Sell and Rent Back An Investor’s Perspective

If you’re an investment property entrepreneur, could or should you be interested in completing deals that involve a sell and rent back situation with a seller?

Are you perhaps someone interested in looking at deals in the current climate, where home owners who require a quick property sale, due to problems which prevent them keeping up with their mortgage?

Should you be looking at these deals favorably or should you stay clear?

In this article, we discusses sell and rent back deals and by the end of it, you should have a better idea of whether this type of property deal will be good for your investment portfolio or not.

Buy to Sell? Move on

Firstly, if you investment strategy involves buy-to-sell rather than buy-to-let, then perhaps you should move on and don’t bother to read the rest of this article. Or should you? There may be a tidbit at the end for you. For the most part, it is our opinion that “Sell and Rent Back” investment deals are for those who are building a buy-to-let portfolio rather than a buy-to-sell.

Buy To Let? Read On

If you are a buy-to-let property investor, then Sell and Rent back may be right up your street. In the current downturn, there are plenty of home owners who are having major problems with keeping up with their mortgage payments. House repossession, depending on which report you read, is up by more than 40% on this time last year. The UK Government, along with other governments around the world are making plans to assist the housing market kick-start, introducing measures to help home buyers get a mortgage, including introducing a stamp duty holiday.

In addition, according to reports from people like Your Move, in the UK, the renting your home is becoming the new buy your own home, as first time buyers who are finding obtaining a mortgage extremely difficult are forced into the rental market.

This last bit of information is pertinent to all savvy buy-to-let or BTL investors. You will know that over the past five years, many first time  BTL investors have been flooding into the market, buoyed by high valuations on their primary homes, many have sought refuge from weak stock markets, and have released equity from their main brick and mortar asset, in order to invest in buying a second property. Some wish for additional income, but most did so in the hopes that the capital appreciation over time would be their nest egg for retirement.

It is my opinion that they will not be proved wrong in this endeavour, and that over time, the capital will appreciate on their assets and they will indeed, providing they liquidize at the right time, reap the rewards for their investment strategy.

It is however the case, that many first time BTL investors speculated that mortgage interest rates would be kept low, and that house price valuations would continue to rise. Anyone who has been in the property business for more than five years, knows that we see rises and falls in the price of property, and that there is a right and a wrong time to buy.

Many BTL investors have found that they have bought at precisely the wrong time when a combination of factors including the squeeze on lending, the increase in available BTL properties creating a supply-demand imbalance and the increase in interest rates, all meant that their finances were put to the test. Some will be among the rising number of house repossessions that we are now seeing reported by organisations such as the Council of Mortgage Lenders (CML).

Homeowners Feel Squeezed

The factors I have just outlined, not only affected BTL investors, but homeowners as well. Not only are there those who released equity from their homes to buy second homes, but also those who did the very same thing in order to fund lifestyle changes, help their children buy their own homes, and/or make home improvements.

This is fine when mortgage interest payments are low or fixed, however the recent rate rises have pushed some people beyond their limits and they are now struggling with mortgage arrears. Today, UK jobless figures reached an 11 year high at just under 1.8 million unemployed. Experts speculate that this figure could rise still further to 2 million before Christmas. The credit crunch, uncertainty in the financial markets and the global recession is just beginning.

All these things lead to home owners feeling squeezed, especially those who have overstretched. Add to this, the problem of a decreasing property market, buyers unable to obtain mortgages from the banks cannot put in offers for property on sale. Sellers who used to be able to find buyers, have to lower their prices in order to garner viewings, let alone offers.

The culmination of these factors present home owners who are in a delicate financial position to consider selling their properties in order to alleviate the pressure from mortgage companies regarding arrears.

As the value of their property decreases, they are more inclined to want a quick property sale. In these uncertain times, they are even prepared to sell the house at a price that is below market value in order to achieve a quick sale. These are the type of sellers that the savvy property investor is the look out for, they are what is commonly refered to in property investment circles as the motivated seller.

Enter Sell and Rent Back

Sell and Rent Back (or sale and rent back) agreements allow a home owner to sell their property and rent it back from the new owner. Some agreements allow for the buy back at market value of the property at a later stage, but the main jist of these agreements is that the seller gets the opportunity to obtain cash that can be used to settle any outstanding mortgage and debts accrued, without having to move home.

How does this benefit the investment property buyer? Well typically, in order to achieve a quick sale, the seller agrees to sell the property for anything up to 70% of it’s market valuation. The buyer pays all fees and costs associated with the sale, including solicitors, valuations and surveyors. The buyer then agrees to rent the property back to the seller, frequently on an Assured Shorthold Tenancy agreement, although as said above, sometimes the deal can be structured in a way to allow the seller to buy back the propery at a later date, once their finances have improved, at the then market value.

If you are a buy-to-let investor, this is an ideal investment scenario for you. In a deal structured soley on a sell and rent back basis, you have

• a property bought at 60-70% of market value, thus leaving at least 30-40% in built equity (minus costs)
• a property which has 10-25% equity that can be released through a remortgage (based on LTV 85%)
• a tenant who likely has an attachment to the property and so won’t destroy it

If you are a buy-to-sell investor, then you too can profit from a sell and rent back deal. If you buy the property, it is yours to do with as you please. Unless you have agreed to sell the property back to the original seller at a later date, you are well within your rights to dispose of the property, once you have completed your deal.

Although properties with a sitting tenant, used to be looked on as a deal which would attract a lower price than one offered with vacant possession, the changes introduced in the late 1980’s mean that most new tenancies are Assured Shorthold tenancies (or AST) and as such, the length of the tenancy agreement can be as little as six months.

This means that you are likely to obtain a good sale and may realise a profit of between 20-40% depending on how agressively you market or how good your contacts are in realising a sale at market value.

From an investment property perspective, sale and rent back, or sell and rent back deals are a good move. It has all the tenets that benefit property investors, motivated sellers, discounted sales price, built in profit margin.

If you are a property investor who wants to find potential sell and rent back deals, there are numerous ways to find sellers who want a quick property sale or who want to sell their house for cash and are prepared to accept a price that is below market value in order to achieve it. This will be the subject of another article another day, so bookmark this site or subscribe to our email updates and you’ll be one of the first to know when it arrives.

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