Selling to a tenant through a rent to buy scheme?

by Readers Question

13:06 PM, 20th June 2014
About 4 years ago

Selling to a tenant through a rent to buy scheme?

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Selling to a tenant through a rent to buy scheme?

My sister and I inherited the home where we grew up, modernised it, and have been letting it to a great couple for 3 years. We told them before signing the first AST that it would be our intention, one day, to sell the house (due to its distance and relatively poor yield compared to closer locations). As it happens, my young sister wants to buy her own place and my wife would like a range cooker and a big kitchen to put it in 😉 Selling to a tenant through a rent to buy scheme

We mooted the idea when we inspected/dropped an Xmas card round some six months ago (hoping to take advantage before the CGT rules changed in April) but typically since then, the topic has come up for discussion again and the tenants are looking at funding through a rent to buy arrangement. They can’t obtain a traditional mortgage as one partner is a mature student and wont graduate for two years.

As far as I understand, we agree a price at today’s value and the tenants are then responsible for maintenance etc but still pay rent as per AST until a mortgage is agreed. There is a legal agreement that they will buy the house at a fixed time in the future (2-5 years), the idea being that in that time, they can save a deposit while living in ‘their’ house.

Has anyone had any experience of this or are there any pitfalls/scams I should be aware of?

Am I correct in thinking that for the fixed time while saving for a deposit, the rent paid is still ours, or does that form part of the tenants deposit? What about the ‘overpayment’ they make each month to bolster their deposit?

What happens if they arent able to get a mortgage in the future (lending criteria, redundancy, house values falling – a flat market since 2010 according to est agents)? Is the legal agreement enforcable (I’m of the impression that they’ll be able to get a x4 joint mortgage to buy the house but havent got any liquid capital, so not really worth suing?) or what happens if they renege on the agreement?

Who owns the property between the time of agreeing to sell at X amount and when the mortgage is obtained a few years in the future?

And what the heck is a range for the kitchen?

The tenancy is due to come to an end in August, and we’ve agreed will run on periodically until an agreement is signed or it is put on the open market if the rent-to-buy proves fruitless

Many thanks for your thoughts

Geraint



Comments

Mark Alexander

13:18 PM, 20th June 2014
About 4 years ago

Hi Geraint

I am familiar with the Rent to Buy scheme but I simply can't get my head around why anybody, vendor or tenant/buyer would see it as a good idea.

My view is that you should either; 1) sell the property to somebody who can afford to buy it at the market value at the time of purchase or 2) continue to let it.

In answer to your questions:-

You still own the property and the entitlement to rent until they buy it.

They are not compelled to buy it.

You are compelled to sell it at a pre-agreed price at any time within X number of years.

If the property value goes down they obviously wont buy and you will not be able to sell for what it was previously worth. If the property value goes up they may buy it but there's no guarantee they can or will and if they do buy, they win and you lose out on the capital growth - BONKERS!

There are many scams but not all schemes are scams. The fairest and most compliant rent to buy scheme I've seen to date is operated by a business called ewemove.com but everything I've said above still applies.

My advice to you is to sell it to somebody who can afford to buy it - unless of course you are making good rental profits and expect strong capital; growth and can afford to leave your money in the property as an investment. If that's the case, just stick with the status quo - there's no point tying yourself into anything else in my opinion.

The relevance of you sister wanting a range cooker is totally beyond me.
.

13:50 PM, 20th June 2014
About 4 years ago

Hi Geraint,

I share Mark's view.

What you will be getting involved in is actually termed a "lease option" and the law dictates that you need a Consumer Credit Licence to offer this as you are effectively offering vendor finance, which is a regulated activity.

Why not release some equity for the things you and your sister want?

Surely that is far easier than selling the property or getting involved in a complex scheme.

Speak to your lender about a "further advance", provided that there is sufficient equity. That may solve your problem without all this complex carry on.

Nick Faulkner

14:55 PM, 20th June 2014
About 4 years ago

As always Mark makes very good points ....and a "Rent to buy" scheme may not provide the cash for your sister's new house or your wife's new kitchen in the near future.
If you are not expecting the "buying " bit to be done pretty soon why,in a rising market,do you want to commit yourself?

G Brown

15:01 PM, 20th June 2014
About 4 years ago

Thanks Mark and Vanessa

I thought the whole principle of having a legally binding agreement was precisely so that they are obliged to buy it, but at time when they have a deposit amassed. But if I understand you correctly, they can pull out but we can not? If so, that’s a massive game changer

Vanessa, the house in unencumbered as mum had paid it all off while she was living there. I had considered remortgaging but feel the time is right to sell because of emotional attachment, its distance away and appeal of better returns nearer to where I live.

It’s making fairly good profits as the tenants are very proactive and there’s no finance payments, but the local market has shown little recovery and houses on the street are for sale for years! From what the local EA say, I doubt very much there’ll be much capital appreciation in the next few years as the recovery since 2010/11 hasn’t buoyed this area yet

Because of the improvements they’ve made and the time invested, they’re keen to live there, but the fact they can pull out while we cant is critical.

