Is this the next big mis-selling scandal?
Sale and rent back schemes are increasingly being touted as the solution for desperate homeowners who are struggling with their mortgage repayments. The concept is simple: an investor offers to buy the property while allowing the former owners to stay on as paying tenants.
For homeowners on the verge of repossession, it’s sold as a win-win solution. They’re relieved of their mortgage without having to hunt out a new home.
As the credit crunch tightens its grip, schemes such as these have been growing in popularity, to the point that they have now been recognised by the government, which announced its own sale and rent back scheme as part of its mortgage rescue package in September 2008.
The housing charity Shelter says: “This will mean that the homeowner in difficulty genuinely has the option to stay in the property as long as they want and the option to buy back all or part of the property when they get back on their feet, making it a valuable tool to prevent homelessness.”
However, while the government has promised homeowners clear terms and financial advice before any agreement is reached, its backing of sale and rent back schemes remains somewhat contentious.
Not only do the exact details of the schemes – which will be run by registered social landlords – remain hazy, but they will invariably involve vulnerable, and in many cases desperate, homeowners. More than a year ago, Citizen’s Advice, Shelter and the Council of Mortgage Lenders saw the potential for mis-selling in the sector and called for urgent regulation of sale and rent back schemes.
The Office of Fair Trading looked into the sector after the industry raised the alarm and in October it proposed that the practice should be regulated.
Until decisive action is taken, it’s unclear how worried we should be. Although the issue has only recently come under scrutiny, the schemes have been around for roughly five years, springing up most notably in Manchester and the North East. And, while the government should lay down rules dictating how its scheme operates, there are plenty more schemes that stand to benefit from the government’s entrance into the market.
Figures from the OFT suggest there are roughly 2,000 unregulated sale and rent back operators, mostly run by landlords or private commercial interests to make a profit.
They offer to buy homes at a discount of 15-40% in exchange for a fee-free, fast sale. Completion within two to three weeks is guaranteed with a cash lump sum, which has huge appeal for desperate debtors seeking a discreet alternative to repossession. The tenant signs a six-month or 12-month short hold tenancy agreement and, sometimes, a property buy-back option.
However some critics have questioned the independence of the property valuations, with some homeowners being offered unfairly low prices for their homes. Many firms also reportedly attract clients with the promise of no upfront fees, but neglect to mention that the extra money that the homeowner would receive if they sold their home themselves would more than cover the cost of estate agent and legal fees. Critics also suggest that heavy-handed or misleading sales tactics, emotive advertising and poor customer care are huge problems.
Crucially, desperate homeowners without impartial advice are overlooking simpler alternatives like negotiating a payment holiday with their mortgage lender or taking in a lodger to ease financial pressures. So, despite the rather vague terms of some of these deals, desperate homeowners regard them as the only way out.
The situation has been made worse by the current economic climate. The lack of mortgage funding – particularly for those with a poor credit history – and the weak housing market continue to make people more vulnerable to these schemes.
“It’s something we are very concerned about, despite the fact we still don’t have a huge amount of evidence yet,” says Moira Haynes, of Citizen’s Advice. “But the evidence we do have is so disturbing the consumer detriment is obviously very serious,” she adds.
Many of the landlords or firms offering schemes are the first to admit sale and rent back is a last resort, but still represent themselves as the solution of first choice.
Myhomerescue.co.uk says on its home page: “With Home Rescue, we see it that we are temporarily looking after your home for you as a short-term solution while you get back on track. Of course you can rent it for longer if you wish” and urges homeowners to “call today for a brighter future”.
Some of the websites involved in sale and rent back – such as myhomerescue.co.uk and avoidreposessionrentback.co.uk – which purport to offer advice to consumers, sell on details as leads to investors.
Websites also imply that tenants can remain in the property for life –myhomerescue.co.uk, for example states “you have the option to stay as a tenant for as long as you wish”. However, operators cannot guarantee this. Most mortgage lenders, for example, are not keen to lend on properties with long-term tenants because they could make claims on the property title.
This is a quirk that unscrupulous operators are using to their advantage. Stories abound of sale and rent back landlords ejecting tenants or raising rents artificially high after the initial deal expires which effectively forces tenants out.
Property investor Alex Murray says he agrees longer tenancies as soon as the first contract runs out. He counters that, when tenants leave it is a costly disruption, because homes need renovation before they can be let again. “All the properties I ever bought have been on the basis that this is their last resort,” he says. “I am careful about who I take on. I don’t want a tenant who is used to being in arrears on their mortgage and is also likely to get behind on their rent. That makes a bad tenant doesn’t it?”
Al Elliott, co-owner of sale and rent back scheme, the Homeowners Advice Centre, says: “We can’t guarantee the rent because, if the mortgage rises, the rent which covers it will also have to rise,” he explains. “We make our money from the customers who don’t buy back their homes and yes, it’s likely most won’t be able to buy them back. No-one has done so yet.”
The sector desperately needs regulation, but the Financial Services Authority can’t regulate the sector because of a technicality. Legally speaking sale and rent back is a property sale, not a financial transaction, although the cogs are in motion to change this.
In the meantime, the industry is attempting to stave off some of the worst iniquities with self-regulation, which the National Landlords Association says should be in place by January 2009.
“We are not opposed to full regulation, but are not naive enough to think it will happen overnight,” says NLA spokesman Chris Norris, who is working with the OFT on its investigation.
The code will set standards for contracts on issues like length of tenancy and tenants’ right to appeal unfair rent rises among other issues, says Norris. Landlords who sign up to the code and are found to be acting inappropriately could be fined or lose trade body membership – but they have to be signed up in the first place. Citizen’s Advice welcomes all standard-raising moves, but agrees that evidence suggests self-regulation can be problematic.
With or without regulation, the appeal of the sale and rent back schemes as a solution for struggling homeowners remains undisputed. The testimonials and pictures of satisfied customers on websites such as Homeowners Advice Centre clearly show the relief many feel when freed from debt. But this release comes at a high price and, until the sector is regulated and offers recourse to people if things go wrong, it’s still a lottery for vulnerable homeowners.
A homeowner’s worst nightmare; repossession is an action of last resort by mortgage lenders to recover money from borrowers that have failed to keep up with repayments on their mortgage or other loan secured on their home (see secured loan). Repossession is a legal procedure that has to go through several processes before the homeowner is evicted and the property reposed. These are: if a borrower keeps defaulting; the lender applies for a solicitor’s notice; the lender instigates possession proceedings through the court; at the court hearing a possession order is granted and sometimes a possession warrant; a bailiff is appointed and an eviction notice issued at which point the homeowner has two to three weeks to vacate the property.
The practice of a dishonest salesperson misrepresenting or misleading an investor about the characteristics of a product or service. For example, selling a person with no dependants a whole-of-life policy. There have been notable mis-selling scandals in the past, including endowment policies tied to mortgages, employees persuaded to leave final salary pensions in favour of money purchase pensions (which paid large commissions to salespeople) and payment protection insurance. There is no legal definition of mis-selling; rather the Financial Services Authority (FSA) issues clarifying guidelines and hopes companies comply with them.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
“Arrears” tend to be associated with debt. If you fall behind and miss payments on any outstanding debt, the amount you failed to pay is an arrear – the amount accrued from the date on which the first missed payment was due.