If you’re struggling to afford your mortgage, you may have considered a ‘sale and rent back’ scheme. Under this sort of scheme, a property would be sold to a property investor and then be rented back to the former owner. Sale and rent back schemes have traditionally been aimed at homeowners in financial difficulty. Properties would usually be bought for significantly less than market value, usually around 60-70%.
Can I sell my home and rent it back?
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Can I sell my house and rent is back?
The sale and rent back industry was temporarily halted in 2012, following an investigation by the Financial Services Authority (FCA). As a result, any company wanting to offer a sell and rent back service now needs to be registered with, and monitored by, the FCA.
If you’re looking to sell your house and rent it back, you should proceed with caution. The FCA study found that the majority of sale and rent back cases were either unaffordable or unsuitable and should never have been offered. They also voiced concern about sale and rent back companies using high-pressure tactics to target vulnerable homeowners.
How do I know if a company is registered with the FCA?
You can search for a company on the FCA register here. The register will provide information on exactly what type of financial service the company is authorised to offer.
Should I use a sale and rent back scheme?
Serious concerns were raised about the sale and rent back industry a full 5 years before the FCA study in 2012. During that time the industry was the subject of several investigations by the Government, Which? And the OFT. Despite industry regulation, the OFT found that the industry was still using highly questionable practices and not adhering to the strict rules that had been put in place. Some sell and rent back companies were also accused of serious fraud. As a result, they were left with little option other than to halt the industry.
There are a few companies that are now authorised to offer a sale and rent back scheme, with very strict guidelines, but you should still think very seriously before using them.
What are the risks of using a sale and rent back scheme?
There are several risks when using a sale and rent back scheme.
Most people interested in sell and rent schemes are hoping to clear their debt but remain in the property long-term. The difficulty is that once you have sold your property, you are put on a standard rental agreement. FCA rules state that the rental agreement should be at least a 5-year fixed term agreement, but that doesn’t mean you’ll necessary stay in the property for that amount of time. If you break any conditions of your tenancy agreement eg. with a late rental payment, your tenancy can be terminated. There is also the risk that your landlord may default on their mortgage and the property will be repossessed. This is something the FCA investigations found was quite common.
Rental payments are currently higher than mortgage payments in many areas. If you’re struggling to afford your mortgage repayment, it is unlikely that a sell and rent back scheme for the same property will be affordable. If you fall behind with your rental payments, you will be evicted from the property. It is likely to make more financial sense to sell your current property and move to a smaller, more affordable rental property.
What are the alternatives to sale and rent back schemes?
If you’re struggling financially and have decided that selling your property is the best way to address the situation you find yourself in, there are other options.
Selling on the open market using an estate agent will be your best option if you need to get as much money as possible for your property. However, if you’re facing severe financial hardship and it’s important that you sell your property quickly, selling your property to a home buying company could offer you the clean slate you’re looking for.
A genuine cash home buyer will buy your property at a discount, but will pay more than sale and rent back schemes did. You can expect to receive around 80-85% of market value. The sale can complete on the date of your choice – in as little as 7 days if needed. It is also guaranteed, which means you can use it to stop repossession and eviction in their tracks. There are now very few companies offering a sell and rent back scheme, but a quick sale to a home buying company could still offer you a way to clear your debts and start afresh.
History of sell and rent back schemes
Concerns were first voiced about the sale and rent back sector in October 2007. The Council of Mortgage Lenders said they were worried about the way homeowners were being targeted and the conduct of the companies running the schemes.
In 2008, the Government asked the Office of Fair Trading (OFT) to investigate the sale and rent back industry. In October of the same year, the OFT suggested that sale and rent back schemes could cause serious harm to vulnerable homeowners and recommended that the industry should be regulated by the Financial Services Authority (FSA).
By 2010, any company wanting to offer a sale and rent back scheme had to be authorised by the FSA. Once the industry became regulated, sale and rent back companies were required to follow strict rules.
- Companies were no longer allowed to do any direct marketing to homeowners, eg. leaflets through letterboxes
- Affordability checks needed to be carried out to ensure the homeowner would be able to afford the new rent
- Companies that buy your house and rent back were required to offer a fixed term tenancy of at least 5 years to offer a little more security to those using the sale and rent back scheme
- An independent property valuation had to be carried out
- Homeowners had to be given a 14-day cooling-off period
Despite industry regulation and strict rules, the FSA found that the industry was still not acting as it should. It identified several issues:
- Incorrect information was being given to homeowners interested in using a sale and rent back scheme
- Tenancy agreements were not meeting FSA standards, meaning former owners were facing rising rents and eviction
- Properties were often undervalued and homeowners faced last minute price renegotiations
- Investors were known to default on their mortgages, leaving the former owners facing eviction with little notice
As a result of these continued industry failings, the decision was taken in 2012 to temporarily halt the sale and rent back market.
Although companies registered with the FCA are allowed to offer a sale and rent back service, very few are still operational. Any company that offers a sale and rent back scheme without being registered with (and therefore regulated by) the FCA is operating illegally and should not be used.
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