By Mark Alexander.
I closed my first Sale and Rent Back, “SARB”, deal in 1990. It wasn’t for me personally though and it wasn’t a property deal either. I had just set up a commercial finance brokerage. At that time we worked from my dining room. One of my first clients was a Norfolk based hire company.
They had instructed me to arrange commercial finance to enable them to relocate to larger commercial premises. I secured a mortgage offer against the security of the property, which at the time was a feat in itself, but they couldn’t raise the deposit.
I went through their accounts with them in detail and discovered they owned 600 portable toilets they rented out to building sites. Not to be beaten I telephoned all finance and leasing companies I could think of to try to secure financing secured against these portable toilets.
You can’t begin to imagine the number of jokes and wind ups I got for broking that deal! No the company wasn’t ‘going down the pan’ and it wasn’t a ‘s**t deal’. I heard them all. My persistence paid off though and I eventually found a leasing company who agreed to purchase the units and rent them back. The deposit was raised and I had saved the day.
I went on to use sale and rent back in my commercial finance broking career to good effect.
By 2003 I had achieved most of my financial goals; to amass enough money to retire at the age of 35, to live in a 7 bed house with pool standing in 5 acres, own a small fleet of supercars, build my own dream holiday home abroad overlooking a lake; you know the type of thing. I had achieved all of this by building a property portfolio and a finance broking business.
That’s when I defined retirement as “do more of the things you enjoy and less of the things you don’t”.
I enjoyed success and had become addicted to buying properties. Therefore, I carried on doing most of what I was already doing and decided “this is my retirement!”
I also wanted to do something philanthropic. It had to appeal to my values and it had to have an element of commercial viability too. I considered giving money to charity but that wasn’t for me.
One day I was out looking at a house near to Norwich University. An older couple had fallen onto hard times due to ill health. They explained that they had a small mortgage, around 40% LTV (loan to value) but they just couldn’t afford to live there any more. They had looked into lifetime mortgages and equity release financing but it just didn’t work for them as they were too young and LTV’s offered were too low.
I asked them how they felt about moving and the whole sad story came out about how they had lived there since they were married, brought their kids up in that house and didn’t want to move away from their friends but they had no choice. That’s when I thought about sale and rent back.
I purchased their home from them and rented it back. The rent was lower than the mortgage and they had cash in the bank. They treated their grandchildren to a holiday, paid to have their garden done and even paid to have a new fitted kitchen, bathroom, full redecoration and a conservatory, all on my house. I was delighted and so were they.
To this day they are still in the property, they’ve been some of the best tenants I’ve ever had and they’ve been great advocates for me personally.
Word soon spread and I found myself inundated with people wanting to do similar deals. The lenders were very happy with my business model at that time.
I also had a bit of a bonus in 2003. Property values in my area increased by 25% and at the same time lenders increased LTV’s from 80% to 85%. At the beginning of the year my portfolio was worth £4 million, by the end the same properties were worth £5 million. I refinanced and released £1 million cash. Now I was set to take this model to another level.
I created the brand “sell-to-let.com” and promoted it by advertising and sponsoring the news and weather on the local radio station. I also did a deal with the Royal Mail whereby they would print and deliver 100,000 flyers a month for a cost of just over £11,000 a month. Enquiries were pouring in.
By 2005 I started to get worried. The buy to let market had reached boiling point and thousands of ‘inspired amateur investors’ were pouring into the market. They were sold on the hype and hope of becoming property millionaires and being taught en-mass how to do ‘no money down’ financing. See my article in ‘The history of no money down and instant remortgages’.
My business model was soon replicated by the BMV (below market value) no money down mob who hadn’t got two pennies to rub together but were allowed by greedy and naïve mortgage lenders to become property investors nonetheless. What would happen to their tenants if they had no money to maintain their properties or to pay their mortgages? The prognosis was not good.
I knew that I had to raise my game. The lenders were not listening to what I was telling them at that time so I decided to use public opinion via the press. I instigated a number of negative PR articles to promote the potential downsides of dealing with an amateur Sale and Rent Back landlord.
As we all know, the press love a good disaster story and the bad news stories begun to flow. This instigated an Office of Fair Trading (OFT) report which I was only too keen to contribute to. A copy of the full OFT report can be accessed from a link at the foot of this article. As you will see, my name and The Money Centre are used as information sources throughout. This report eventually led to full Financial Services Authority (FSA) regulation of Sale and Rent Back.
Whilst all of this was going on I had also managed to evolve my business model. I created a legal framework combining Sale and Rent back, shared equity and improved security of tenure without affecting the rights of the mortgage lender. This information was also shared freely with the OFT. I labelled the scheme as “Entrusted Equity”. Sadly the scheme details were leaked by two ex-employees of The Money Centre to a few unsavoury folk and they created copy cat schemes without the tenancy protection that I had evolved. The dodgy version of my scheme was being taught to inspired amateur investors who were using it again to build portfolio’s with no money.
Through my broking contacts I created the National Association of Sale and Rent Back (NASARB). I attracted over 800 supporters who completely backed my aims to stamp out the rogue traders. However, I was slated on the internet forums by the people who were profiteering from teaching people with no money how to build their portfolio’s. They claimed that NASARB was a publicity stunt organised by me to attract more clients to arrange mortgages through The Money Centre. I was having none of that so I persuaded my shareholders to gift 100% of our research to the National Landlords Association who were a completely independent organisation. I worked with them as an honorary Consultant to the NASARB board (free of charge) and they did a great job of lobbying government and influencing the outcome of the eventual regulation of the sector.
I also worked closely with Julian Sampson of Wright and Wright solicitors as they took a keen interest in regulation of the sector and as a result were well geared up to advise landlords on FSA regulation. If the credit crunch had not happened for a few more years they would have been very busy registering SARB landlords with the FSA.
I was delighted with the outcome of the OFT report and the prospects of FSA regulation. This would effectively wipe out the bad guys.
The problem was we were witnessing the beginning of the Credit Crunch. The credit teams within the mortgage lenders had read the bad publicity that Sale and Rent Back had received and they were getting nervous. The words “reputational risk” was the reasons they were giving for refusing to write this type of business any more. They were less hungry for new lending at that time and SARB was an easy and politically correct form of lending to cut back in their minds.
Despite this, I was on the verge of closing a £200 million securitised line of credit to fund my Entrusted Equity business model. That’s when the credit crunch started to bite. Securitised lending literally stopped in its tracks and my opportunity to secure funding ceased at exactly the same time.
It was pointless for me to pursue my Entrusted Equity business model without funding so I decided that is was not commercially viable to apply for FSA permissions to conduct SARB business.
However, I am very pleased that the sector is now fully regulated and most of the rogue traders seem to have disappeared. I’m confident that my Entrusted Equity model will meet all regulatory criteria when I’m ready to register it. For now though, mainstream Sale and Rent Back in the buy to let market, and specifically the Entrusted Equity business model, will be shelved and gathering dust until the worldwide Credit Crisis is over.