With the levels of personal consumer debt continuing to make the headlines numerous companies have sprung up as they have seen the opportunity to cash in on this spiralling phenomenon. One of the biggest growth sectors has been in the area of selling your property to rent it back afterwards and, although this can be a useful solution to unmanageable debt problems, it’s not the ideal solution for everybody and can often turn into a disastrous scenario which becomes far worse than the predicament you faced originally.
How It Works
When you sell your home to rent it back, you’ll usually find that the price you are able to sell it for is significantly lower than its actual market value. The company will usually pay around 70% to 80% of the market value and will usually cover all the costs associated with selling a property and it is sometimes a useful solution if you are experiencing mortgage arrears and are living in constant fear of having your home repossessed. Once the company has bought the property, they will then rent it back to you at market value which sometimes can mean that your rental costs will be less than what you were paying on your mortgage, although you should be warned that this is not always the case. If, however, you are in serious debt some of these companies are able to complete the sale of a property extremely quickly and it’s this ‘time’ factor that can often provide a lifeline for those who are struggling to meet mortgage payments and other unmanageable debts and who might face repossession.
In many cases following the sale, a person can use the money to pay off their mortgage and can use any residue to pay off other existing debts with a view to getting back on an established financial footing and some companies do make provision for you to buy back the house at a later date should you so wish and have the means to do that.
In addition to getting you out of a financial ‘hole’, many of these companies can undertake these sale and rent back schemes with the utmost of discretion so that you’ve no need to feel stigmatised as a result of your financial difficulties and no neighbours need to know and this also means that, where you have children, you’ll be able to avoid the upheaval of them having to change new schools, move to unfamiliar areas etc and can help to keep family life on an even keel. They can also be useful if you’ve experienced a property chain breakdown which has put you in financial difficulty and in cases where you might be living in sub-standard accommodation which is proving difficult to sell on the open market.
The biggest disadvantage is that, as a homeowner, you’re going to end up selling your home for significantly less than its market value and will, in reality, be effectively paying the lender’s mortgage for them and then some. Another pitfall is that the industry is yet to be properly regulated and, whilst some companies carry out these kinds of arrangements highly professionally, paying due diligence to the sensitivities involved, others are simply out to make money without giving much thought to an individual’s own personal predicament. And, where this happens, you might find that there is no long-term security in any rental agreement that is put in place and there have already been nightmare stories appearing on news programmes where a person(s) has entered into this kind of agreement, only to find that after a 6 month rental tenancy, the company decides not to renew the agreement and then proceeds to put your home on the market at its ‘real’ value to make a profit with the result that, once again, you’ll be faced with losing your home anyway and you could end up being worse off financially as a result.
We can all make rash decisions if we are faced with financial difficulties and are feeling vulnerable. Many of these sell to rent back companies know this so it’s absolutely crucial to look at your own individual circumstances and speak to independent financial advisors or your local Citizen’s Advice Bureau before entering into any agreements. It might just be possible that you can renegotiate your mortgage with your lender or even use a broker to shop around for you free of charge to see if they can come up with a cheaper deal elsewhere that may be more tailored to suit your own specific circumstances.
Other options might include switching to an interest-only mortgage or delaying repayments on an existing mortgage which might help to give you time to sell your property at its true value if trading down is your only option. At the end of the day and in spite of all the letters you might receive from your mortgage lender threatening to take action against you, most mortgage lenders do not like to go through the process of repossessing homes. It’s often a complicated and costly process for them and they’d only tend to use it as a last resort so, as long as you don’t bury your head in the sand and not ignore any communication from your existing lender, you may find that some agreement can be reached which will, in the long term, prove far better for you both financially and for your own peace of mind.