Sale and Rent Back

[seaview]

Hi,

Last year we had put our house on the market (detached bungalow, Torbay/Devon, 2 bedrooms, open plan with sea view and large new conservatory) to release equity for funding our business. Originally we intended selling the house and moving somewhere else, but since we couldn't find a suitable and affordable alternative nearby, we now strongly consider staying!

We are fully aware of the problems associated with "Sale and Rent Back". We learned that apart from private buyers only very few regulated firms are active, and that we will get less money for the house than by a normal sale, but this may still be the best option for us - if we would get a sincere and reasonable offer.

Since, as mentioned, an important reason for selling our house is releasing equity for our business, we can't afford losing too much by the sale. From internet forums we've learned that often 85% are paid on SRB, and sometimes more according to the status of the property. In our case, the property has been completely renovated recently (we invested about £42,000 during the last few years), so no further investments or works are required.

Can anyone recommend interested private buyers or a reputable firm, and do you possibly know what they can and cannot do regarding SRB (e.g. Assured Tenancy with fixed term, option of repurchase at a later point in time...)? Or how could we find such buyers?

We will be ideal tenants and keep everything in good order and condition. As mentioned above, we invested a lot of money in the house and love the outcome very much.

Many thanks!

 

[paulc]

Sale and Rent Back schemes fall under the remit of the Financial Conduct Authority - Any company, be it a firm or a private individual, must be registered with the FCA.

Even the FCA regard SRB schemes as high risk for homeowners and point out some of the risks involved. For example, even with a fixed five year tenancy agreement in place, you could still be evicted within that time. In the words of the FCA: As private sale and rent back schemes can be risky, you should only think about signing up to one if you have no other options.

 

[malcolm]

Surely these schemes would charge you more in rent than it costs them to pay the mortgage. I assumed they were a way to screw money out of the elderly. Is there not any possibility of re-mortgaging?

 

[steveb]

can you raise money in the name of the business but backed by your own assets - the end result would seem to be the same - your house it at risk - but no messy ownership problems. I assume there is a reason why you can't go down this route

my gut feeling, not having looked into this at all, is that a sale and rent back is likely to be a bad option - anyone who buys it is then locked into "you" for 5 or more years, and can't re-sell it if they need the money themselves except to the same 85% merchants. and of course you have to be trusted to look after it, not have built up "hidden problems" that then become the landlord's problem the day that ownership changes, etc.

-Steve

 

[LadyArowana]

I suppose you might be very lucky and find an expatriate who wanted a house in the UK and didn't actually want to live in it right away, we leased our place back to our vendors but only for 4 months while they found somewhere else to buy.

 

[a twig]

Could you not have your business rent some of the house as office/storage space? Would at least be able to offset against your tax bill and free some cash that way?

Alternatively do you have a young family member who could take up ownership of the house on a long (~35yr) mortgage with you as the guarantors? Should be able to help your financial situation that way?

 

[seaview]

[...] anyone who buys it is then locked into "you" for 5 or more years, and can't re-sell it if they need the money themselves except to the same 85% merchants [...]

Hi, If required, why shouldn't it be possible for the owner to sell the house on the open market "including" tenants? This happens often, and for the tenants only the recipient of the monthly rent changes (happened to us about 20 years ago). So this shouldn't be a problem.

The only limitation is that the landlord could not mortgage the property, because lenders don't accept tenancies longer than 12 months, so it would only be suitable for buyers who don't want/need a mortgage.

 

[LadyArowana]

You have to look at the transaction from the POV of a potential buyer, why would they buy your place ( with a long term tenant ) rather than somewhere else? realistically the answer is "because it's giving a good rate of return" so either they bought it for cheap, or the rent is high. The specialist companies doing those transactions structure them that way for a reason, honestly I think you would struggle to find a private individual, with enough cash sloshing around to buy the house, who doesn't want to live in it, who is willing to give you a better deal than the professionals.

 

[Alex O]

[...] anyone who buys it is then locked into "you" for 5 or more years, and can't re-sell it if they need the money themselves except to the same 85% merchants [...]

Hi, If required, why shouldn't it be possible for the owner to sell the house on the open market "including" tenants? This happens often, and for the tenants only the recipient of the monthly rent changes (happened to us about 20 years ago). So this shouldn't be a problem.

The only limitation is that the landlord could not mortgage the property, because lenders don't accept tenancies longer than 12 months, so it would only be suitable for buyers who don't want/need a mortgage.

