Lime Legal

Poison pill

Published 01 November 2023

Beware firms claiming to offer a way out of repossession. They are not the panacea for struggling home owners, writes Tony Marshall

Home owners struggling with mortgage arrears – especially high-interest sub-prime loans – face a new threat from companies that have sprung up in the wake of the massive rise in repossessions.

So-called sale-and-rent-back schemes advertised in leaflets pushed through the letterbox or on unregulated internet sites seem to offer a lifeline to people who believe they have nowhere to turn.

The companies operating them will buy the mortgaged property and grant sellers an agreement that allows them to remain as tenants. But the price paid may be only a fraction of the market value – and the tenancy agreement may be practically worthless, with the new tenants facing huge rent rises or even eviction a few months down the line.

Some of the companies are simply agents for buy-to-let investors, or fronts for individual dealers whose real intent is to grab properties at knockdown prices to boost their holdings or sell on at a massive profit. But for many of the victims it’s a case of out of the frying pan and into the fire.

‘These companies, or more commonly individuals, buy the property as cheaply as they can,’ says David Milton, a solicitor at Shelter’s Norwich housing aid centre. ‘A typical seller is someone who bought their council house with a mortgage from one of the big lenders a few years ago, but has remortgaged since then with one of the sub-prime lenders, paying nine or ten per cent interest but with still some equity in the property.

‘The new owner will then rent it back on a short-term tenancy at rates higher than people can afford – the intent is to get them out and cash in so they can do the same trick again. Anyone who offers anything which hasn’t got inbuilt security of tenure is a cowboy. People can be served a Section 21 notice and be evicted and there’s no defence.’

Higher interest rates have pushed overstretched borrowers to the brink, and in the sub-prime sector, where borrowers with a poor credit history or those on low incomes are charged premium rates, recent rate hikes have been little short of a disaster.

Sub-prime borrowers feature prominently in court lists of repossession hearings. The casualties are frequently the most vulnerable – pensioners, lone parents, people facing a financial crisis after losing a job through redundancy or ill health.

But now people threatened with repossession are being targeted by firms posing as good Samaritans who claim to offer a way out of financial difficulties, and – what is more important to many of their victims – a way of remaining in the family home.

Armed with lists of repossession proceedings, some operators have even turned up at court to persuade home owners to sign a sale-and-rent-back agreement by promising they would be able to hold on to their home.

‘Sub-prime lenders are more aggressive in the way they deal with people in arrears, so they are driven towards these wrong solutions,’ says Peter Tutton of Citizens Advice. ‘It’s very aggressive lenders adding to people’s stress, worry, fear and panic which makes them more susceptible to someone offering solutions that are very bad.

‘It happens when people are under financial pressure and think they’re going to lose their home anyway. If it’s the family home that they’ve lived in for years, they’re very emotionally attached to it and want to stay where they are. They are preyed upon at a time of intense vulnerability.’

The number of cases seen by Citizens Advice is rising. ‘We’re getting more dodgy cases with houses being sold at massive discounts – people losing tens of thousands of pounds – and all they get in return is an assured shorthold tenancy,’ Tutton says. ‘People are told, “Oh, you can stay for years and years” – but that doesn’t happen. You have limited security of tenure, and after six months the rent goes shooting up ’

Operators promise up to 90 or 95 per cent of the value of a home. But the level of deceit practised by some operators means sellers can receive as little as 30 per cent. Mr E, a pensioner in his 70s, sold his home in January for £30,000. The property’s market value was close to £100,000. He agreed to sell on condition that he could stay on as a tenant indefinitely, but was only given a six-month assured shorthold tenancy. Mr E went ahead because he had taken out a loan that he was finding difficult to repay. He was panicking that he would be evicted due to the arrears. His wife was ill and he did not want to worry her. The landlord’s company is now in receivership and he has been told that he cannot stay at the property. Mr E faces homelessness.

