Insider guide:
Sale and Rent Back Schemes

Everything you need to know.

2018 update

Keep reading to discover…
  • If it’s still possible to sell and rent back your home
  • How to spot companies making misleading claims
  • How your benefits may be affected
  • And lots more…

 



Key facts and dates

Present Day

  • Currently the sale and rent back (SRB) industry is shut for business.
  • There are zero regulated firms currently trading.
  • Most local councils (and other advice resources – most notably the housing charity Shelter) are unaware of the current position, as many still reference SRB as a viable, if risky, option.
  • Vulnerable homeowners are unaware the market is completely closed, and are currently at risk of being offered SRB illegally by unregulated firms advertising on the web.

Feb 2012

  • FSA (now the Financial Conduct Authority – FCA) review all regulated firms.
  • One firm is referred to their enforcement division; all other firms cease trading and / or cancel their permissions to trade.

June 2010

  • Full regime implemented. Any firm wanting to offer SRB has to be authorised by FSA.

June 2009

  • FSA given regulatory oversight by HM Treasury, interim regime implemented 1 month later.

Nov/Dec 2008

  • OFT found SRB could cause ‘serious harm’ to vulnerable homeowners and recommend the FSA regulate the industry.

2008

  • OFT announce intention to study the SRB industry due to worries over rogue operators.

Companies that buy houses and rent them back to you

We hate to say it but any company offering to buy your house and rent it back to you is doing so illegally.

Let us explain…

…Initially, 36 entities applied for permission to ‘enter into regulated SRB agreements’ (i.e. to be allowed to buy someone’s house and rent it back to them).

Today only 17 are recognised by the FSA:

Entity:FSA ref:FSA status:Taking new business?
New Life Mortgages Limited303418AuthorisedClosed for business
The NMB Group Limited303549AuthorisedClosed for business
Gurpreet Singh Chadda525693Applied to cancelNo
Residential Property Solutions Ltd523724Not allowed new businessNo
Quick Purchase Limited522468Not allowed new businessNo
Fruitful Property Ltd523117No longer authorisedNo
Churchfield Investments Co525877No longer authorisedNo
Momentum Homes Limited522470No longer authorisedNo
Black Diamond Limited527207No longer authorisedNo
DFB Housing Solutions522472No longer authorisedNo
Your Home And Rent Back Ltd526930No longer authorisedNo
Jevons Summerfield526500No longer authorisedNo
Christian Paul Gachet524145No longer authorisedNo
Network House Buyers525927No longer authorisedNo
Sophie Oliver526652No longer authorisedNo
National Property Buyers525465No longer authorisedNo
YCN Financial Services Ltd428945No longer authorisedNo
  • Of the 17 recognised by the FSA – 15 are no longer authorised to enter into regulated SRB agreements.
  • The final 2 entities (which are actually the same organisation) have confirmed they are not taking any new SRB business.

Bottom line: The sale and rent back market is closed!

Yet SRB adverts on the internet still exist!?

Exhibit A:

source: Google 2018

 

Companies do exist that have permission from the FSA to ‘advise on SRB’ and even ‘arrange SRB agreements’.

However:

  • These companies are not allowed to actually buy your house and rent it back.
  • At best they are allowed to introduce you to a fully regulated firm.
  • Given no regulated firms exist (that are still open for business), you have to ask what their motives are for still advertising a SRB service.
  • You can check which activities a firm is authorised to carry out by looking them up on the FSA Register.

What is a private sale and rent back scheme?

Sale and rent back (SRB), also known as sale and lease back, is the name of a financial transaction which involves the sale of someone’s property to another party, but rather than the seller moving out of the property, they are allowed to remain in it and rent it back from the new owners.

These sorts of schemes were typically aimed at homeowners who were facing the threat of repossession, or who were over indebted and saw this as a way out of their financial problems.

The amount paid for the property was always a lot less than the full market value, typically 60% – 70%.

However, the amount of rent charged was usually consistent with local rates.