Sorry, I was having a joke about my wife wanting a range cooker from the sale of the house

G Brown

15:13 PM, 20th June 2014
About 4 years ago

Hi Nick,
The valuations of the house are coming back as acceptably close to what the tenants are offering, in a market which has at best been standing still, at a time when we need capital released.
The route would save EA fees, contracts exchanged with the same firm of solicitors (different partners) that would save time, and we know the buyers are keen, having spent time and their own money improving the place - hence my attraction to the scheme.
If the lady, who's a mature student, was working, then a traditional mortgage would easily be the best way forward.
The quick answer to your question is that prices are not rising and houses are not selling in the area.

Mark Alexander

15:49 PM, 20th June 2014
About 4 years ago

Reply to the comment left by "G Brown" at "20/06/2014 - 15:01":

Hi Garaint

The more you say the more concerned I am becoming for you.

Who put this deal together, was it you, an agent or the tenant?

The phrase "exchange contracts" implies that it may not be a Rent to Own scheme at all. It may be a "long stop completion" which is effectively an exchange of contracts to purchase with a VERY long gap between exchange and completion. If that is the case there may not be rent payable and there are massive insurance and possession issues too. Unless the deposit on exchange of contracts is a very significant one then you will be taking all the risk, especially not knowing for sure whether the purchaser will ever be in a financial position to complete.

Have you taken independent legal advice?

Have any contracts been prepared yet which you could obtain advice on?

I know that Mark Smith from Cotswold Barristers has done a lot of research into these business models so if you want some professionally qualified advice I'd suggest contacting him >>> http://www.property118.com/member/?id=1945

My advice, which is based on experience but not qualified, is DO NOT do this deal and make a decision on whether to sell (normal rules of exchange to completion period of circa 14 days) or to continue to let.
.

Roy B

16:18 PM, 20th June 2014
About 4 years ago

If you don't need the money from the sale why not mortgage 50% of the property to buy your sister out and give your tenants time to get a deposit together. You seem to have good onesand better the devil you know, esspecially since you seem to get on well with the tenants. Then 100% of the rent is yours though your returns will drop a bit you will get a decent rate on the mortgage.

G Brown

10:40 AM, 21st June 2014
About 4 years ago

Hi Mark
The idea of selling this way rather than a traditional mortgage is the tenant's, and so far nothing has been agreed, we're merely at discussion stage as to whether its a viable option for both parties. It's becoming increasingly clear that the scheme is weighted towards the tenant.
I havent taken any professional advice on this. In the first instance I thought a forum might be a good starting point to gauge opinion.
I doubt that the deposit accrued will be significant enough to warrant taking the risk of the tenants pulling out.
Thanks
Geraint

G Brown

10:50 AM, 21st June 2014
About 4 years ago

Reply to the comment left by "Roy B" at "20/06/2014 - 16:18":

Thank you Roy
It is a good idea and one that was considered in the new year when the tenants originally said no. Even though I don’t ‘need’ the money, with a business head on, it is the worst performing investment simply as it was never intended to be anything other than a family residence.
It’s an avenue definitely worth further investigation with the available rates, our relationship, and it suiting the tenants and my sister, just not my first option, but workable nonetheless.
Thank you again
Geraint

Colin McNulty

13:03 PM, 21st June 2014
About 4 years ago

Mark and Vanessa are very cautious of these kinds of deals, but there are people out there (rightly or wrongly) doing hundreds of them. Some would argue that Vanessa is not correct that you need a Consumer Credit License to offer a Lease Option.

Indeed a Lease Option doesn't quite sound like what you had in mind. What Mark calls a Long Stop Completion, is I believe more commonly known as Exchange with Delayed Completion, or an Instalment Contract.

Again there's disagreement among the experts as to what hoops should be jumped through to make these arrangements legit. E.g. if the tenant pays you a monthly fee that covers your mortgage interest + a top up that's counted as a down payment towards the deposit / cost of the house, some people say you should keep this top up in a separate client account, as in theory it's their money still until completion, and you should give it back if they back out of the deail, less their notional 10% deposit say.

Others disagree and say you can spend that money and just knock it off the final value of the house on completion. And if they default and back out of the deal, you keep that money.

The benefit to you as the seller of an instalment contract / EwDC / Long stop completion arrangement is 2 fold: firstly you can put all the responsibility for maintenance and insurance etc on the tenant-buyer (though you should probably still get a gas safety certificate) so your agro level goes down. Plus your risk of a void disappears and there's no agency fees, nor any estate agent fees to pay.

And secondly, you could legitimately argue that if they intend on buying in 5 years say, that house prices are expected to rise 5% pa for 5 years i.e. nearly 28% (including compound interest) so you could split the expected gain and charge a premium of 14% over the current value of your house. E.g if your house is worth £100K today, agree an instalment contract with a completion price of £114k in 5 years time.

I did, and would still, consider selling my own house this way, but make sure you use a solicitor who is comfortable with doing this and has done it before.

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