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A relatively new type of property transaction, sell and rent back or equity release has grown in popularity since early 2007. A company purchases an individual's home, usually at a discount, and then rents it back to them at market-price enabling them to remain in the property. This is attractive to those either pensioners or those who have debt management problems
The Office of Fair Trading (OFT) has concerns for this unregulated sector and cautions that sale and rent back may not be the best solution for some consumers. They also warn that some firms are misleading customers with the value of their property or the security they will have as tenants, including an exaggeration of the guaranteed tenancy period. Since sale-and-rent-back companies usually pay for the survey, there is an immediate risk of the home being undervalued to suit their purpose.
The rising of bad debts and uncertainty about interest rates has led to an increasing number of sell-and-rent-back property companies preying on overstretched home-owners. The advantages of sale-and-rent-back may seem attractive to borrowers in arrears, especially as these deals are conducted swiftly and discreetly. The individual might receive only 60% to 70% of the market price for their property (often less if all fees and costs are paid), but they might end up paying less in rent than their mortgage payments. They can then use the cash released to repay their existing mortgage and outstanding debts without they need to move home. Some companies also provide an opportunity to repurchase the house at a later date for the market value.
If you are struggling to meet your monthly repayments, it is advisable to discuss the options with your bank or lending organisation. A chat with a Citizen's Advice Bureau representative or the local government money advice might be helpful. There are alternative solutions such as downsizing your home, borrowing from family members, renting out rooms or using savings to meet any shortfalls before considering sale and rent back. It is sensible to deal with the situation sooner rather than later to remain in control of the outcome. Remember there may be long term implications for leaving the property market as it may be difficult to get back on the property ladder at a later date.
If sale and rent back is your best option, it is sensible to discuss your decision with your family. Taking impartial advice from independent financial and legal advisors would also be prudent. Make your own checks for peace of mind before entering into an agreement. Try to discover as much about the firm's business practices as possible as it is important to establish trust at an early stage. Sale and rent back firms often entice consumers with the promise that they will be able to stay in their home for years, but in reality the tenancy is rarely guaranteed for more than twelve months, and usually only for six. If a long tenancy period is expected, it would be sensible to raise this at the outset and agree rent over this period. Tenants may lose their homes if the landlord defaults on the mortgage, and may be evicted if they cannot afford the agreed rent. It is advisable to make your expectations completely clear and to get appropriate safeguards written into the contract before you sign.
