Two Myths You Shouldn't Believe
This is one of the most dangerous ways to get out of debt -- and if you believe these myths, it could leave you homeless.
A leaflet pops through the door. "Sell your home and rent it back!" it screams in big, glossy capital letters. Perhaps there is a picture of a smiling couple on the front. "Wave goodbye to your financial worries - we will buy your home in just 24 hours!"
In today's battered and credit crunched economy, these so-called `sale and rent back' or `sale and lease back' schemes seem to offer a lifeline to homeowners facing repossession by their mortgage lender. They allow the homeowner to get rid of their mortgage debt -- but remain in the home as a tenant.
So perhaps it's not surprising that, according to a recent survey of Fool readers*, 50% of Fools would consider selling their home using a sale-and-rent back scheme, if they were facing repossession.
The trouble is, most of the people we surveyed were clueless about what these schemes truly entail. We discovered there are two key ways in which people are being misled:
Myth 1: You are entitled to the full market value of your property
One in six of the Fools we surveyed believed they would be paid the full market value of their property.
But the truth is, you will usually be offered just 80% of the price your property would usually achieve - with some schemes offering even less.
It is understandable that so many Fools believe this myth. Most schemes do not highlight this fact in their marketing literature and it is only when they have got their hooks into you that you realise just how little is being offered.
When the property has been bought at 20% discount, in a falling property market, you have to wonder how long the new sale-and-rent-back owner will want to hang on to it for. After all, they have to sell up trying to capitalise on the bargain price that has been paid.
Which leads me nicely into the next myth..
Myth 2: You can stay in the property as long as you want
More than a quarter of the Fools we surveyed believed these schemes allow you to stay in the property as long as you want to.
In fact, you will usually only be given a tenancy contract for just 12 months. After this point, the landlord can kick you out, increase the rent or do anything he pleases - you have no legal rights whatsoever to stay in the property (read A Dangerous Way To Get Out Of Debt for more details on why this is).
But, since most schemes deliberately give their customers the impression that they can stay in the property forever, it is not surprising that so many Fools were fooled on this point.
For example, some schemes promise "you can stay in your home with total peace of mind" and "maintain stability" in your life and the lives of your children. Others stress that you will "avoid the stress and disruption of moving".
Furthermore, I conducted an undercover investigation as a `customer' earlier this year. Some of the most prominent sale-and-rent-back schemes I spoke to told me orally that I could stay in the property for "as long as I wanted to", or for "an unlimited time period".
Are these schemes all bad?
When you're facing repossession, there is no doubt your options are limited. If you cannot stop the repossession proceedings from going ahead, the mortgage lender will try to sell your home quickly, particularly in this market, to ensure the money it has loaned you is returned to its balance sheet. This often means selling at auction, at a heavily reduced price.
What's more, the mortgage lender will usually add the cost of its legal fees to your debt, so you foot the bill for the repossession proceedings. This means that, in some cases, you can lose out on 15% to 20% of the money you would get if you sold the property on the open market -- just as you would with a sale-and-rent-back scheme. Then again, this is not true of all cases.
Personally, I wouldn't wait for the mortgage lender to repossess and charge me the fees. And I wouldn't go for a sale-and-rent-back scheme either. If I had enough time, I would prefer to try to sell my property at auction.
This is much, much quicker than selling through an estate agent and there is no way the sale can fall through (as my Foolish colleague, Szu Ping Chan, explains in this article). You can set the reserve price at the level the sale-and-rent-back scheme has offered you, minus the rent you would pay for a year. That way, you won't be out of pocket -- and hopefully you will achieve a much better price.
Either way, it is an open and transparent procedure -- and you'll receive a 10% deposit from the buyer on the day of the auction, which should help to hold off the mortgage lender until the transaction is completed 4 to 6 weeks later.
Of course, the unique allure of sale-and-rent-back schemes is that they allow you to stay in your property as a tenant. And our survey did show that 11% of Fools would still consider these schemes even if they did not receive the full market value for the property and could be turfed out within a year. But this is a significant drop from the 50% of Fools who would consider these schemes if they could stay in the property forever and get paid the market value.
But what bothers me most about these schemes is that their marketing literature misleads people. And yet they target homeowners facing repossession -- people who are at their most financially vulnerable.
That's why The Fool is calling on the Government to start regulating these schemes, and why we are working with the Office of Fair Trading (OFT) is to aid its investigation into these schemes.
So, if any of you have either sold their house through a sale-and-rent-back scheme, or have thought about selling your house through sale-and-rent-back and then decided not to for whatever reason, the OFT and The Fool would like to hear from you. You can contact the OFT here. To contact The Fool, please email firstname.lastname@example.org.
But don't forget to post in the comments box below, to share your experiences and thoughts with other Fools who may be considering these schemes. Thank you for all your help.
*We surveyed 1,114 Fool readers between 25 June and 2 July 2008.
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