A Dangerous Way To Get Out Of Debt

By Donna Werbner | 11 January 2008

You're in debt up to your eyeballs. You've lost your job, the mortgage lender is threatening to repossess your home and you're worried you and your family may soon be homeless. Then along comes what seems like a fantastic solution: a firm offers you the chance to sell your home -- and rent it back.

It's a bit like suddenly being told you can have your cake and eat it. OK, so you have to sell your home, but that means you can pay off all your debts and, most importantly, you don't have to move. You'll be able to continue to live there as a tenant, paying rent that is often less than you were paying for your mortgage.

According to Property Rescue, one of the companies offering ‘sell and rent back' schemes, this allows you to "maintain stability" in your life and your children's lives. "It's a win-win situation!" they claim on their website. Another company, National Property Buyers, is even more upbeat, emphasising such a scheme means "you can stay in your home with total peace of mind".

If warning signs aren't flashing up on the screen as you're reading this, they should be, according to housing charity Shelter. Together with the Council of Mortgage Lenders and the Citizens Advice Bureau, it recently called on the Government to introduce regulation to better protect the consumer from ‘sell and rent back' companies.

Why? What's wrong with these schemes?

Here's a quick summary of Shelter's argument:

1. The purchase of the property is usually at a vastly discounted rate - typically losing out on 15% of the market value of their property. This ‘market value' may be a valuation placed on the property by the company buying it, rather than an independent surveyor acting on the seller's behalf.

2. The lease back to the customer is usually on an Assured Shorthold Tenancy (AST), which affords little security of tenure to the tenant. Many ASTs last for just six to 12 months. In other words, after that, there is nothing to stop the company from evicting the tenant from the property.

3. While assurances on National Property Buyers' website that "your home cannot be repossessed by your building society or mortgage company" are technically correct, this is only because you no longer have a building society or mortgage company. Should the sell-and-rent-back company go bust, the company's mortgage lender can repossess the property and evict you.

What's more, Shelter claim the way in which some schemes are advertised is potentially misleading, arguing that some companies give the impression the customer will be able to stay in their home for as long as they wish.

Put to the test

To put Shelter's argument to the test, we tried to find out what different companies say to their clients. But it was difficult to find a company that was willing to comment: National Property Buyers would not even tell The Fool the name of its director.

Property Rescue, however, was willing to talk to us, so we asked its director, Danny Niberg, what information is given to clients about its schemes.

He admitted:

The main way the company makes its money is by selling off the properties it has bought.
Clients are only offered a 12-month AST and have no legal right to reside in the property beyond this date.

Yet:

Clients are told they are welcome to stay in the property as long as they wish.

He doesn't see this as a contradiction because he claims the firm likes long-term tenants. If so, why not offer ASTs to tenants that last longer than 12 months? That would provide long-term security to tenants, as it would mean the firm could not evict them if, for example, they wanted to sell the property.

Unfortunately, the fact of the matter is: once your AST runs out, there is nothing to stop a landlord from legally evicting you.

Fool research!

Some companies were unwilling to speak to us, so we went undercover to try and get some answers.

We asked: If I were to sell my property to you, how long would I be able to stay there for?

National Property Buyers

Answer: "As long as you wanted, if you kept up with the rent payments."

Maximum-length AST contract available: Six months.

National Homebuyers

Answer: "We don't have a maximum period... you could stay there for the foreseeable future, that should be fine."

Maximum-length AST contract available: Three years.

Property Rescue

We also thought we'd do an undercover test on this company to see if potential clients are given the same information as director Danny Niberg told us. We were told:

"You can stay in the property for an unlimited time period."

Maximum-length AST contract available: 12 months.

The way forward

One of the biggest players in this market, A Quick Sale, openly claims on its website: "You can sell your house, and then rent it back from us for as long as you need to."

But when we asked director Glenn Ackroyd how long tenants can actually legally stay in the property for, he said: "We will only offer ASTs up to a maximum of 12 months, to comply with the terms set by mortgage lenders."

But he claims that, if tenants want to stay in the property long-term, A Quick Sale is often prepared to sign a further ‘tenancy guarantee' agreement with them, stating its intention to continuously renew the AST for a set period.

"If we fail to comply with this agreement, we will offer them a fixed compensation of 5% (or £5,000, whichever is the greater) of the property value. They may also be able to go to a trade body we are helping to set up, to get further compensation."

However, this trade body has not yet been officially launched, and therefore it is difficult to know how much protection it will give. Furthermore, it will not be an independent, public regulator like the Financial Services Authority, which regulates the mortgage industry, ensuring that any information given to borrowers is "fair, clear and not misleading". In my opinion, a similar level of regulation of ‘sell and rent back' schemes would be greatly beneficial.

Desperate times

It's true that, for many mortgage borrowers facing repossession, the risk that their tenancy agreement may not be renewed could be one they are willing to take - especially as, in today's market, their repossessed property may not be sold for their full market value by their mortgage lender anyway.