Except these days tenancies are assured shorthold. It's very difficult to get a legally binding long term tenancy agreement with a private landlord. So there would be nothing to stop the new owner giving you notice to quit as soon as the sale went through. Those houses you see for sale with sitting tenants are usually places that have had the same tenants for decades, on the old assured tenancy agreements.

 

[steveb]

Exactly what the lady says - your target buyers are cash buyers who are looking to make a return on money - and if they need to sell it then it needs to be sold to the same people. That excludes maybe 85% of the market who want to buy a house to live in, to fall in love with, to cherish. So by reducing your potential buyers, you reduce it's value. I wouldn't pay market prices for something that I could not sell except at a discount, neither would anyone else.

Cash buyers or professional investors who only care about what they can get back - they won't be bothered by how pretty the place it, won't have an emotional attachment. That may be harsh, but I think it is true - your house will be bought as an investment and as such they will chose the best investment available

-Steve

 

[paulc]

It's very difficult to get a legally binding long term tenancy agreement with a private landlord. So there would be nothing to stop the new owner giving you notice to quit as soon as the sale went through.

There is also the very real risk of when the "landlord" goes bankrupt and/or the property is repossessed by the finance company - In both cases, the occupier would be evicted without any compassion or care.

Bottom line is any SRB must be regarded as a last resort and should only be entered in to after consulting an independent financial adviser.

 

[seaview]

[...] anyone who buys it is then locked into "you" for 5 or more years, and can't re-sell it if they need the money themselves except to the same 85% merchants [...]

Except these days tenancies are assured shorthold. It's very difficult to get a legally binding long term tenancy agreement with a private landlord. So there would be nothing to stop the new owner giving you notice to quit as soon as the sale went through. Those houses you see for sale with sitting tenants are usually places that have had the same tenants for decades, on the old assured tenancy agreements.

Thanks for the answers, in the meantime we've read regulations:
On https://www.handbook.fca.org.uk/handbook/MCOB/2/6A.html => MCOB 2.6A.5B [R] 26/04/2014 we read:

"(i) if the property is in England and Wales, as an assured tenancy (including an assured shorthold tenancy)
under the Housing Act 1988 (as amended); [...]
(b) the tenancy is for a fixed term of no less than five years;"

What shall this mean "is [...] an assured tenancy (including an assured shorthold tenancy) "?
Why "including"? – Isn't it either/or?

For SRB, we're still not sure about the difference between a
• 5 years fixed term AST ("shorthold" – offered by some SRB firms) and a
• 5 years fixed term Assured Tenancy ("not a shorthold")?

Is it possible under a 5 years fixed term AST that a landlord can give notice to leave
at any time after the first 4 months (with 2 months section 21 notice)?

 

[seaview]

... there would be nothing to stop the new owner giving you notice to quit as soon as the sale went through.

There is also the very real risk of when the "landlord" goes bankrupt and/or the property is repossessed by the finance company - In both cases, the occupier would be evicted without any compassion or care.

Thanks to all for your answers. We found this:

http://nhas.org.uk/docs/Eviction_if_your_landlord_is_repossessed_May_16.pdf

So under certain conditions ("binding tenancy"; you were a tenant in the property
before your landlord took out a mortgage), after a repossession,
the lender could become the new landlord!
Assured tenancy or 5 years fixed term AST should be safe.

 

[seaview]

Apart from SRB (with all its disadvantages) we now also consider renting somewhere else,
so we were looking for more information regarding "safest" renting:

From the brochure "Assured and Assured Shorthold Tenancies" we learned:
(https://www.n-kesteven.gov.uk/_resources/assets/attachment/full/0/5761.pdf)

Page 21:

6.6 Can the landlord ask me to leave during the fixed term of a shorthold tenancy?
The landlord can only seek possession during a fixed term of the tenancy if one of the following grounds for possession in Appendix C apply – grounds 2, 8, 10 to 15 or 17 – and the terms of the tenancy make provision for it to be ended on any of these grounds. It is for the court to decide whether one or more of the grounds for possession apply.

6.7 Can the landlord ask me to leave if I am an assured tenant?
The landlord can only seek possession during a fixed term of the tenancy if one of the following grounds for possession in Appendix C apply – grounds 2, 8, 10 to 15 or 17 – and the terms of the tenancy make provision for it to be ended on any of these grounds. Once the fixed term of the tenancy has ended, he or she can seek possession if one or more of the 17 grounds for possession in Appendix C apply. It is for the court to decide whether one or more of the grounds for possession apply.

