Should I consider renting back to vendor?

by Readers Question

8:10 AM, 5th August 2016
About 2 years ago

Should I consider renting back to vendor?

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Should I consider renting back to vendor?

I am a first time buyer considering buying an ex-council flat on a buy-to-let mortgage. The seller who lives there with his family is suggesting I let it back to him while he looks for a property to buy. thinking

I am concerned he may have an agenda to try and become a sitting tenant. For example if he started to claim benefits.

Has anyone experienced such a situation?

Would it be best to either wait potentially indefinitely for the seller to find a property or terminate proceedings altogether.

Any advice gratefully accepted

Justin



Comments

Neil Patterson

8:12 AM, 5th August 2016
About 2 years ago

Hi Justin,

There are many lenders that will not allow the vendor to live in the property after the sale as they can see this as a sale and rent back agreement which they consider can affect access to their security. Therefore you will need to check this.

Ross McColl

10:55 AM, 5th August 2016
About 2 years ago

Steve Bower

12:56 PM, 5th August 2016
About 2 years ago

Definitely avoid unless you are registered with FCA - could get in a lot of trouble, aside from any tenancy issues.
Much better to give him, say 6 months rent (deducted from price) to take another property. You could even find it for him, if the deal is good enough.

Check though any restrictive covenants on the property as ex-council, and also check on the repairs element of the lease - have heard of private buyers being hammered for roof repairs on a part council-owned block

Kate Mellor

16:55 PM, 5th August 2016
About 2 years ago

I would have thought that 'sale-and-rent-back' is only relevant to those who have sold their house at a discount with a pre-agreement that they can continue to rent the property - long term. All the risk is on the side of the seller as they are getting less for their property than they could on the open market and can still be evicted. You can prove that this does not apply in your case as presumably the seller marketed the property with an agent on the open market; you're purchasing at full market value with a surveyors valuation as evidence and if needs be your seller can make a declaration with their solicitor that they are not selling with any discounted arrangement in exchange for being allowed to rent back their property.

If your intention is to let the property anyway and you would be happy to accept them as tenants if they had applied to rent the property in the normal course of business, then I would simply consult my solicitor and if they couldn't see any legal issue with it, I'd incorporate the paperwork into the completion process and you could even ask for the 6 months rent and the deposit in advance on completion ie. deduct it from the sellers sale proceeds as long as they are in agreement.

Lenders normally exclude the new owners/borrowers or their relatives from being tenants in a property with a BTL mortgage, I have never personally seen an exclusion on a BTL mortgage of a FORMER owner as a tenant, but again, your solicitor will be able to give you clear and accurate advice on this as they are also acting for your lender (I would assume).

Have the seller sign a standard 6 month AST at the point of exchange of contracts (or later) bearing the same date as has been set for Completion. At least you know that they can afford the rent and you won't have a void period or any costs associated with preparing the property for letting, or sourcing a tenant.

Ensure that you provide your NEW TENANT with all the necessary legal paperwork, just as you would with ANY tenant, don't assume that you needn't provide them with a copy of the EPC for example just because they will already have this information from when they marketed the property, (although you can use the same one provided to you in the purchase process as they are valid for 10 years).

Just go through all the motions and tick all the boxes. That way you will not leave yourself open to anything, and you will be able to issue a valid Section 21 notice should you need to.

Get a Landlords Gas Safety Certificate issued between Exchange & Completion (with the consent of the vendors), a copy of which needs to be provided to them in their capacity as new tenant. Do all the Right to Rent checks, protect the deposit in a recognised scheme; issue the Prescribed Information and have them sign a condition report and take dated photographs to ensure that you can claim against the deposit for any damage or unpaid rent when they do move out. Specifically photograph any known pre-existing damage so that you are in agreement with the tenant that this pre-dated the tenancy. This is not an exhaustive list, so make sure you have done your homework and you know what your responsibilities are as a landlord.

