Alistair Darling to Stop Rent Back Evictions

The Guardian reported an interesting article on sell and rent back and repossession this week:

Owen and Moira Martin are among the many British victims of companies offering controversial sale-and-rent-back deals. Their three-bedroom maisonette in Plymouth was repossessed last month because the company with which they had entered into an agreement never paid the mortgage, even though it had pocketed about £45,000 in fees from them.

Such horror stories have prompted the government to consult on how best to regulate the estimated 2,000 or so companies in the UK offering such schemes.

‘It’s been devastating,’ says Owen Martin, a supermarket worker, who has had to move into a privately rented two-bedroom flat with his wife. ‘We made sure the rent was paid, but we lost our home anyway because the company we sold to never paid the mortgage company.’

The Office of Fair Trading estimated in its recent report into the sector that some 50,000 sale-and-rent-back transactions had taken place. Operators offer to buy the property of someone facing repossession at a discount price, allowing the former mortgagee to remain in the property as a tenant. They usually also charge significant fees.

Read the full story at the Guardian website

http://www.guardian.co.uk/money/2008/nov/09/rent-back-evictions

Stop Repossessions Org UK Sees Rise in Negative Equity Repossessions

As 2008 marches on and the global and economic situation looks ever more bleak, so are the tales we are hearing from UK homeowners facing repossession.

Back in 2007 a rough estimate would be that 70% of those people who contacted us by phone or email had some difficulties with their mortgage repayments, were in arrears but were also in a position to:

a) Repay the arrears over a given period either by direct agreement with their mortgage lenders or by a court judgement.

b) Remortgage with a new lender in order to get a fresh start with a new payment record appearing on their credit score

Fast forward and now it is rare that we are hearing from people who have enough extra monthly income to repay their arrears over time and many lenders (especially the sub prime) are refusing to accept repayment plans to pay off morgage arrears.

The majority of people contacting us are now also at the start of the negative equity trap.

The true and actual cost of their borrowings, (which consists not just of the amount borrowed but also the huge penalties, legal and court fees and Early Redemption Penalties), have risen dramatically, whilst the value of their homes is in many cases starting to stagnate, if not fall.

A homeowner who previously remortgaged their £200,000 home with a 90% mortgage (£180,000) and who has either added a secured loan (say £10,000 – new total £190,000) or had a County Court Judgement for unpaid credit card bills of a similar amount, and who has an early redemption penalty of say £7,000, may be mortgaged to £197,000.

One missed mortgage payment and not only can the interest rate rise dramatically so that monthly costs are hugely increased, but legal fees and punishing penalty fees will be also be added.

Suddenly we could be looking at redemption costs of over £200,000.

Sell the house?

Not always possible.

Estate agents will charge a minimum of 1%, more if you go with multiple agents. That’s at lease £2000. Legal fees and the Government’s ridiculous HIPs pack will add another £1500.

It’s now going to cost £3,500 to sell the home and get nothing in return.

But it doesn’t stop there.

If you remortgaged before the Northern Rock crisis hit in September 2007, then the chances are that your lender was giving signals to surveyors to over value properties.

The market is always rising so why not let them over value your home and then lend you more money in return for more profit?

By the time you may be in trouble house prices should have risen by enough to bring down your mortgage level to less than 100% – just in case they need to repossess.

But the reality is that homes are now only selling if the price is right.

Now it’s a buyer’s market again.

Houses which comfortably sold for £200,000 back in 2007 are now sticking in agent’s windows at £189,000.

Suddenly it could cost you as much as £10-20,000 to buy your way out of repossession.

But who is going to lend you the money to pay the costs?

It is not going to happen.

If you do have equity in your home then you do have options to avoid repossession find out here

Does Alistair Darling Want You To Be Repossessed?

Maybe the Government, along with the usual middle class do gooders at the Citizens Advice Bureau (CAB) and Shelter actually want you to be repossessed and lose your home?

Surely, that can’t be right?

Yet the Scottish newspaper the Sunday Herald Reports today the following:

“Prompted by concerns raised by Citizens Advice, Shelter and the Council of Mortgage Lenders, chancellor Alistair Darling announced last week that he has asked the Office of Fair Trading to investigate potential consumer detriment in the sale-and-leaseback market.

