This arrangement entails an agreement usually in the form of lease where the landlord rents a property to an individual or company at a fixed rate.
There a number of ways to sublet a property these range from guaranteed rental schemes through to company tenancies and lease agreements.
The Rent –to-Rent scheme appeals to landlords who want ‘a hands’ off investment with a guaranteed rent and zero property maintenance.
These landlords tend to be those who have had to move out of area or buy another property and do not want to manage a tenanted property.
Conversely the ‘Rent-to-Renter’ can significantly gain from this arrangement by creating Houses in Multiple Occupation (HiMO’s).
The rent-to-rent market has also ‘taken’ many homeowners who ‘give-up’ their properties through Lease Options.
What is a Lease Option
Essentially a lease option is where a buyer agrees to buy a property at £X, 000, and complete on a fixed date, usually 2 to 5 years. An agreement is drawn up where a buyer purchases this agreement at a token amount from the seller, typically this equating to 75% of the option price and is non-refundable.
The market is awash with property owners that have entered into lease option agreements. These agreements, usually entered into by intermediaries are then sold on to a buyer. Typical fees can be anything from £2,000 through to £5,000.
There are many reasons why a home owner may enter into a Lease Option Agreement:
- The homeowner may be relocating and enters into an arrangement where the buyer takes control of the property
- A few years ago many faced problems in paying their mortgages and entered into lease agreements
- The home-owner through marriage or a partner ends up with a second property and theirs will not sell and do want the hassle of a tenant.
The option buyer will take over the maintenance, cost of mortgage and any other costs. The buyer typically tries to maximise the income on the property by creating a HiMO.
There are a number of risks that landlords and home owners need to consider before a home owner or landlord enters into any of these schemes:
- The landlord or home owner is responsible for the property and the repayment of the mortgage. If the buyer gets ends in financial difficulty, the landlord/homeowner is responsible for any missed mortgage repayments and potential loss of a property.
- By not informing the Mortgagor of entering into any of these schemes may void the mortgage terms.
- The contract entered into may have conditions that incur further costs or penalties.
The below is an excerpt from the Operations Director of a high street building society following a conversation with The Property Buyers:
“From a lenders perspective I am assuming;
- the current owner would vacate (in order to achieve the rental potential illustrated) which would mitigate the risk of sale and rent back regulations; and
- that the mortgage payments would have to be paid from the ‘investors’ bank account (to ensure the investment and option is protected); and
- that the title is remaining in the original borrowers name (to avoid the stamp duty requirements); and
- that the original mortgage will remain in the current owners name.
If these assumptions are correct then the Direct Debit/mortgage payment would be made by a third party, and under Direct Debit guarantees the recipient (lender) is required to notify the mortgage holder within 14 days of any changes (e.g. rate changes), which if we were communicated with a third party could be deemed to be in breach of the regulation.
Secondly, the lender would still be issuing correspondence to the original borrower e.g. Mortgage statements, and if the owner had not registered an alternative address these would be returned by the tenant and cause the lender to investigate. Alternatively, the current owner could request consent to let and if the lender gives permission, other than the payment issue, the ‘assisted sale’ may not be detected by the lender.
As a lender if we had suspicions regarding the appropriate use of the property or the person paying the mortgage our powers do permit us to seek possession to redeem the mortgage – in which event any surplus funds would be sent to the owner named on the title/mortgage – not the ‘investor’.
(as a foot note if rates started to rise I cannot see how the mortgage payments could be negotiated/controlled, the investor would rely on the original borrower to discuss with the lender any mortgage variations e.g. product switch, term changes etc.…)
I am not qualified to offer any investment advice, other than to say I have never come across ANY investment that does not carry an element of risk.”
The risks with lease options and rent-to-rent have the potential to be devastating. The Sell and Rent Back schemes were curtailed by the FCA. Some rogue operators bought houses at knock down values, then to evict the tenant and now this market is heavily regulated.
The same is true of some of those offering Lease Options and Rent to Rent schemes. The internet is littered with stories of landlords who have entered into Rent-to-Rent schemes only to find council housing officers on their door steps enquiring as to why they do not have HiMO licences.
There are probably hundreds, if not thousands of home owners, that have not reported to their lenders of Lease Option agreements nor Rent-to-Rent schemes that invalidate their mortgage conditions.
The facilitators of these ‘deals’ , good and bad, make good monies from selling them on to buyers, but as in the case of Sell and Rent back will we see the FCA start to investigate – it will ultimately be the home owner, the lease option holder and the Rent-to-Renter that will lose out.
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