Sell to rent back

Steve S. explains the new trend in: sell to rent back businesses and proposals, as buy-to-let gives way to it.

With interest rates having risen five-fold in the last year, many homeowners are becoming over-stretched and debt ridden. As house prices increase, people need to borrow more debt in order to buy a new house, and mortgages are getting increasingly more expensive.

With this in mind, many people will have debts to pay, want to release some equity, or may even have a repossession or eviction pending. Out of all this, some alternatives for overstretched homeowners have developed.

What is this Sell to Rent Back thing all about then?

A company offers to buy your property off you, in cash, for usually 70% - 80% of its current market value. They then rent it back to you for an agreed fixed period (usually six to twelve months) at a fair market rental rate. In some cases, they may even let you buy the property back again at a future date, albeit at a higher price. Hence the term “sell-to-rent-back”.

So, in a few examples I’ve seen - the calculations work out roughly as follows:

• Property Market Value: £100,000
• Price Offered: £80,000
• Rent Charged: £550 / month (£6600 / year)
• Yield Cost: 6.6%

In a pure “would it be cheaper to rent or pay a mortgage scenario”, it works out slightly more expensive this way (compared to say a mortgage rate of 6.25%), but not far out. If you also take into consideration that you’re getting 80% of the property equity in cash that you can then invest in elsewhere or pay off any outstanding debts - then it can make sense.

You could also re-mortgage your property or sell through an estate agent but these channels take time and the former would mean you incur more debt and interest repayments.

What’s the downside then?

Well, some things to consider from what I could find in my research on the sell to rent back market:

• Rental contracts often end after 12 months, meaning the rents can increase dramatically.
• Depending how much of a rush you are in to sell, you may get less than 80% of the market value - so haggle hard.
• You sell your house for less than it is worth, offset by a reduction in fees and hassle.
• Currently the market is unregulated

Overall, it really does depend on if you want to release equity on your home quickly or in danger of having it repossessed, compared with negotiating a better deal with your current mortgage provider. If you have some real-life experience with this type of arrangement, feel free to comment below.

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