You don't say what your experience is with BTL so I apologise if I'm preaching to the choir here. 😉

Lyndon Whitehouse

18:11 PM, 6th August 2016
About 2 years ago

I'm a portfolio landlord, letting agent and I increasingly source BTL properties for clients to buy, which we then manage.
I have re let to a seller many times. It is a good negotiating tool, when agreeing the purchase. The seller will become a first time buyer and benefit from all that that brings.
Treat them as though they are normal applicants for the property. Meet them, discuss it, (you will immediately see how they look after the property). Try to establish their motive to sell, will they receive a large amount of cash (equity) from the sale, or have they remortgaged up to the hilt. It's all due diligence, but you have the wonderful advantage of chatting to them in their own home. If you have any doubts about them - don't do it! As per normal.
If they are genuine, obtain all the fees and deposit upfront in the week prior to completion. Sign them up on an AST the day before. Do as good an inventory as you can, bearing in mind furniture and that's it!
People in their position are easy to assess, you're in their house and that's what its all about!!! Making a good assessment.

Mark Alexander

10:55 AM, 7th August 2016
About 2 years ago

If you purchase a property which is rented back to the former owner and you get a mortgage on it you could be committing mortgage fraud, the punishment for which is up to 14 years inprisonment.

Furthermore, unless you are regulated to conduct such business by the FCA then you could also be prosecuted for criminal activity by them.

Search Google for "The history of sale and rent back" and you will find a blog I wrote on the subject many years ago.
.

Kate Mellor

22:40 PM, 7th August 2016
About 2 years ago

Sorry to contradict you Mark, but according to Ben Reeve Lewis on Tessa Shepperson's landlordlawblog.com when he phoned the FCA they confirmed that restrictions on sale and rent backs 'apply to companies only and not on an individual choosing to do a private deal with another individual. The FCA wouldn't interfere with an arrangement of that kind'.

Whether your lender would consider this private arrangement to be acceptable or not you would need to be confirmed with your lender, but in my experience careful reading of your mortgage offer generally spells out any restrictions of this type.

If it's not mentioned in your mortgage offer and it's perfectly legal then why should it be mortgage fraud? You've got me!

Mark Alexander

10:01 AM, 8th August 2016
About 2 years ago

Reply to the comment left by "Kate Mellor" at "07/08/2016 - 22:40":

Hi Kate

I have a great deal of respect for both Ben and Tessa, we go back a long way.

However, on this occasion I think Ben has been given duff information, has asked the wrong question or misinterpreted the answer. Whichever it is, I am extremely confident that SARB regulation has very few exceptions and that simply not being incorporated is not one of them.

An example of a deal which might avoid regulation would be a "one-off" between family members but even that isn't clear cut.
.

Steve Bower

17:52 PM, 8th August 2016
About 2 years ago

A SRB agreement is a regulated product, and must only be sold by an authorised firm, so there is no concept of a private arrangement in this case. In https://www.handbook.fca.org.uk/handbook/MCOB/4/11.html firms included individuals. I'd even avoid it for families, as a BTL mortgage usually specifically exclude relatives as tenants, Its inviting a whole world of trouble.

Kate Mellor

22:30 PM, 8th August 2016
About 2 years ago

Assuming you're correct and the SRB restrictions also apply to individuals, I would argue that the example given in the question clearly does not constitute an SRB in any logical way.

The property was marketed professionally by an agent to all comers and the purchase/sale was patently at full market value; there was no condition on the sale/obligation that the buyer would rent back to the seller (the purchaser could equally have been an owner-occupier); the purpose of the rental period is specifically for the seller to find and purchase another property; the AST is a standard 6 months term and not the minimum 5 years of an SRB and there is no written SRB agreement. Additionally both buyer and seller could, for belt & braces, make a stat dec in front of their solicitor to the effect that the seller is not selling on any condition that they be given a tenancy and the buyer that they have not given any representation of same to induce seller to sell to them and that the agreement to let to the seller was made subsequent to the sale being agreed.

I'm not saying I'd like to be the test case in any malicious prosecution, but as an academic exercise I'd be interested to know if there is anything in writing that can be relied on to clarify these points. Logically there must be more specifications to constitute an SRB than the seller becoming the tenant. It shouldn't be something you can do by accident.

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