The prevalence of sale and rent back schemes has grown considerably in the last few years with a number of companies now offering troubled borrowers – crippled by mortgage arrears and bad debts – the chance to start afresh by selling their homes to providers.
Many are larger organisations that offer borrowers rental guarantees, giving them a degree of protection. However, this is not a sector without controversy, and accusations have been levelled at smaller landlords specialising in the buy-to-let sector who merely look for property at a knock-down price.
The basics
So, how do sale and rent back schemes work in practice? The companies involved in these types of schemes purchase peoples’ homes for less than their market value – typically 70-80 per cent.
They will usually pay all fees and costs and then rent the property back to the original owners at a rental value in line with the current market at the time or at less than their mortgage payments.
The borrower is then able to pay off their existing mortgage along with any other outstanding debts they may have, including their loans and credit cards.
But why would a customer choose to sell their home at less than market value?
Borrowers choosing sale and rent back schemes are usually facing repossession by their mortgage lender and many also have other debts that they need to pay back as soon as possible.
Borrowers are also attracted by the fact that many providers can complete quickly – some in less than a week – and most will pay any allocated fees and charges, including any legal fees and redemption costs.
In order to sell the schemes to sceptical home owners, many of the companies now offering sale and rent back schemes claim that one of the advantages is that, to the outside world, the borrower will not look like they have had to sell their home or face the stigma of repossession.
Companies also say that this is the best option for many borrowers facing repossession as they will not have to worry about their children having to change schools or suffer any other disruption that moving house can bring.
There is little doubt that in the current situation there are cases where a sale and rent-back scheme can be a viable option for a troubled borrower.
However, this does not eradicate the situation that whilst the product remains non-regulated there remains the risk of unscrupulous providers operating freely.
There are many horror stories of scheme providers buying properties well below market value, taking large fees from their clients and then passing the properties on to landlords known to the provider. The properties are then remortgaged, sometimes on a back-to-back basis.
A disaster waiting to happen?
The Citizens Advice Bureau has called for regulation of the sector saying it is a ‘disaster waiting to happen’. It said that some companies are paying less than 60 per cent of a property’s value with no guarantee that the borrowers’ will be able to remain in their property beyond a standard six to 12-month rental period.
This is where the unscrupulous operators in the sector are letting the market down. It is certainly true that there are many providers offering sale and rent back schemes without rental guarantees, but there also providers who do offer this as part and parcel of their scheme.
Now is the time to clean up the market and ensure that all parties involved start to act in the best interests of borrowers.
There was some movement on the issue, back in October 2007, when the Council of Mortgage Lenders, homeless charity Shelter and the Citizens Advice Bureau, urged the government’s Economic Secretary, Kitty Usher, to bring sale and rent-back schemes under the control of the Financial Services Authority (FSA).
Previously, the FSA has said it does not consider that the schemes should fall under its remit as in its eyes the transaction involved is a property – not a financial service.
Attempting to tackle the issues
The letter, sent in October, stated that vulnerable borrowers on the schemes were at risk of losing their homes, increasingly saw equity disappear by selling at a discounted rate and often failed to receive an independent valuation carried out by the firm.
It argued that the sector should be regulated by the FSA because the products offered are similar in nature to regulated equity release home reversion schemes, which involve the purchase of equity in a borrower’s property followed by a long-term financial arrangement.
The letter tackled many of the issues that have blighted the sale and rent back sector but, so far, there has been little action from the government and the unscrupulous providers are still being allowed to target vulnerable borrowers.
It is the more reputable providers that are suffering as they are being tarnished with the same brush.
Ironically, industry figures from the once much-criticised equity release market are now taking a stand against sale and rent back schemes, saying that pensioners, for example, would be much better off going to a regulated equity release provider.
However, although Safe Home Income Plans approved equity release plans come with a no negative equity guarantee, there are many plans that can end up being very costly in the long run. In comparison, a reputable sale and rent back scheme allows the borrower to sell their property and pay off their mortgage and debts, leaving them to start afresh.
Providers also point out, that in many cases, especially when house prices are slowing, many borrowers selling on the open market accept offers that are less than the property’s market value – in some cases 75 per cent.
A typical sale and rent back scheme can offer the borrower from 70-90 per cent of a property’s value, based on a valuation by a qualified surveyor.
Again, this is where unscrupulous operators tarnish those in the sector that are acting professionally, by not carrying out a survey by an independent valuer, and reputably undervaluing properties.
Of course, anyone considering a sale and rent back scheme should consider their options carefully and realise that there are other routes open to them.
However, in many cases, if done through a reputable company, offering a rental guarantee and an independent assessment of the property’s market value, a sale and rent back scheme can be very worthwhile.
However, at present, the sector is continuing to undergo a high level of criticism simply because providers are continuing to operate unchecked.
Ousting rogue traders
Regulating the market should help to clean it up and oust any rogue traders – much like the equity release market which has enjoyed a vastly improved image, of late.
There has not been a great deal of progress since October’s letter to the government. Now, to ensure the issue moves forward at pace, pressure needs to be put on the government to ensure that regulation of the sector is considered in the future. In the meantime, a code of conduct could help its beleaguered image.
It would be a real shame if the actions of unscrupulous providers continue to tarnish those reputable providers that, in many cases, offer a viable option to troubled borrowers.