How long has this being going on?

It is very difficult to know when the lease back industry was born, but early in 2008 the Office of Fair Trading (OFT) announced that they were to study the industry in more detail to understand how many of these transactions were taking place, and under what terms and conditions.

It is understood that during their investigations they estimated that as many as 50,000 such deals had taken place, and that there were around 1,000 firms involved.

Unemployment benefit and the DWP

  • In principle, the concept of SRB seemed to solve a problem to someone facing financial hardship.
  • The idea that someone could remain in their home paying rent rather than a mortgage appealed to many.
  • With the support of the Department of Work and Pensions (DWP), tenants get faster support via the local housing allowance scheme if they are unable to work, and therefore becoming a tenant instead of a homeowner had financial benefit also.
  • Many of the prospective clients may well have purchased their properties via the local councils’ Right to Buy scheme, so essentially they were simply reverting back to that position, albeit with a private landlord rather than the security of the council.

Mortgage fraud

  • Prior to regulation, it was widely known in the trade that many firms saw SRB as a way of building property portfolios by targeting financially distressed people.
  • They were only involved in it to make money, and were often able to acquire the properties by using buy to let mortgages, often without the lenders knowledge that the person selling the property would remain in it as a tenant.
  • Property prices were often inflated to the mortgage company to allow the purchase to be funded without any form of deposit (100% mortgage), and were then often refinanced soon after allowing the investor to withdraw further monies from the house value.

Scams and dirty tricks

Scam #1: Last minute renegotiation

  • Purchase prices that had been agreed were often chipped away at the closer they got to completion.
  • Because the individuals were desperate to get out of the situation they were in, they often just went ahead anyway.

Scam #2: Unexpected eviction

  • Promises were made about the seller’s ability to remain in the property for a very long time after completion.
  • However, often only a short term tenancy agreement was given initially, with the promise of it being renewed on the same terms thereafter.
  • In reality the original terms of the tenancy agreement were rarely adhered to and the tenants were often faced with an increase in rent payments or in some cases simply asked to move out.

Scam #3: Mortgages arrears

  • In extreme circumstances rents were paid to the new landlord but they in turn did not pay the mortgage used to purchase the property.
  • Eventually the tenant would be evicted by the lender for non payment of the mortgage, but the lender was unaware that the person they were kicking out used to be the homeowner who had a valid tenancy agreement, often lasting years.

The road to regulation

Budget 2008 – The Government asked the OFT to investigate the private sale and rent back sector [1]

May 2008 – The OFT launched its study into SRB sector and highlighted the “widespread concerns raised by Citizens’ Advice, Shelter, and the CML, among others” [2]

October 2008 – OFT reported it’s finding and highlighted that SRB could cause ‘serious harm‘ to vulnerable homeowners and recommended to the Financial Services Authority (FSA) that they regulate the industry [3]

June 2009 – FSA was given regulatory oversight of SRB by HM Treasury  and implemented an interim regime one month later [4]

June 2010 – Interim regime was replaced by a full regime which meant that any firm wanting to continue had to be authorised by the FSA to be able to carry out any ongoing activities [5]

Permissions and regulated activities

Permissions were split into various categories depending upon the role that the individual company wanted to carry out.

These included:

  • Arranging the deal
  • Advising on the suitability of the transaction
  • Providing the funds to purchase the property
  • Administrating the transaction and the property/tenant post completion

Rules SRB companies must follow

In an attempt to protect the public, strict rules have been laid down that all sale and rent back firms must follow.

These included:

  1. No direct marketing such as promotional leaflets being dropped through prospective clients doors.
  2. Full affordability checks ensuring that a potential client could afford the proposed rent.
  3. Gauging whether completion of the transaction would affect any entitlement to benefits.
  4. A fixed term tenancy that had to last at least 5 years.
  5. An independent valuation of the property in question.
  6. The introduction of a cooling-off period of 14 days to enable more time to decide if the offer is suitable.