What I object to is the amount of contradictory information, as highlighted by our undercover report. Since most of the homeowners who consider these schemes are at their most financially vulnerable, I am concerned some people may be agreeing to sell their home below its market value because they believe they will have a legal right to stay in their homes for as long as they wish.

That's why here at The Fool, we are calling for regulation of these schemes. Vulnerable homeowners should be protected by legislation which ensures they are able to make an informed choice and fully understand the risks involved, just the way they would with a mortgage or an equity release scheme.

With sub-prime mortgage companies tightening lending criteria and repossessions set to increase dramatically next year, it's high time the Government woke up to the potential dangers of these schemes and took action to better protect vulnerable homeowners.

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool.

At 11:57 on January 13 2008, freespeech100 said:

Thank you Donna for your revealing article, in which the specified firms appear to be a continuation of the sort of practice of firms who offer to buy your house outright when you put it on the market. However, when they disclose their offer it is so low that it is breathtaking in their mark up, which beats the expenses usually incurred in a normal sale. They could possibly be the same firms who have not been successful in their first endeavour. freespeech

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At 12:20 on January 13 2008, anteggs said:

I have just shown this article to my son. As I have been trying to tell him that there is a BIG catch in these ads. If it looks to good to be true - it usually is! These companies must be regulated very soon - before vulnerable people get shafted by sharks !!!

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At 13:08 on January 13 2008, dontfoolme107 said:

We were desperate to sell our house asap, and A Quick Sale offered us £270K (which would have cleared our outstanding mortgaqe). We borrowed enough from family and friends to keep paying the mortgage, and we sold it 3 months later for £380K. I don't begruge anyone making a profit, but £110K for 1 transaction is just ridiculous, not to mention immoral as it's taking advantage of people who already have enough problems!

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At 14:35 on January 13 2008, jmmby said:

The more I read about government in the UK and in the EU, the more I feel the "them and us" division. As an "Equitable Pensioner" I have felt the non effect of government regulation and can assume that here is another area of life, which desparately needs regulation and active policing, that will be "papered" over if anything is done at all. I'll vote for anyone who will do the proper job when in office. Good grief why do we have to wait for Motley Fool and other consumer institutions to investigate? Motley Fool: the best resource I have given to my children to help them on their way. Thank you...........

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At 14:58 on January 13 2008, TheBankManager said:

I can't agree enough. It always looks too good and thus there must be some catch in the small print. The main problem is that with the apparently untrained staff making the statements you have quoted, it misleads those vulnerable enough to turn to this sort of lending, into believing the organisation. I do not disagree that it potentially places a comforting thought in the minds of those in financial trouble, that they would love to stay in their existing property, but this is only another false 'driver' for those sale and rent-back companies to perhaps 'prey' upon. I cannot emphasise enough, the need for those in some form of financial difficulty, to make an appointment for FREE advice via the Citizens Advice Bureau, the Consumer Credit Counselling Service, or their Bank/Building Society. Believe me, financial organisations are loathe to repossess assets, as not only is this costly, but their is the risk to the organisations reputation. Just recall all the poor press they received during the 80's and 90's. What is most important of all, is not that financial institutions have perhaps offered too much credit, but that people have been so keen to keep up with the Jones's and felt the need to spend, when they do not have the money to repay. If there is fault that people are in such debt that they have to turn to these rent back companies, then a proportion of the fault must be placed squarely at the feet of the individuals too. After all, they are adults and they do have grey cells between their ears, so therefore, they should have thought long and hard before they borrowed more than they could afford. I know I sound harsh, but everything in life is a two-way street. One can always say NO!

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At 15:15 on January 13 2008, cdavies14 said:

Thank you for this post Fool. Quite informative and surprising. Shall be forwarding it on to many. I have another area that I feel is a potential bubble that may pop and be a major problem in the future. I see this: At the moment it seems single mothers are better off on there own. I say this as I am going out with one. Now I am not rich or have a great job but we want to move in together as we are expecting a child in March. But as soon as I move in she loses 80 % of her benefits and I have to pay for the flat she is in. I can just about sort myself out with my current debt level let alone look after a family with 3 kids when I move in. yes you get tax credit but I have looked into this and it still makes us worse off by allot and makes in not a viable option. So the problem I see is that people are not getting living together now as the government makes it almost impossible to do so. Kids then grow up without a male role modal and get sucked in to the area gangs and become a hoodie. 30 years have past and you still have not been able to get a house by the time you retire and so without a pension as they can’t be trusted anymore and are all crap you end up your life after an age of hard work needing handouts from the government. Now this is not just one person. The problem of people not being able to get on the housing market and others not being able to live together means you have a society 30 years from now where half of the population is retired and homeless and needing government handouts. Putting great stress on the economy and the country will not be able to afford it making it go bust. It is the governments fault. It has socially engineered the society to be dependent on them and money.

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At 15:33 on January 13 2008, wizzerwotsit said:

I fear the change of heart on the side of the banks saying no to more and more people will force people in trouble to go down this route. O