‘Some sale-and-rent-back companies are reputable, but a large number are fly-by-night people trying to get on buy to let at a huge discount,’ Tutton adds. ‘Sometimes the purchaser has taken out a mortgage and gets in arrears, so the seller ends up being made homeless anyway – but they’ve lost thousands of pounds into the bargain.’

Mrs D took out a £50,000 loan secured against her home, despite the fact that she was in receipt of income support. Her home’s value at the time was £75,000. When she got into arrears and possession action was threatened, she tried to remortgage and after that fell through she agreed a sale on the condition she could rent the property back. She received a lump sum of £1,500 on completion of the sale. She has a six-month assured short-hold tenancy, which is in arrears because of housing benefit problems. The landlord, who works for the company Mrs D approached when seeking a remortgage, is now threatening action.

Hundreds of sale-and-rent-back websites are now on the internet. Some have few details of who is behind them – no office addresses, just email contacts and mobile telephone numbers. Testimonials from what are claimed to be satisfied customers seem to give credibility to guarantees of security, but, like many statements on the internet, there’s no way of checking the claims are true.

‘Some are networks,’ says Howard Springett of the Citizen’s Advice Bureau in Kingston. ‘You’ll reply to a number on the internet or in the local free paper and this organising company, for a fee, will pass your details to someone on their books. It could be no real company at all, just someone facilitating the introduction. All you need is a phone number and a computer, and a list of people who might be interested in picking up the business.’

The full extent of the rip-off is hard to judge, given that a central reason people go down this road is to conceal the scale of their financial difficulties from family and neighbours. People are sometimes too ashamed to talk about the pressures they face.

It also explains why sale-and-rent-back websites offering what seems like helpful and objective advice online are particularly attractive. Websites promise aid for people facing difficulties as a result of illness and redundancy, bereavement, divorce, separation and so on. The sites claim to be offering a social service, but in a lot of instances it’s just a marketing ploy – a con trick, according to Springett.

Milton, the Shelter solicitor, says it is inevitable that more cases will surface in the coming months as credit is squeezed in the wake of the sub-prime collapse and the near demise of Northern Rock. ‘It is likely to develop into a massive problem in the next 12 months. Until now, people could always find a worse lender and remortgage out of their problems. But that solution will be cut off when self-certification ends.

‘I’ve been told by many people facing repossession recently that they are going for sale-and-rent-back. My advice to them is don’t. But when I don’t hear from them again it’s likely they’ve not followed my advice. A lot of these short-term tenancies will be coming to an end soon and they’ll be threatened with eviction. That’s when the problems will really start.’

There have been calls for the Financial Services Authority to bring in regulation to stem the tide.

‘My concern is there’s no regulation. How does anyone know if they’re dealing with a reputable firm or a dodgy one?’ says Tutton. ‘You are losing thousands of pounds of equity for continued occupation rights but if that firm or landlord isn’t secure in making repayments then that right is useless. With no regulation on the way deals are offered, there’s an opportunity for scams or near scams.’

But Milton says such action is already too late, and he is sceptical about the FSA taking on a role. ‘A better solution would be for the larger, more reputable companies to set up a code of practice. It would be clear that anyone who hasn’t subscribed is an out-and-out cowboy.’ He believes it would be good practice to have properties valued by an independent valuer: ‘They [sale-and-rent-back buyers] should declare the true value at the outset and make it absolutely clear what the discount is.’

And there is no reason not to award tenants greater security, he adds. ‘In an ideal world it would be an assured tenancy, and second best would be a five-year fixed term with a provision that rents wouldn’t go up faster than inflation.’

Although sale-and-rent-back deals recently came under fire from the Treasury select committee, its chairman John McFall stopped short of a demand for regulation and merely called for a ‘warning’ to home owners of the potential risks.

Milton believes the government’s response is inadequate given the rapidly deepening crisis. ‘It’s only when they’ve started evicting big numbers of people because they can’t afford the rent or they’ve been served with a Section 21 notice that the real screams are going to be heard. And the screams aren’t loud because they come from the bottom of the pile. These are people who don’t know who to complain to. That is the real scandal.’