Page 37:

Appendix C - Grounds for possession

Ground 2:
The dwelling-house is subject to a mortgage granted before the beginning of the tenancy and [...]

Ground 8:
Both at the date of the service of the notice under section 8 of this Act relating to the proceedings for possession and at the date of the hearing–
(a) if rent is payable weekly or fortnightly, at least eight weeks’ rent is unpaid;
(b) if rent is payable monthly, at least two months’ rent is unpaid;
(c) if rent is payable quarterly, at least one quarter’s rent is more than three months in arrears; and
(d) if rent is payable yearly, at least three months’ rent is more than three months in arrears;
and for the purpose of this ground “rent” means rent lawfully due from the tenant.

Ground 10:
Some rent lawfully due from the tenant–
(a) is unpaid on the date on which the proceedings for possession are begun;
(b) except where subsection (1)(b) of section 8 of this Act applies, was in arrears at the date of the service of the notice under that section relating to those proceedings.

Ground 15:
The condition of any furniture provided for use under the tenancy has, in the opinion of the court, deteriorated owing to ill-treatment by the tenant or any other person residing in the dwelling-house and, in the case of ill-treatment by a person lodging with the tenant or by a sub-tenant of his, the tenant has not taken such steps as he ought reasonably to have taken for the removal of the lodger or sub-tenant.

Ground 17:
The tenant is the person, or one of the persons, to whom the tenancy was granted and the landlord was induced to grant the tenancy by false statement made knowingly or recklessly by–
(a) the tenant, or
(b) a person acting at the tenant’s instigation.

These five grounds shouldn't be a problem for honest tenants, so there shouldn't be a risk of eviction with Assured Tenancy or 5 years fixed term AST. Or are we missing something?

 

[LadyArowana]

These five grounds shouldn't be a problem for honest tenants, so there shouldn't be a risk of eviction with Assured Tenancy or 5 years fixed term AST. Or are we missing something?

Let me preface this by saying that I don't wish to sound harsh and I'm only offering my opinion ( as a private landlord, I don't know how a housing association would view the matter ). I would not agree to a straight 5 year tenancy with new tenants, irrespective of how good their references were/ deposit paid. This is because you are locked in to a tenant and a set of circumstances that may turn out to be disadvantageous say 2+ years into the deal. The property is effectively not saleable unless deeply discounted, rent increases will probably only be index linked, even if the market should move more sharply upward, and the tenants may turn out to be a nightmare. At most I would do a 2 year straight or a 5 year with symmetrical break clauses every 12mos.

I urge you to think vary carefully about what you are trying to achieve, and what downsides there are to each plan in a worst case scenario should your business be unsuccessful. There is a temptation for people to cling to a failing company long beyond what is rational, to put more and more of their own money in because they believe their big break is about to arrive. Honestly speaking I sense a certain naive quality to the questions you are asking, and I would hate to see you go from being a homeowner with a good idea to someone at the mercy of renting cheaper and cheaper accommodation in a spiral of pumping more and more cash into a money losing venture.

We are a well meaning and supportive bunch here, but this is not the best place to seek the sort of specialist advice I think you need. You should ask an independant financial professional or business advisor, and you need to know that any money put into the business may well be lost, anyone who tells you otherwise is not telling the truth. You may have to deide between the security of a home and the opportunity of the business.

 

[seaview]

Thanks for your answer.

I would not agree to a straight 5 year tenancy with new tenants, irrespective of how good their references were/ deposit paid. [...] At most I would do a 2 year straight or a 5 year with symmetrical break clauses every 12mos.

This is perfectly understandable. We wouldn't expect more than 1 year AST for a new, normal rent situation. With SRB however the buyer would get a huge discount (often 25%) and therefore the FCA regulated that the previous owners must be allowed a 5 years tenancy in return (that's the whole sense of SRB - to stay).

Thanks also for the warning regarding business activities. In our case we wouldn't want to invest a lot of money in a questionable enterprise, but rather "buy us time" for working/completing own ideas without the need of earning money during that period. We could stop at any time.

As an alternative we are now also looking into moving to a cheaper house - but this comes with other problems and would be very time consuming too as we know! :roll: