Sale-And-Rent-Back Schemes Are "Misleading" and "Harmful"

According to the Office of Fair Trading, some sale-and-rent-back firms cause "serious and permanent harm" to vulnerable homeowners.
"Misleading". "Harmful". And finally: "Unacceptable".
This is how The Office of Fair Trading (OFT) described at least some sale-and-rent-back schemes in a damning report published today.
The report recommends that there should be statutory regulation of the sale-and-rent-back sector by the Financial Services Authority (FSA) - a measure that, here at The Fool, we have been calling for since January.
Back then, I conducted an undercover investigation to reveal how vulnerable homeowners facing repossession are often misled into selling their homes and renting them back. They are told by sale-and-rent-back firms they will be able to stay in the property for "as long as [they] want to", but in fact are only offered 12-month tenancy agreements or less.
The OFT's investigation echoes The Fool's, confirming that:
- Some sale-and-rent back firms mislead customers about the security they have as tenants, claiming they will be able to stay in the property for years -when in reality the tenancy is typically only guaranteed for six to 12 months.
- Some sale-and-rent back firms may also mislead customers about the value of their property (as The Fool identified in Two Myths Your Shouldn't Believe)
The OFT also found that:
- Some firms impose substantial rent increases or even evict tenant after a short tenancy period.
- Some tenants are evicted because they cannot afford the agreed rent, which suggests staying in their property was not sustainable in the first place.
- Firms have the potential to cause "serious and permanent harm" to vulnerable homeowners. "The unfamiliar and highly pressurised situations that these people find themselves in may leave them particularly vulnerable to misleading statements or valuations from sale-and-rent-back firms looking to make a deal," the report said.
Recommendations
To try to address these problems and clean up the industry, the OFT wants the FSA to begin regulating sale-and-rent-back firms. Specifically, it recommends that:
1) There should be an obligation on sale-and-rent-back firms to be more transparent about the initial valuation and sale price, the terms of the tenancy and the amount of rent to paid.
2) In particular, firms must offer forms of tenancy that match the assurances they give to customers.
3) There should be a requirement on firms to tell customers about the free, independent advice available to them before they decide to sell.
The OFT also suggests regulation may also require firms who fail to honour their commitments to offer redress to consumers. It adds that "recommending statutory regulation is not something we do lightly or often, however in this case we consider it necessary to put a stop to the unacceptable behaviour of some sale-and-rent-back operators and to ensure consumers are better protected".
Reaction to the report
For the past 10 months, here at The Fool, we have been writing about the dangers of these schemes. Upon request, we gave the OFT details of our investigation on this.
So I am very pleased to see that the OFT has agreed that these schemes need to be regulated, and that - in particular - firms must be more transparent and honest about the length of the tenancy agreements that tenants are offered. Hats off to the OFT for recommending this, hopefully it will help a lot of people.
Similarly, the crackdown on valuations of properties and the requirement that firms should tell customers about the independent legal advice they can get is crucial. Most homeowners do not receive an independent valuation of their property - indeed, sometimes the firms do not even bother to send surveyors round, and simply base their offer on information you give them over the phone.
Transparency is also definitely a step in the right direction. Tenants typically lose the right to live in their home if the landlord defaults on the mortgage, but this is something I have rarely seen explained in the literature from sale-and-rent-back firms. Homeowners need to be fully aware of the risks that they are taking, before they sign on the bottom line.
Similarly, I wholeheartedly support the OFT's suggestion that firms who renege on their promises should pay compensation. This is long overdue.
The next step?
Of course, none of these recommendations mean anything until they are put into law. I would like to see the Government announce legislation on this as soon as possible.
I should add that, at the end of the day, there is nothing inherently wrong with the concept of a sale-and-rent-back scheme. It is the way that at least some operators of these schemes lie to and mislead their customers that I deeply object to. I just hope that no more people suffer before the Government decides to step in.
More: A Dangerous Way To Get Out Of Debt | Two Myths You Shouldn't Believe
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Comments
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Whilst the clarification is no doubt welcome, and companies should be forced to be clear and open in the terms of the contract, I do wish we would desist in this nonsense about a property value...[br/][br/]A property like anything else is only worth what a buyer is prepared to buy it for.[br/][br/]Even at 15%-25% below "market value" it can still offer a better value to the seller than being repossesed and still owing other debts too. Especially given that the banks then tend to then dump the properties at speed in order to get "thier" money back.[br/][br/]It can offer those people a route out of spiraling debt - which surely is a baisc principle of TMF.
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John Bibby - You are quite right - elderly people with often substantial equity in their homes do need a reliable scheme that satisfies their cash flow needs without a) loss of ownership b) costs that cannot be matched by continuing growth in equity.[br/][br/]Sale and rent back provides a lump sum of equity but then you need to decide how to invest that sum, plus you need to be sure you are getting fair value for the sale and fair and continued rights as a tenant. Unfortunately as has already been mentioned by PhilMartinMRN lenders prefer short term tenancy just in case they need to re-possess easily, so unless your buyer is mortgage free you have a potential problem.[br/][br/]One solution I used for my elderly aunt nearly 30 years ago was a 'roll up' mortgage. She started with no mortgage and each year borrowed £4,800 which was paid into a deposit account to release £400 per month to top up her pension and investment income. The mortgage interest was also rolled up so there was no payment of interest or capital required until eventual sale.[br/][br/]The property increased in value despite the last recession and when she eventually had to go into a care home with advanced dementia the mortgage had only grown to one third of the house value.[br/][br/]I do not know whether any lenders would provide such a facility today, but it is not impossible.[br/][br/]The other alternative which ensures continued ownership of your existing home is using an offset mortgage to release equity into the offset deposit account (ie interest only paid on amount spent). The benefit of the offset arrangement is that you can maximise your mortgage (ie one set of costs to set up) but have the use of the cash with interest only running on what you spend OR invest.[br/][br/]At a time like this you could invest in high yielding rental properties such as student houses or first time buyer homes in areas where the rental demand is well established. You acquire a rental property at a currently discounted price with rental covering costs.[br/][br/]Anything you spend from the offset mortgage to meet day to day needs could be covered by the growth in your rental property, which saves too much depletion of the overall value of your estate, which you may need later on.[br/][br/]There are responsible advisors who could help you use any of these approaches. [br/][br/]Peter[br/]www.jvpi.co.uk
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I have looked into these schemes as a potential user, and I agree they seem to be a rip-off.[br/][br/]However, some scheme is needed for elderly people who are equity-rich but cash-poor. (We want not blow our money before we die - not leave it all to the kids and the taxman.) Surely some scheme can be developed which will be fair _and_ satisfy these needs? (Perhaps the state shd have a role? Clearly the banks have failed to develop anything adequate. It needs a long time-perspective which private companies cannot have - but the state can.)
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17 October 2008