You may or may not be aware that Financial Services Authority has recently made available a consultation paper in regard to sale and rent back property transactions. This consultation paper has come about in response to the government wanting more regulation in the sale and rent back sector. The OFT have estimated that by the summer of 2008 there were around 50,000 households that had undergone a SRB transaction and that the majority of these had taken place in the last couple of years.
While there has been many attempts to self regulate the SRB sector, the powers that be think that self regulation is not a route that will work in the long term, for various reasons, to address the specific issues and problems with sale and rent back transactions and to ensure the consumer is sufficiently protected.
The paper is also a direct result of recommendations from the OFT who have said that the sale and rent back industry should be subject to statutory regulation and that this regulation should be carried out by the FSA.
Some of the conclusions that the OFT’s investigation came to were that people where sometimes misled by sale and rent back firms in regards to the true value of their property and their rights to continue to live in the property as a tenant after they had sold the property.
It also found that the sale and rent back route was not always the best route for consumers. On top of this, the consultation paper sets outs ways to help give consumers a way of redress if they have been misled etc in some way.
The consultation paper outlines a two stage approach. This would mean that an interim skeleton regulatory regime would be introduced in July 2009 and a full regime would be brought in by the second quarter of 2010.
Although there has been talk of change in the sale and rent back industry before there now seems to be a renewed vigour to actually push through changes as quickly and effectively as possible. This is perhaps partly triggered by the huge rise in repossessions and vulnerable home owners since the beginning of the credit crunch.
You can view the full consultation paper by CLICKING HERE!
If you want to get your views on the consultation paper heard then there are contact details on page 4 of the paper for doing just that.
Most are in favour of the principal of regulation since the consumer needs to be protected and the fact is that although there are many ethical SRB property investors, there are also a few unscrupulous ones that need to be rooted out.
It would be nice to think that all SRB property investors where ethical, but the fact is that when you are talking about the huge sums of money that can be involved in property transactions, it can unfortunately bring out the worst in many people. This has been displayed by misleading advertising from some property investors in regard to things such as the speed a sale can be completed, the tenant’s right to stay in the property and other options that may be open to the tenant.
There has also been issues with consumers not being able to use their own solicitors for their side of the transactions and while professional property investors understand the reasons why it is often easier to use a team they are used to and that understand the SRB sale inside out, the truth is that from an outside independent prospective it can be seen as a highly suspect thing to do.
The problem is that the consultation paper doesn’t seem to take into account the good that private SRB investors have done for people whose best option was the SRB route. The paper itself seems to have been put together hurriedly, but maybe we should take heart from the fact that it is a consultation paper, and hope that our voice will get heard. Perhaps the best chance the private SRB investor has to get their voice heard is with the help of organisations like the National Landlords Association.
The bottom line is that if things go ahead as planned – which it looks as if they are – firms that plan to continue to do SRB’s when the new interim regulation comes into place will need to have an interim permission and will need to adhere to certain conditions and criteria which will be beyond the scope of what many private SRB investors are able to adhere to.
Potentially this could see the demise of the sale and rent back sector for the small firms and private property investor and it could see a monopoly of this sector by organisations, such as registered social landlords, who are exempt from needing authorisation.
Personally, we don’t feel this will be the end of sale and rent back altogether; however, it is looking likely that if you are a smaller firm and you want to continue with sale and rent backs you might have to look at joining forces with other investors to create a bigger company.
We are potentially going into a time when SRB’s will be ruled by the big boys only! There may also be a handful of smaller specialist SRB firms that continue but the majority will most likely seek pastures new and new ways of making money from property or another type of investment altogether.
If you are involved in the sale and rent back sector or you think you might get involved with it in the future, we would strongly urge you to read the consultation paper and to find a way to get your voice heard. You can also visit some of the forums mentioned on our investment property forums page to read some of the many debates that have taken place regarding these planned proposals.
If property investors don’t speak up then we will be dictated to and as things stand, if the current plans go ahead as they are at the moment, this will actually be bad news for both the investor and the consumer. Yet with a number of tweaks in the right places, there may be a way of routing out the majority of the unscrupulous SRB landlords while not needlessly penalising ethical investors who genuinely want to run an ethical SRB business that is above board and helps home owners that find themselves in a difficult position.
However, the truth as we see it is that to adhere to any FSA regulation in the future will be a major headache to many smaller firms hence the Sale and Rent Back sector is going to be a closed door to most of the companies and individuals that currently doing SRB deals.
Unfortunately there may not be a way around this, since the FSA is always going to be strict and many ethical SRB investors will simply not be able to live up to some of its expectations: for example, there is a chance (perhaps a strong chance) that in the full regulatory regime that firms will be required to retain a certain amount of capital that will demonstrate that they are able to carry out the intended activities of a SRB business, this will probably be set at around £100,000 which is currently the amount that applies to home financing. There are also going to be many other fees that any firm looking be in the sale and rent back market, will have to pay, read the full consultation paper for more details on all the fees potentially involved.
For those property investors involved in sale and rent back transactions the time may have come to assess your business and to start looking for other opportunities while still keeping one eye on what the conclusion of the consultation paper is.**Nothing on this website should be confused with financial or legal advice. If you need this, or any other type of advice, please seek the help of a competent professional. In addition, because real estate laws change all the time and differ from state to state, and even city to city in the same state, everything in these pages should be considered general marketing advice and ideas. Please see link to full Disclaimer at the bottom of this page.