In real estate, many opportunities exist for making money but one in particular was devised in 2006, known as the sell and rent back scheme, as a means of helping out homeowners at risk of losing the property. The concept was to get away from repossession or foreclosure by selling and renting the home back. For instance, the homeowner having trouble making payments could work with an investor to have a quick sale done on the home but instead of moving out, the homeowner would remain in the property but pay rent to the investor that purchased it.
This scheme continued for about a year at which time it evolved into a different type of plan for helping the homeowner. People that had owned property for years usually had a significant amount of equity and with homeowners not wanting to lose this money, the sell and rent back scheme headed in a new direction. At that time, the homeowner having financial issues would have the option of buying their home back after getting debt under control, which meant most of the equity was untouched.
While this sounds great, homeowners interested in this type of plan need to use caution. Below are several problems that might arise from this type of arrangement so anyone considering a sell and rent scheme should know how to identify and avoid them.
Fees
With this particular real estate scheme, associated fees would be the responsibility of the buyer, which might include things such as inspection, solicitor expenses, and surveys. Since the buyer pays these and other fees, if the now renter were ever asked to pay for something, they should be wary in that if the sale were to fail, fees would never be recouped.
Rent Increase
Obviously, the buyer and now renter would sign a contract but all of the information needs to be carefully read before anything is signed. For the rent contract, close attention should be on monthly rent payments. If the contract states that the buyer can increase rate twice a year, this means they are taking advantage of this situation. Unfortunately, dishonest buyers or companies will set rent payments for six months and then increase them so high that the renter cannot afford the payments, forcing them to move.
Home Sale
The new homeowner would have right to sell the home if wanted, which would again put the renter in a bad position of needing to move with little notice. If the sale of the property were covered in the sell and rent back contract, then certain restrictions need to be outlined. This way, the buyer would not be allowed to sell the home unless the renter provided written authorization.
For the sell and rent back scheme, negative aspects exist, but there are also positive features of this situation too. Most importantly, the homeowner at risk of losing the home to foreclosure would be safe. While the owner could put the house on the market, the challenge there is with the current economy and real estate market, prices are low and property is moving slowly. Therefore, the homeowner should put pen to paper, looking at the numbers to determine if a normal sale makes sense.
In addition, the homeowner is not at financial risk for this kind of scheme since the buyer has the responsibility for paying fees. This transaction is private, a situation that could save the homeowner embarrassment. Since the homeowner would remain in the home as a renter, nosey neighbors would have no idea that a sell and rent back scheme had occurred.
Sadly, in the past two years, millions of people have lost homes to foreclosure. While not for everyone, the sell and rent back scheme does protect homes, making it a possible solution. However, anyone in this situation should not wait until things have become too bad, instead taking action.
Author Resource:
Allison Clarke is a real estate investor based in Texas. He is a former estate agent and writes widely about issues related to real estate and finance. He is currently studying the latest developments in the UK http://www.sellhousefast.co.uk/ market and how it’s been progressing during the recession.
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