Landlords who get into the Sarb market can offer a service which is both ethical and profitable, says Emma Tyrrell
Last Updated: 5:06pm 30/05/2008
Thousands of landlords are attempting to break into the sale-and-rent-back (Sarb) market, drawn by below-market-value-prices, and the growing number of people facing repossession.
Despite a new investigation into the market by the Office of Fair Trading, and bad publicity over the actions of rogue operators, sale-and-rent-back is on the increase.
A Quick Sale (AQS), which claims to be the largest Sarb company, estimates that in the past four years, 20,000 homeowners have sold their properties to landlords and stayed on as tenants.
Typically they will have received 70-85pc of the property value, with no guarantee they can stay long-term. But in many cases the alternative would be repossession.
Assessments of the number of Sarb operators vary from 2,000 to 6,000, but according to research by the National Association of Sale and Rent Back (Nasarb), 43pc have been in the market for less than a year. With the number of repossessions predicted by some to hit 70,000 this year, many more could be tempted.
For the landlord, sale-and-rent-back offers the chance to acquire property at a discount, and provides tenants who want to stay long-term and will treat the property well.
But the market has an appalling reputation. Any landlord getting into it will face criticism that they are preying on vulnerable borrowers.
“The seller can clear their debts, stay in the family home, keep their kids in the same school, and the neighbours need never know,” says Chris Norris, policy officer for the National Landlords Association. “But there are horror stories about companies that don’t do Sarb responsibly. Many don’t see themselves as landlords, but as property investors who happen to have tenants. We see cases where landlords bought very cheaply, or with a very limited tenure tenancy, and after a short while the tenant is kicked out or the rent increased.”
Critics find it distasteful that landlords are able to buy property at a discount simply because the seller is desperate to avoid repossession. Those in the industry counter that sale-and-rent-back properties are often not traditional rentals, and that buying below market value may be the only way to make the rent cover their mortgage.
The OFT study will determine whether existing consumer laws can keep homeowners adequately informed and protected, and could recommend that sale-and-rent-back is fully regulated.
In the meantime, a number of voluntary codes of practice have sprung up, aiming to improve the industry’s image.
Landlords who want to operate a profitable and ethical Sarb business, need to consider several issues.
Make sure your numbers add up
The worst-case scenario for a homeowner turned tenant is the landlord failing to pay the mortgage and having the property repossessed. They will have sold for less than their property was worth, but will lose their home anyway.
To avoid this, it is crucial for landlords to ensure the rent will comfortably cover the mortgage, says Chris Francis of Sussex Property Buyers, who owns 60 Sarbs in the Haywards Heath area. “You should consider tenants’ financial situation and charge them a fair rent. But you also have to ensure cash flow is good. We typically pay 80-82pc of market value, but have 30pc equity, and a 118pc rental cover,” he says. “I also keep a cushion of rental payments to tide me over if tenants don’t pay. If I had to, I would sell to another landlord so tenants could stay on.”
The balance is to ensure you give the seller the best possible price, without overpaying.
Phil Martin, a founder member of the Mortgage Rescue Network code of practice, says landlords who miss a mortgage payment must tell MRN and immediately offer the property to another member for sale.
Security of tenure
The main attraction of sale-and-rent-back is that sellers can stay in their family home. But landlords can usually offer no guarantee of long-term tenancy.
Sarah Robson of the Council of Mortgage Lenders explains: “The majority of mortgage companies will only lend to landlords on assured shorthold tenancies, of six or 12 months. We would be willing to explore assured (longer-term) tenancies, but only under legislation or a robust voluntary code.”
Most landlords say it is not their interest to evict good tenants. “We have bought around 2,000 Sarb properties, and the vast majority of tenants are still there,” says Glenn Ackroyd of AQS. “Sarb void periods are very low. I have 100 properties and only two of my tenants have moved on in four years.”
Landlords who want to differentiate themselves from the competition could insert a right to renew clause in the tenancy agreement. AQS offers clients the option to renew each year for up to five years, while members of MRN can renew for as many as 20 years.
Be clear and straightforward
Homeowners facing repossession are vulnerable, so point out the negatives as well as positives of Sarb. Also, check that they have explored other options, such as remortgaging, a switch to interest-only payments, or a traditional sale.
Set out charges and terms clearly, preferably in a key facts illustration, and draw up a proper tenancy agreement, with no unfair terms.
John Socha of Nasarb says the most common problem is the percentage discount being poorly explained. “Also, many Sarb landlords don’t seem to know how to write a tenancy agreement. I’ve seen some try to put repair costs onto tenants, and you can’t do that.”
If you are producing adverts or leaflets, make sure they are not misleading. The Advertising Standards Authority has previously ruled against National Homebuyers for not making it clear that a survey fee had to be paid before a written offer could be made.
