We’re all aware of the benefits, to investors and vendor/tenants alike, that are involved in sale and rentback schemes (SRB). Many people reading this blog will undoubtedly have taken the opportunity to save at least one family from repossession and eviction from their home by the lender too, so readers both know that satisfaction and are now reaping the financial rewards (it’s business so a fair profit is reasonable to expect). And done ethically this is a fantastic win:win arrangement where the potential repossession victim gets to stay in their home, and the investor hopefully gets a good tenant.
I’ve posted before though about why some investors are less desirable than others and of course that problem is compounded many times over when their tenant is a vulnerable family in a rentback situation. In the last couple of years many people have jumped on the BMV/NMD bandwagon, and many property investment gurus have been pleased to charge them very large sums of money indeed to teach them… well, probably not enough as it happens, but that’s another matter; it’s also not what went wrong here.
More than 6 years ago, on 14th March 2003, a company called Repossessions Stopped Limited was incorporated; their purpose was clear enough from the name.
Long before that however, right back in 1984, a couple called Paul & Amanda Jackson had bought themselves a home in Shrewsbury and a few years later they had children; so a pretty normal family in most respects.
The two parties met in 2005 when Mr & Mrs Jackson fell into mortgage arrears, and Repossessions Stopped “saved the day” by buying their home from them and renting it back to them. Repossessions Stopped clearly negotiated hard though, too hard in my opinion, because they paid just £63,000 for the Jacksons’ home that was then valued at £100,000. 37% BMV in a fast-rising market (as Shrewsbury was back then) is however exploitation in my personal opinion, but that’s another matter. Still, I’m sure that the shareholders of Repossessions Stopped enjoyed the substantial cash-out, and using the Jacksons’ lifetime accumulation of equity to put towards another fast car!
The real problem came in 2007 though when Mr & Mrs Jackson received an eviction notice after Repossessions Stopped managed to get themselves into mortgage arrears! Perhaps some of the cash-back they were living on would have been better – i.e. more prudently – invested in something that depreciates slower than a power-boat or a helicopter? Learn the lesson: ultimately LIVING ON DEBT DOES NOT WORK!
The Jacksons were finally put out of their misery last week when a judge at Birmingham County Court ruled that they really could stay in their home for life, with them either taking out a new mortgage and becoming the owners, or by renting the property back from the mortgage lender who had repossessed it, as they wished. The judge further ruled that when the parents die their daughter can inherit the tenancy, as can their son if he is over 18 at the time.
So finally, thanks to Birmingham County Court, the Jacksons really do have the security of tenure that Repossessions Stopped had promised (but failed miserably to provide) them. The judge described the firm, Repossessions Stopped, as “dishonest”.
Make no mistake, this is a landmark ruling, and full credit must be given to Shelter for taking the case to court.
So, expect the FSA’s new Rentback Legislation to be tough (the interim legislation is already with us to provide immediate protection to vulnerable homeowners, and it’ll be full by 30th June 2010). It needs to be tough because, regardless of the good intentions of many investors, there are inevitably those who are dishonest, greedy, lack any form of asset backing and/or cannot manage their own financial affairs any better than the people they are supposedly rescuing! Yes they are in the minority, but they do exist and they have ruined it for the rest of us. You can thank the various ‘property investment gurus’ who pimped innumerable, and mostly inadequate, ‘get rich quick’ schemes to people who lacked the investment maturity to properly execute them for causing this problem.
And if you do approach any prospective rentback situations from now on, don’t be too surprised if the prospective vendor/tenant is a little better informed than before and wants some firmer reassurances that they really will be able to stay in their home and that you’re not about to go bankrupt too! After offering suitable reassurances as to the soundness of your own financial footing, i.e. that you are lowly geared and not mortgaged to the hilt, you can of course also use this ruling to reassure them that even if it does all go wrong the court will be on their side.
Meanwhile, in the North-East of England, Police are carrying out a criminal investigation into fraud allegations after North East Property Buyers and Newcastle Home Loans collapsed. They had also been set up to buy homes from cash-strapped families and rent them back.
So take this opportunity to ensure that your own house is in order! And despite the advice that you may hear elsewhere mine remains to look at ways to reduce your gearing, not increase it as far as you can.
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