Under sale-and-rent-back schemes companies offer to purchase properties from people facing repossession which are subsequently rented back to them. This practice has recently grown quite rapidly but has also come in for some criticism.
Some homeowners have reportedly received less than 60% of the market value for their properties, while others have had to face a steep rent increase or even an eviction. Many of these schemes do not spell out exactly what customers can expect.
The Office of Fair Trading is investigating the sector following concerns that consumers were not properly protected.
Finance comparison website Fool.co.uk is also pushing for stronger regulation of sell-and-rent-back property schemes after discovering 20% of homeowners are worried they will not be able to pay their mortgages over the next year. A further 50% would consider one of these schemes should they face repossession.
Mixed signals
Most people (89%) have heard of sell-and-rent-back (or sale-and-lease-back as they are also known). Yet, there are mixed views on what these schemes actually entail.
- 26% believe they can stay in the property as long as they like
- One in six (15%) believe they are entitled to the full market value of their property
- 41% believe they have full tenancy rights
- 11% would still consider these schemes even if they did not pay the full value and could be turfed out within a year
- Half (50%) would consider one of these schemes if they were facing repossession
There are many myths behind these schemes. The most concerning is that over quarter (26%) believe that they can stay in their property for as long as they like. This is not true. The lease back to the customer is usually on an Assured Shorthold Tenancy (AST), many of which last for just six to 12 months, meaning there is nothing to stop the company from evicting the tenant from the property after this period.
Schemes do not remove the prospect of eviction
Another myth is customers are entitled to the full market value for their property; one in six people (15%) believe this to be the case. However, the purchase of a property is usually at a vastly discounted rate with customers typically losing out on 15% to 20% of the market value of their property. Worryingly, 11% would still consider these schemes even if they did not pay the full value and could turf them out within a year.
Property expert Donna Werbner: “The allure of such schemes to people facing repossession is understandable. However, I would urge anyone considering doing this to do their research. Much of the information out there is misleading and by the time you find out the truth, it could well be too late to change your mind.
“What is particularly shameful is that they are targeted at homeowners facing repossession – so people who are at their most financially vulnerable.
“That’s why we are calling for some regulation. Vulnerable homeowners need to be protected by legislation, which enables them to make an informed decision and understand the risks involved, just the way they would with a mortgage or an equity release scheme.”
The figures quoted are from a survey of 1,114 Fool.co.uk readers conducted between 25 June and 2 July 2008.
