The concept of sell and rent back is a sound one but it does not suit all circumstances. Careful consideration should be taken before entering in to such a scheme.
The Sale And Rent Back industry has received some very negative press recently following an Office of Fair Trading (OFT) investigation. The reason is largely because the industry has to date been unregulated.
In a nutshell, you sell your house to a company and in return they rent it back to you.
These schemes can be used to stop repossession and a black mark on your credit record. Are they worth it? It depends on the circumstances.
Many mortgage companies on taking possession of homes are selling them at auction. There is a pressure on these companies to get the money back that they have loaned. Therefore, the price houses are selling for at auction can be significantly lower than the hoped for “market value”. In addition to the cost of the mortgage the mortgage company will also add their sale costs to the debt.
Cash buying property companies or companies offering a “sale and rent back” service will typically purchase properties at a discount on the market value of a home of around 20-25%. In return, they offer speed, convenience and terms to suit your circumstances. This is not necessarily lower than the house would sell for via the mortgage. The plus of the cash buyer is that the price is guaranteed and YOU get the option of going through with the deal or not.
The schemes should only be undertaken in the following circumstances:
• There is sufficient equity in a property
• The sale price will clear both the mortgage and other necessary debts
• The rental terms are sufficiently lower than the mortgage payments would have been. Otherwise, the same problems will undoubtedly arise and individuals will be in a worse position as there is no longer the asset of a house
• If by selling the property you are able to release equity that allows you to pay a higher rent than the monthly mortgage costs although not sustainable in the long term it can sometimes provide a short term solution if it is a short term solution you are after.
If the above criteria are satisfied then it is important to establish a clear agreement with any buyer. This includes the length and terms of tenancy that you want or need.
Understand how the property has been valued. Reputable companies will share with you the research they have made as to the value of the house. This should include actual sale prices (if available) of similar properties and take in to account the condition of the property. Valuations will reflect outstanding service charges and material matters affecting the property such as lease renewal costs. It is a difficult market to value property with prices significantly declining in most areas. Data is able to assist a valuation to a point then all parties need to take a view. If you are in disagreement as to a value which has been given do not enter in to an agreement as it will be legally binding.
If you are thinking about utilising such a scheme then independent legal advice i.e. a solicitor acting on your behalf should be sought. Many companies recommend solicitors or you can use your own. Plus, it is often worth speaking to independent bodies such as the Citizens Advice Bureau to see what other benefits or solutions are available before you take any decision.
If you have the time then you can always try and sell the property at auction yourself.
