So it seems that SARB – otherwise known as Sale And Rent Back is officially dead. Thank heavens this trend, which hopped over from Australia and the US, is no longer with us.
The FSA has stated that;
Most deals were either unaffordable or unsuitable and never should have been sold.”
Regulation Of Sale And Rent Back
It came to the notice of the OFT in 2008 because thousands of home owners had been ripped off by investors who were in it for a fast buck. Sale and rent back was finally regulated back in 2009. Of course there will be some success stories too by investors who used it to help people, but, it always had the potential to be misused.
The sale and rent back scheme was initially heavily promoted via property networking groups. Investors began using it to gain control of someones property for very little money or risk on their part. ( And this, to my mind, is always what separates the good property folks from the bad.)
Many home owners, who were desperate to sell, were offered the opportunity to sell and rent back their own property instead. In theory, what was supposed to happen is that owners would sell their property quickly at a knock down price (off market) to the investor in return for an affordable rent on an agreed long term. The investor gets a cheap asset and a ready made tenant. Seller gets to stay in their home at an affordable rent, which is less than their mortgage, for a long term.
Investors Took Advantage
However, what happened in reality, was investors taking advantage of people in a distressed state who subsequently signed documents which basically allowed the investor to put up their rent or even evict them with just a minimum notice given. This was eventually stopped in it’s tracks via FSA sale and rent back regulation, which made companies offer a tenancy lasting at least five years after the sale.
After the FSA regulated sale and rent back only 22 out of an original 1000 firms stayed in the market and actively carried on doing business.Reports state that only 60 deals have been completed since the regulation. Compare that to the 50,000 or so vendors who did early deals. Many regulated firms have not renewed their license or have now cancelled them.
Newly Regulated Firms Still Put Vendors At Risk
The FSA found that even the regulated firms who were still doing business on sale and rent back put vendors at risk with bad business practices. Clearly, there is no longer any money in it for the providers. One firm was still committing fraud even after they were licensed. old habits die hard.
Sales completed by vendors caught up in the fiasco prior to regulation unfortunately have no redress for compensation, those after regulation will have the benefit of the Financial Services Compensation Scheme (FSCS).
One thing is for sure, when a particular technique, such as sale and rent back or lease options, starts doing the rounds at property networking/ investment clubs, it’s a fair bet a high percentage of deals done will be dodgy. Lets hope the use of lease options on residential property will go the same way as sale and rent back.