Beware sale and rent back offers

There are an increasing number of companies who are offering to help beleaguered home owners by giving them the chance to sell their home and rent it back. However, dealing with firms that are not regulated can lead to problems, as all too often these firms are looking to make a fast profit out of the misfortune of their clients.

These sale and rent back companies buy homes from people underneath the regular market value – usually somewhere between 70 and 80% – but including payment of all fees and costs, and then they rent back the property to the erstwhile owners at market rate, or it can be less than their mortgage payments were if they were lower than the rental rate. The homeowners use the cash they have received from the sale of their house to pay off their existing mortgage, and possibly other debts, but they get to stay in their own home. Some of the companies in the market offer the occupiers the chance to buy back the house at a later date – at market value.

Although the sale of a home at less than market value cannot be appealing to anyone, it can be more attractive that the fear of repossession which stalks so many people currently, with mortgage repayments on the rise and the country’s debt problem at its highest ever level. Selling off your home and reaping the cash benefit can appear to be a quick fix.

The firms in this market emphasise their ability to complete the sale in quick time (a week!) if required, together with the payment of legal fees and how they will help customers pay off their debts. They say that most vendors only ever get around 85% of their asking price on the open market, and suggest that they will pay between 70 and 90%, depending on valuation. They also say they will be discrete and that your neighbours need never know that you are no longer the owner of your home, and you and your family can continue in the same schools and jobs as normal.

It all sounds fine and feasible, but the biggest drawback is the sale of the property at less than market value, but then paying rent to the value of the new owner’s mortgage. These companies deal with people who need to settle their debts, those who need to relocate swiftly, those who want to avoid problems in a property chain, or those who have properties that for any reason are difficult to sell. Sadly, all these factors help the companies negotiate the price downwards.

The quality of service can vary greatly. Some longer term companies wish to do a sound job and protect and build their reputation; offer want a quick profit from vulnerable clients. These services are all unregulated and very few offer any security for long term tenancy or levels of rent.

It is quite feasible for a previous owner to find themselves thrown out of their home after only twelve or even six months assured tenancy after having sold their home at a bargain basement price.

Homeowners are offered a percentage of the value of their property by the sale-and-rent-back companies who say it compares well with what they’d get on the open market. Property website Hometrack suggests that the average sales achieves 95.7% of the asking price. Where most estate agents’ valuations take a 5% reduction on sales price into account, valuations for sale-and-rent-backs state the market value, and then they take off up to 25% from that value.

Thus, a property worth £200,000 could be sold for a mere £150,000 by this method. Would it not better for owners to accept the fact that they are struggling financially, and sell on the open market, thereby achieving a much greater sale price – nearer the £200,000 value. Other alternatives would be to look for a cheaper mortgage deal, switch to an interest-only mortgage or ask for a delay in repayments. Talk to your mortgage company who will try and help, because they don’t really want to repossess your home. Or you could sell for a little less than the market value to achieve a quick sale, but still obtain much more than 75% of the value. Would moving to a new property be such a disaster is comparison?

Sale-and-rent-back companies have often grown out of those who were offering a quick-sales service and have spotted the opportunity to obtain properties at bargain prices with a ready-made tenant. The Internet and lack of regulation makes it easy to set up a business and start to reach potential clients easily and quickly.

Before considering sale-and-rent-back, anyone with financial difficulties should first look at all other possible options. If ultimately it does seem the best way forward then it is recommended to get different quotes, check out the company’s background, and make sure to get firm commitment on tenancy terms and rights.