More: FCA Handbook – Sale and rent back: advising and selling standards

Sale and rent back schemes halted

In February 2012, the FSA reviewed all regulated SRB firms and published a report that showed most SRB transactions that had been completed since regulation in June 2010 were either unaffordable or unsuitable and should never have been allowed [6][7]

It confirmed that of all the SRB regulated firms, the FSA had referred one firm to its enforcement division while others had simply closed for new business and/or cancelled their permissions.

Bottom line: This effectively means that the industry is now shut.

Customers with existing SRB agreements that have concerns about the way they were dealt with, should contact their SRB provider initially, or seek professional advice.

What’s being going wrong?

The most common failings identified by the FSA include:

  1. Firms did not correctly assess people’s circumstances and the appropriateness of SRB.
  2. Customers were not given enough time to consider the agreement properly.
  3. Incorrect disclosure of the key facts of the SRB agreement.
  4. Firm’s sales processes were inadequate and not enough client information was gathered.
  5. Tenancy agreements contained incorrect information and did not meet FSA standards.
  6. Financial promotions breached FSA rules.

What are the FSA doing now?

The FSA are now focussing on working with firms in conducting reviews of past business to ensure any affected customers are treated fairly.

They expected struggling homeowners to be treated much better initially and claimed that the temporary closure of SRB could have been avoided if SRB firms had taken the time to fully understand their regulatory responsibilities and their customers’ needs.

They suggested that most firms were focused on their own commercial success rather than the welfare of their customers, with one firm even resorting to fraud.

Here's the next disaster waiting to happen

Whilst the regulated SRB market is now effectively shut for business for the foreseeable future, the FSA has further concerns that firms are looking for alternative solutions in place of SRB.

It can be argued that the OFT dropped the ball with their investigations of the ‘Quick Sale’ market, but we live in hope the same doesn’t happen when far more dangerous schemes such as Lease Options or Exchange with Delayed Completion (EDCs) come under the spotlight.

These schemes are being openly offered to home owners with negative equity, first time buyers with insufficient deposits, and property investors looking to buy more properties.

Both these transactions involve an ‘up front’ price being agreed in advance for the sale of a property, with the completion happening a number of years afterwards.

The FSA are aware of these schemes and believe that these unregulated products may not live up to the expectations of participants [8]

Thankfully they have issued a number of warnings in the past 12 months as they’ve noticed a rise in companies advertising for this type of business to:

  1. Aspiring homeowners who might be priced out of properties in future.
  2. Investors looking to build their portfolio in time but at a fixed price now.
  3. home owners who are financially distressed.

During her tenure as Mortgage Sector Manager at the FSA, Lynda Blackwel had said…

“From our point of view, the main concern for lenders around Lease Options and EDCs is where they are being used to disguise rent-back, which is a regulated activity.

This could be where the property seller is in trouble with mortgage arrears or trying to avoid repossession and enters into a Lease Option but remains in the property. In this case someone else is agreeing to buy the property in the future and may be offering a lump sum to help clear the arrears or other financial help.

In our view this meets the definition of a regulated rent-back agreement and the buyer would need our permission to carry out this kind of arrangement” [9]

TheAdvisory’s concerns

As far as we can see, the main danger of these schemes for home owners will be that the buyer defaults on maintaining mortgage payments.

The homeowner would still remain responsible for the debt and this situation would compound their financial difficulties.

It would be very difficult for home owners to unwind this type of arrangement and regain control of the property.

From the buyer’s perspective there is a real risk that the contract will not be properly drafted, and becomes unenforceable when they try to exercise their option to buy.

Furthermore, even if the contract has been properly executed, if the seller changes their mind the property buyer would have to consider legal action to exercise their right to buy and run up large legal bills in the process.

Because these schemes are unregulated, clients do not have redress available to them under the Financial Ombudsman or the Financial Services Compensation Scheme.

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Gavin Brazg

Gavin Brazg

MSc Dip Arch

Founder & CEO

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