A spokeswoman for the Council of Mortgage Lenders said: “While we welcome the review, it is disappointing that no immediate action will be taken to regulate sale-and-leaseback schemes.

“Homeowners in difficulty may currently be considering selling their property through these schemes at a discounted value, without an independent valuation of their home, and with no real security of tenure.”

Whilst it is true that there are some rogue rent back traders out there (especially those offering to pay 100% of market value who in reality keep at least 40% back for many years), this Government is expert in knee jerk politics.

So many of the laws that have been passed since Labour came into power seem to be a reaction to scare stories in the tabloids.

The reality of the sell and rent back scenario is that it gives homeowners a last resort to keep their homes when all else has failed.

If the Government legislate against that last resort because a powerful lobby of middle class people feel that that they need to legislate against other people having the right to sell their homes for less than market value in order to stay in them, the outcome (like that of many of their policies) will be exactly the opposite.

CAB and Shelter may talk the talk but they won’t offer you a home when you are repossessed and evicted.

As for the CML (Council of Mortgage Lenders) – well who do you think supplies the financing and re-mortgaging for sell and rent back companies?

Is Alistair Darling (or any other of the wealthy Islington-ite Labour Government) going to provide you with a nice Council House or put you to the top of the housing list when you are repossessed?

I think we all know the answer to that one.

If you are thinking of selling and renting back make sure that you do the research and ask for references from other sellers when dealing with a rent back buyer.

Is Sell and Rent Back The Right Option For Me

When Sell and Rent Back is not an option

One of the questions we get asked most is ‘Is Sell and Rent Back and Option For Me’?

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The answer really depends on a number of circumstances and every situation is different, but generally speaking sell and rent back options are not feasible for those whose properties are worth £300,000 or more.

We have seen a massive rise in those seeking help to stop repossession whose properties are valued at over £300k.

For sell and rent back options to work, the buyer must be able to charge a rent that covers the cost of financing their mortgage.

With interest rates currently at around 6% for Buy to Let mortgages, this means that for every £100,000 that the buyer needs to mortgage, he or she must pay £600 pcm in mortgage interest. For a property over £200,000 this already equates to a rental figure of over £1200pcm.

Even if you might be prepared to pay £1200pcm now (and it may seem attractive if you are currently paying a lot more in servicing your debts), but the problem is that market rents in most areas of the UK are nothing like that amount. The average UK 3 bed semi may be worth £200k on the open market, but rental averages are probably more like £650 pcm.

This means that market rents are out of sync with property values. No investor can afford to buy a property and rent it back to the previous owner unless the rent covers the cost of their buy to let mortgage. No lender will lend against a property for a buy to let mortgage unless it believes the rent will cover the cost of the buyer’s interest payments comfortably.

For most lenders this means 125% coverage. For example is the interest was £1000pcm, the market rent must be at least £1250pcm otherwise they will not lend against the property.

For those who are facing financial difficulties with properties over £300k the obvious option is to sell on the open market and realise the best price.

Sometimes it might be possible to enter into a sell and rent back option providing the seller has enough equity in the property to allow a sale at a much lower figure, with an option to buy it back at a discount at a later stage.

Beware Sell & Rent Schemes Offering 100% of Your Property Value

We’ve been so busy since the New Year dealing directly with those facing repossession that there has been no time to update this blog.

However, a recurring theme of many conversations with those facing home repossession has been ‘Should I deal with Company X who are offering me 100% of the value of my property?’

The answer is NO! It can only be no!

Sell and rent back schemes can sometimes offer an answer, but the companies who offer to pay 100% of the market value for your home are hiding something very important.

The reality is that you will sell your home for as little as 50-60% of it’s value and be left homeless, if not sooner, then certainly later.

How come? Surely if they pay 100% that’s what I’ll get?

Again the answer is NO!

These companies will pay you at the point of sale 50-60% of the value of your property. Very often this is just whatever it takes to pay off your mortgage redemption figure.

