The homeowner usually continues to live in the home rent free. When the homeowner dies the proceeds are split between the provider and any heirs to the estate. Equity release plans are usually offered only to people aged 65 or over.
These are long term investments (7 years+) made by cash rich insurance companies and banks which is why you do not see many private investors in the market. The players are big names like Norwich Union, Northern Rock and Mortgage Express.
How Do They Make Their Money?
Well for a start, the homeowners do not get a high percentage of the
value of the home. The amount paid by the providers is based on how soon they think the homeowner will either vacate the property or die.
This might sound simple enough but it actually involves some of the most complex mathematical equations and regression analysis around, performed by highly trained actuaries in the City of London. Part of their job is to assess age, lifestyle, location and many other factors to determine when a typical person is likely to vacate the property or die.
The equity release plan therefore
will be structured in such a way that the companies providing the funds will be able to sell the property when the homeowner leaves or dies and make a profit from the transaction.
A Sale Leaseback Is Different…
The homeowner sells ALL of his or her interest in a property to a property investor or investment company. The previous homeowner becomes a regular tenant on an assured shorthold tenancy agreement.
Introduced by the Housing Act 1988 these are the commonest forms of |
arrangement for the renting of private houses and flats by private tenants.
With AST’s, the landlord has a right to possession of the property if the tenant owes more than 2 months rent. The landlord can also gain possession by proving to a court that he has ground for possession (e.g. the terms of the AST have been breached).
Sale leasebacks have been in use in the commercial property world for many years. In fact Tesco raised £500m early last year by selling a chunk of their property portfolio to British Land and leasing it back. This lump sum helped them fund International expansion.
At about the same time, Kwik Fit
raised £103.7 with a similar sale
leaseback deal to GE Real Estate
UK. Lots of other companies do the same thing.
Remember earlier when I mentioned that equity release providers offer a low percentage of the property value in cash for the homeowner to spend? Well sale leaseback property investors can generally offer homeowners much more. Most typically offer 70% - 80% of market value.
So what’s the problem?:
- Some homeowners confuse equity release with sale leasebacks
- Some homeowners do not realise the rent can be raised
- Some homeowners do not fully understand the implications to them if the property investor gets repossessed
- Some homeowners do not
realise they could be evicted by the landlord
The commercial deals mentioned
earlier were between fairly sophisticated players within the very top |
end of the property market. Sale
leaseback arrangements take place
between property investors and ordinary homeowners who some might say are not as sophisticated as large commercial enterprises although the majority of homeowners do employ the services of a qualified solicitor when selling their property.
So What Should Be Done?
The ethical players in this market
make it very clear to sellers what
they are getting into and what the
consequences could be of various
scenarios occurring. If anything
should change, it’s us. We need to
make sure people are better informed at the outset of exactly what
sale and rentback is all about.
As I mentioned earlier people haven’t
a problem with the concept….
Many people want to unlock the
value within an asset without having
to take on a load of debt. Many
people may not be able to refinance
(e.g. credit problems, previous bankruptcy, arrears etc) and sale leaseback is the only way to release the money and retain the use of the
property.
Sale leaseback also gives the previous owner the flexibility to move out and go do other things without worrying about the property or looking after major repairs.
Why Should We Take This
Seriously?
The treasury are now looking into
sale leasebacks via a questionnaire
they are sending out to people involved in the market place.
To find out more or to reply to the
questionnaire yourself visit:
http://shmyl.com/mcfpson
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