June 28th, 2010 HIP-Consultant.co.uk Posted in Financial Products, Property Market | 3 Comments »

The latest craze to affect the property market is “sell to rent back scheme”. You’ll see lots of adverts on national television (usually during the daytime) and it seems every week there is another leaflet through the door. These schemes have a bad reputation, but is that justified?

In this article we’ll look at the pros and cons of sell to rent back schemes.

How do Sell to Rent Back Schemes Work?

A company will purchase your property and then rent it back to you under an assured shorthold tenancy agreement, which will usually have a term of six months, at a market rent. There will often be an option for you to buy the property, though of course the company would expect to make a profit. It is common for the company that buys the property to pay your legal fees. They often seem to make a big deal of the fact that they will pay the valuation fees, though in reality you would expect this of any purchaser.

What are the Advantages of Sell to Rent Back Schemes?

The basic principle of these schemes is that they allow you, at least initially, to stay in your home. Obviously if you sold on the open market you would expect to have to vacate your property on completion. In addition, these companies will usually be able to complete quite quickly since they will often have finance in place and will not be in a chain.

What are the Risks?

Firstly, the price the sell and rent back company pays for your property will be well below market value, typically no more than 75% but often even less with the more unscrupulous companies. Secondly, the tenancy agreement you will enter into will usually be for just six months. After that, the company may offer a further tenancy or they may evict you in order to sell the property. If a further tenancy is granted this may be at a higher rent. In fact, the initial monthly rent may be artificially low in order to entice you into a deal.

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If the company buys your property with the aid of a mortgage and fails to keep up the repayments, or in any case if it becomes insolvent, it is likely the property will be repossessed and sold, so tat obviously you will have to leave.

You may find that you are unable to claim housing benefit following the sale, for up to 5 years.

The Buy Back Option

Many schemes offer a “buy back option”, which allows you to buy the property back should your financial circumstances improve. Unfortunately, this option is likely to have no practical value since it will often only last for six months. If your financial difficulties are that temporary then you probably shouldn’t be entering into this sort of scheme in the first place.

Can I Sell to Rent Back If I’m in Negative Equity?

No. With the money you receive from the sale you’ll need to pay off all of the debts secured against the property in full, and the company will not pay more than the market value to enable you to do this (in fact they will pay substantially less).

What Should I Check Before Selling to Rent Back?

You should understand before entering into this type of arrangement that you will be selling your and you will no longer be the legal owner. You may have a right to occupy for a short period under a tenancy agreement but beyond that you will have no legal interest in the property. You should also get answers to the following questions:

How long will the initial term of your tenancy agreement be?

How often will the rent be reviewed and what formula will be used?

Is the initial rent a fair market rent and if it is below market rates, is it likely to increase substantially upon expiry of the initial tenancy?

If there is a buy back option, how long will it be valid for and how much will you need to pay?

Will you be able to claim housing benefit following completion (if you are unemployed)?

What percentage of the market value of the property will the company pay? (although the company will obtain a valuation, you should also obtain your own to check they have not undervalued your property)

Conclusion

Sell to rent back schemes are rarely the best way forward for home owners. The option is only available when there is significant equity in the property and if this is the case then it is usually better from a financial standpoint to sell on the open market and rent another property elsewhere. The equity received can be used to pay off other debts or saved to use as a deposit for your next house purchase when your financial circumstances improve.

If you are tempted towards these schemes because you are in mortgage arrears and don’t think you’ll have time to find a buyer on the open market then it can be a useful solution as a large portion of your equity is likely to be swallowed up by arrears and fees if you are repossessed however speak to your lender first. Explain you are trying to sell and try to come to some type of temporary arrangement.

If you do decide to sell and rent back, it is unlikely you will be able to stay in your home forever. At some point it will be the right time for the company to sell and most likely you will then have to move on. The company may sell the property back to you but you will probably end up paying an inflated price and they will take advantage of the sentiment factor.

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