable.
The industry is currently completely unregulated as the Financial Services Authority regards Sale and Rent-back schemes as property transactions rather than a financial service.
Using the internet as the medium for their business has enabled these companies to cut costs and flourish. The numbers of potential customers accessible via the internet also outstrips those offered by more traditional media such as classifieds.
Without regulation and with a boom in the number of companies offering this sale and rent-back the standard of service varies wildly. Most companies claim to offer their client between 70% and 90% of their homes’ value. They claim that the customer is getting a good deal from this offer as their home would probably only reach about 85% of its value on the open market. This is misleading however as Hometrack, a property information group, has shown that the average sale in England and Wales reaches 95.7% of the asking price.
Of course many participants in Sale and Rent-back schemes are offered sums much lower than the 70-90% of value the companies claim to pay. Caught between the pressures of debt and reluctance to uproot their families some people do accept the deal as the best of a bad lot. The companies marketing sale and rent-back services target those most vulnerable and extend their profit margins by offering the consumer as low a price as they can for the property.
The money offered for the property is also kept to a minimum by the keeping the valuation low. The Sale and Rent-back companies pay for all the legal and administrative costs associated with the sale, including the surveyor’s valuation. Many sale and rent-back participants do not have their own survey done.
After the company has taken ownership of the property at a bargain price they then proceed to charge the former-owner rent at market rates. The majority of companies do not offer any security regarding the period of tenancy or rent levels. Most offer a guaranteed tenancy of 6 to 12 months at the most. The potential worst-case scenario sees a former-owner unwillingly evicted after a short 6 month assured tenancy agreement expires as the company sells on the property.
What’s being done?
The National Association Sale and Rent Back (NASARB) under the chairmanship of John Socha (also Vice-chair of the National Landlords Association NLA) have begun to draw up a code of practice for the industry. NASARB is the only industry-wide group for the sale and rent-back sector.
David Salisbury, chairman of the NLA said, “it is precisely to protect these so-called ‘distressed vendors’ that we have drafted and are about to publish a comprehensive code of practice which will set out what best practice should be in this sector.”
On 14th May the Office of Fair Trading (OFT) announced that it was launching a market survey into the sale and rent-back industry. The survey will consider whether existing protections for consumers are strong enough.
John Fingleton, OFT chief-executive, has stated that, “Sale and rent back schemes might be helpful for some consumers but there are a number of potential concerns including whether consumers in difficult circumstances are making well informed choices. We are therefore prioritising this work to take a good look at whether consumers are adequately informed and protected”.
The OFT expects to have the results of the survey published in September.
