Can you sell and rent back your home?

It’s not unusual to consider extreme steps when we’ve fallen on hard times.

For some homeowners that could include schemes known as sale and rent back or sale and lease back. These allow you to sell your property at a significantly reduced price to a firm which then rents it back to you as a tenant at market rate.

Sale-and-rent-back schemes tend to be aimed at homeowners facing possible repossession or who are otherwise in dire financial straits.

But sound investment strategies rarely emerge from such predicaments.

So while you may not want to automatically rule out sale and rent back, you should only enter into such a scheme if you can afford it and it fits your specific circumstances.

What is sale and rent back?

Sale-and-rent-back schemes are intended to help homeowners stay in their homes as tenants after selling their property to local authorities, housing associations, or private companies.

However, the selling price for homes in such schemes tends to be discounted, meaning that sellers may only get around 60-70% of market value.

But once they become tenants, they can usually expect to pay market rate for rent.

Obviously, those figures are not in the homeowner’s favour. Sale and rent back is thus only to be considered an option in very few circumstances, such as when a homeowner has an urgent need for quick cash but cannot -- or does not want to -- vacate their home.

Is sale and rent back legal?

Yes -- but it’s open to relatively few firms and under tight regulation by the Financial Conduct Authority (FCA).

Sale-and-rent-back schemes have a checkered legal history. They were even temporarily halted in 2012 after a series of failings.

One extreme example of their potential for abuse came when the FCA fined a Birmingham-based sole trader a then-record £1 million and banned him from working in the financial services industry for bilking his sale-and-rent-back clients in 2009-2010. Many victims, including pensioners, were left homeless.

The market is again operational, though it remains susceptible to abuse and scams.

For instance, in 2020, the FCA brought High Court proceedings against two London property companies for allegedly pushing ‘highly vulnerable’ people into deeper debt partly through unprincipled sale-and-rent-back schemes.

What are the rules for sale-and-rent-back schemes?

As a response to such transgressions, the FCA now tightly regulates all companies that participate in these schemes to ensure they’re adhering to appropriate rules and standards.

These regulations are in place to protect consumers against potentially unscrupulous practices.

Firms engaged in sell-and-rent-back schemes:

• are prohibited from cold calling or dropping promotional leaflets through letter boxes;
• are prohibited from using high-pressure sales techniques and terms such as ‘flash/fast sale’, ‘mortgage rescue’, or ‘cash quickly’ in advertising literature;
• must give home sellers 14 days to ‘cool off’ and decide whether selling and renting back is what they really want to do;
• must ensure that home sellers can afford the agreement and whether any deal affects the sellers’ right to benefits;
• must set up an independent valuation of the home, unless the seller has already arranged one;
• must offer renters who have just sold them the property a fixed-term tenancy of at least five years.

Check the FCA handbook for more information on the regulations that govern sale-and-rent-back schemes.

If you’re considering it, check that the firm you’re considering is listed on the FCA website. We’d also recommend that you seek out independent financial advice before proceeding with a sale and rent back scheme.

What are the risks with sale-and-rent-back schemes?

Sale-and-rent-back schemes come with plenty of risks.

If you sell and rent back your home:

• You’ll cease to own your home;
• You could face rent rises both during and after the fixed term of your tenancy agreement;
• You may still have to vacate your property after your tenancy’s fixed term has ended;
• You could still be evicted. For example:
• You can still be evicted from your home during the fixed-term part of your agreement if you break the rules -- for instance, if you fall behind on rent;
• The property can still be repossessed because, for instance, the company that bought your home falls into financial distress;
• You’ll get less money for your home through this scheme than if you’d sold your home on the open market;
• Your participation could affect your eligibility for bankruptcy or other forms of insolvency.

How will a sale-and-rent-back scheme affect my benefits?

The decision to sell and rent back your home could affect your Housing Benefit, as well as other means-tested benefits.

For instance, for a former owner to be eligible for benefits on a home they’ve owned within the last five years, they need to satisfy their local authority that they could have remained in the house without selling it.

Regardless, Citizens Advice offers guidance on local benefits and whether your particular sale-and-rent-back scheme impacts your entitlements.

What should I look for in sale-and-rent-back schemes?

Chiefly, you should determine whether you understand and can afford the agreement. That’s why seeking independent advice is essential.

In addition, you should also:

• Ensure that the firm is regulated by the FCA;
• Upon initial contact, ensure that the company gives you information about their fees, and whether they can present you with various schemes to choose from or whether they’re only tied to one provider;
• Upon initial agreement, be presented with a Key Facts Illustration, which is a document that includes all of the scheme’s key details;
• Contact Citizens Advice to check if the scheme affects your rights to benefits.

What if I have problems with my sale-and-rent-back scheme?

All firms registered with the FCA have agreed to be governed by a uniform complaints procedure.

If a problem arises, you should complain directly with the company offering the scheme in the first instance.

If that fails to resolve the issue, you should contact the Financial Ombudsman Service (FOS). The FOS is free to use.

What are some alternatives to sale and rent back?

Sale and rent back should be seen as a final resort. Before taking such a step, consider other courses of action, which could include:

• Talking to your mortgage lender.

You may be able to switch to an interest-free mortgage or temporarily reduce your mortgage payments while making efforts to stabilise your finances;

• Considering selling your home on the open market, where you’ll likely be able to get more for it than through a sale-and-rent-back scheme.

You’d then need to find a new place to rent. To find out which estate agents near you have the best track record of selling homes quickly, try out this free tool. Just pop in your postcode and it’ll list the six agents best suited to your sale. Try it now.;

• Seeking out free debt help online, by phone, or face-to-face from an independent adviser;

• Talking to your creditors about whether they’d be willing to restructure your repayment plans;

• Considering equity release if you’re aged 55 or older. Read our blog for more information;

• Checking your eligibility for government help, including benefits.

In short, through a sale-and-rent-back scheme you can sell your property and then still live in it (while paying rent).

But should you? That’s a more difficult question that only you can answer in close consultation with independent financial advice.