They will promise that you will receive the remaining 40-50% in 5 years’ time (one company we heard of was quoting 10 years) PROVIDED that you remain renting for that whole period.

‘Fine’, we hear sellers say, ‘we want to sell and rent back for years.’

Only there is a HUGE catch.

Anyone who thinks that these property buyers will ever pay them the remaining 40-50% is dreaming.

Legally, all the landlord has to do is terminate your tenancy agreement (or put up the rent to a point that you can’t afford to pay and stay) BEFORE the 5 or 10 years is up, and then you will no longer qualify for the final payment.

The result? You have sold your property for very little today on a promise of more tomorrow, and that ‘more’ will never materialise.

So what is the alternative?

If you are considering a sell and rent back option you need to evaluate what you are being paid today for your home.

  • Does it cover your mortgage?
  • Does it leave you with any cash left over?
  • Is the rent affordable?

The only guaranteed thing when you sell your home to rent it back is the price you are paid today.

Avoid any scheme that promises to pay you more in the future!

Citizens Advice Bureau Claims Repossessions Lender’s Fault But Is CAB To Blame Too?

Reuters reported a couple of days ago that the Citizens Advice Bureau are claiming that UK home repossessions are dramatically rising due to the lender’s aggressive arrears recovery policies and brokers’ misselling.

Whilst both of these statements are undoubtedly true, and we have accused lenders of such practices on this very blog, the Citizens Advice Bureau also plays its part in homeowners being repossessed.

How so?

Well in a number of cases that have come to our attention, including ones we have been involved in, the CAB has advised homeowners facing repossession that they must surrender to their fate and let the bank take their home, rather than pursue alternatives such as a cash property sale or that bete noir of NGOs and the press, the sell and rent back.

Our fictional Mr & Mrs Smith have 4 months’ mortgage arrears, a court possession order, and bailiffs due to evict them in 10 days. Where to turn?

The Citizens Advice Bureau promotes itself as the place to go for impartial debt related advice. Mr Smith mentions that they are thinking about selling and renting back.

The CAB advisor warns them against this. They will be losing money. Their home is worth at least 20% more than the Smiths have been offered.

The Smiths are relieved to benefit from the wisdom of the CAB.

However, the logic of this advice is somewhat strange.

If a homeowner allows a lender to repossess they immediately lose all control over the sale price of the home, whereas with a cash property buyer, the owner is free to decide whether or not to sell at a discount in order to pay off his/her debts, once the property is in the hands of the lender the property will be sold (usually at auction) to cover only the mortgage debt of the first charge.

Most repossessions involve second and third charges for secured loans. These high interest rate sub prime lenders are not going to shrug and walk away.

The will chase their debts aggressively for up to 12 years.

Of course selling your home for a discount is not something to be happy about. But what are the real options? Homelessness and another 12 years of being pursued by your lender with interest and charges racking up?

With so many properties now being repossessed prices for repossessions at auction are once more becoming bargains. However, if the lender sells the property below the mortgage debt redemption figure, then the lender can pursue the previous owner for the balance of the debt.

If you compare this with the owner selling for a price to cover their debts and recover at least some of the equity in their home then the CAB’s blanket condemnation of cash property buyers makes little common sense.

We have come across a number of people who have taken the CAB advice to allow themselves to be repossessed rather than accept a cash offer. Once repossessed, the person taking the advice is then not only homeless (and depending on their situation) with little chance of the local council rehousing them, but without any funds with which to rent in the open market.

Selling to cash buyers and sell to rent schemes may not be the answer to everyone facing repossession, but the attitude of the CAB seems to be a very middle class and patronising hair shirt ‘you’ve made your financial bed now lie in it a while’ coupled with sheer horror that a third party might make money out of somebody’s repossession situation.

Well, the banks, especially the sub prime lenders are making a lot of money out of repossessions with massive fees and penalties, the victims are ending up homeless when the options of selling at a discount and moving on or renting back their homes and getting their lives back together are simply not open for discussion by CAB advisors.

But at least the staff at the CAB can sleep well knowing that no property investors have made a penny from our Mr & Mrs Smith (who tonight may be sleeping in a council run B&B on the wrong side of town…)