Generating leads
Landlords wanting to get into Sarb have several options when it comes to finding potential sellers. They can do their own marketing, using targeted leaflet drops and local newspaper adverts, or buy into a Sarb franchise. Costs vary significantly. AQS charges between £25,000 and £60,000 for a three- to five-year franchise, plus an average £1,400 a month for marketing costs, and a 1.95pc finder’s fee on leads. Meanwhile, Repossession Angels charges £2,500 to join, then £100 per month, recommending advertising spend of £800 to £1,000. It also levies a 1.5pc lead admin fee.
A third option is to buy individual leads. Phil Martin uses a company called Rapid Property Investment. “Lead sellers allow me to focus on my clients rather than marketing,” he says. “I can take a week off, and just not buy any leads.” Robert Clark of Rapid Property Investment says around 28pc of his leads are sellers wanting Sarb. “We generate thousands of enquiries a month, allowing landlords to find property deals without having to be a marketing expert.”
CASE STUDY
Keeping hold of a home full of memories
“To suggest I am preying on people’s misery is untrue,” says Phil Martin, a sale-and-rent-back landlord from Milton Keynes. “A lot of what I do is helping people to find other options than Sarb. I have been close to repossession, so I know how terrible it is.”
For Roger and Sandra Neale, however, Sarb was ideal. The couple, celebrating their 40th wedding anniversary next week, have lived in their home for 37 years. Until early last year they owned it, but were struggling to keep up repayments. “We were doing six jobs to get by,” says Mr Neale. “I had had two heart attacks, and we just couldn’t keep it up.”
The Neales say they checked out several Sarb companies, but were put off by the short six-month rental contracts. “We did some digging to make sure Phil’s was a reputable firm, and liked that it gave the right to renew the tenancy.”
Mr Martin bought the couple’s home for 82pc of its value, and helped them apply successfully for housing benefit. Their monthly outgoings have fallen from a £445 mortgage payment to a £100 rent top-up.
“We have a lot of memories in this house,” says Mr Neale, 62. “But we couldn’t carry on working as we were. From our point of view, it has been perfect.”
Mr Martin offers his clients an initial
12-month assured shorthold tenancy with a right to renew clause, giving them the option to annually renew their tenancy at a market rent for an agreed term up to 20 years.
“If you get into Sarb you need to ensure you can keep your promises,” says Mr Martin, 35. “My wife and I knew we would keep the portfolio for at least 20 to 30 years, and perhaps pass it on to the children, so we can say we have no intention of selling.
“You need a good grounding in landlord law before you start in Sarb. It’s even more important to get it right than with ordinary buy-to-let. People have ties to the property and it would be wrong to let them down.”
Code war that has put a brake on giving Sarb an air of respectability
Arguments flare over sale and rent back regulation
One is a “watered-down budget version” code of practice, aimed at stalling the threat of regulation in the sale-and-rent-back market. The other is the “creature” of its founding companies, who want to “keep out smaller landlords” and “protect their own business model”.
A war of words has broken out between two self-styled guardians of the Sarb market’s reputation, over who will offer the best code of conduct.
In one corner is the National Association of Sale and Rent Back (Nasarb), backed by the National Landlords Association. In the other is the Property Buyers Association (Probas) founded by three large Sarb companies.
The dispute is bringing confusion over best practices for landlords in a market with an already murky image. Many want their industry and its reputation cleaned up, and believe a robust voluntary code is a positive step, on the road to regulation.
The question is, which code?
Nasarb claims that 610 Sarb operators have registered an interest in joining its code. It insists that as it is backed by the NLA, it is the only market-wide body which will offer a truly independent code of practice, uninfluenced by any one group of Sarb providers. The trouble is, its code is not yet published.
“We have applied to the Office of Fair Trading to register our code of practice, and hope to put out a draft next month, and work with the OFT to formalise it,” says John Socha (above), Nasarb chairman. “It will ensure complete transparency, and ask the vendor to confirm they have either taken independent advice or turned it down.” The organisation also plans to introduce an insurance-backed scheme to pay out if a landlord runs into financial difficulties, buying a respite period to ensure an orderly transfer to another investor.
Probas has had its code up and running since February, but has only three members — founders A Quick Sale, UK Property Buyers, and North East Property Buyers — with two more going through the application process. It requires members to come up with a £100,000 insurance bond, to pay out in cases of bad practice, as well as hefty joining fees of £5,000, which it describes as a deliberate attempt to set the bar high.
“Nasarb wants to represent the smaller operator, so are never going to have the means to offer protections at the level we can,” says Glenn Ackroyd (right) of A Quick Sale.
“A lot of landlords are happy to get a badge and credibility but not to put any money up,” he adds. “We think statutory regulation is inevitable, and any regulations are likely to insist landlords have a bond.”
The problem, counters Mr Socha, is that a voluntary code without a professional body behind it will always face accusations that it is being run to benefit the operators.
Confusingly, Nasarb and Probas are not the only codes of practice in the Sarb market. Franchise operations and groupings of landlords have set up their own.
The Mortgage Rescue Network, for example, has 151 members who have paid £125 and then £50 a month to sign up to a detailed code.
Labels: below market value, property investing, property networking, sale and rent back, SARB
