Compensation available for Homeowners duped by Buy and rent back companies
From July 1st this year anyone duped into selling their home and renting it back from unscrupulous companies may be able to claim compensation for their financial losses. This could be good news for the 50,000 home-owners that are believed to have used a sale and rent back scheme from one of the 1,000 or so firms that offer them.
Partial regulation will be introduced by the Financial Services Authority (FSA) to part regulate some of the activities. From 1st July next year, the industry will fall under the full regulatory supervision of the FSA after years of mis-selling and misery for many.
On the surface, to buy and rent back your home seems like a good idea. However, the actual experiences of many have showed that this unregulated property transaction has led to misery, as unscrupulous companies have sought to make vast amounts of money by taking advantage of people's bad fortune or ignorance.
The usual sell is to those burdened by debt or looking to release cash from their property. After paying up to £500 for a valuation, the company agrees to buy the property and then rent it back to the seller. This avoids them having to move home and generates cash to pay off debts. The buyer pays off any mortgage on the house, which leaves the former home-owner with a cash lump sum.
However, the execution of the process has been fraught with problems.
Firstly, the valuation is carried out by a surveyor rather than an estate agent. Surveyors will normally price on a forced sale basis or what the property would fetch if it were to be sold at an auction. Estate agents look at what the property would be worth if sold for best value and will allow a little for negotiation. The difference in valuations can be as much as 25%. The buying company usually pay all fees and costs – but with such a cheap property buying price, this is small beer. In most cases, the valuation can be as low as 65% of the true market value of the property were it to be ordinarily marketed through an estate agent.
Secondly, when the seller agrees to rent the house, they do so on an assured short hold tenancy basis. The rent charged is usually at a full market rate basis so there is no subsidised rental given the value of the property. Additionally, at the end of the initial period of 6 or 12 months, they can be evicted from their home even if they have been paying the rent. This leaves the buying company with a tidy profit on the sale of your home along with a healthy rental return in the meantime.
It is this gross mis-selling practice that has finally encouraged the Office of Fair Trading to ask the FSA to bring the activity under their supervision from 1st July 2009.
Anyone who believes that they have lost money as a result of one of these buy and rent back schemes can apply to the Financial Ombudsman Service to have their case reviewed. First, the claimant must have sought redress from the company that bought the house but assuming that they get no satisfactory resolution, the Ombudsman will review the case and make a decision.
As a first step, companies operating in this market will have to apply to the FSA for permission to continue trading. To qualify, they must sign up to the FSA's principles for business and prove that the management are fit and proper people with adequate resources. The FSA will be able to stop, ban and/or fine any organisation breaking the rules.
Buy and rent back schemes are not to be confused with equity release or home reversion products marketed by regulated and reputable lenders. Equity release is a lifetime mortgage product where the home owner takes out a mortgage on their home that is usually repaid when they die or move into alternative care accommodation. Home reversion plans involve the owner selling all or part of their home in return for the right to live there for the rest of their life, until they move into a care home or for at least 20 years in return for a discounted rent. Both equity release and home reversion plans are fully regulated by the FSA.
The proposals for regulation exempt newspapers and journals that carry information about such products. Therefore, any compensation claim will have to be targeted at the buying company. With many now facing tighter controls, limited financial backing and greater challenges, they may not be around for too long to pay out any judgements against them.