Avoid the sell and rent-back trap

With property prices tumbling, and growing numbers of homeowners struggling to remortgage at anything like the low rates of a few years ago, "sell and rent back" (SRB) might look tempting, particularly for cash-strapped owners who don't want to give up their homes. But a new report from the Office of Fair Trading (OFT) confirms what many have been saying for some time that some sell and rent back providers are taking advantage of desperate people, and the sector needs to be regulated.

With sell and rent back, the provider values your house before quickly taking it off your hands (sometimes within days) at a discount. That avoids estate agents, endless viewings, legal bills and agent commissions. Then and this is the part designed to appeal to families in particular they rent it back to you. So you lose your mortgage debt, but you get to stay in, and rent, your existing home. In principle, not a bad idea. But as the OFT has found, in practice, it's often not as good as it sounds. "Vulnerable people losing the security of their homes, pensioners selling properties for a fraction of their value, and jobless homeowners giving up state benefits; that's the charge sheet against SRB, also known as 'flash sales'," says Tony Levene in The Guardian.

Even if your provider is honest, there are pitfalls. For one thing, the valuation won't be independent it's done by the buyer so it's bound to be conservative (on the low side). Next, whatever the valuation, the sell and rent back firm won't pay you anything like the full price. Some claim to pay between 80-90% but in most cases it's more like 60-70%, and the Citizen's Advice Bureau reckons sometimes you'll get even less. Then perhaps more importantly there's the rent back bit. Some landlords will let you stay in the house as a long-term tenant. But there's no guarantee. You will generally not be offered more than a standard six-month or one-year tenancy agreement the OFT wants this changed to five years, but that could be a while in coming. Once the agreement is up, you can be asked to leave. On top of this, landlords sometimes get the sums wrong and can't meet their mortgage payments. That means repossession, and you being thrown out of the property. And don't forget that you won't be setting the rent your new landlord will.

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The OFT, rightly, is calling for the Financial Services Authority to regulate the sector, but that could take at least two years, says The Daily Telegraph. In the meantime, no matter how desperate you may be, this looks like a financial crisis "solution" to avoid.

A week in the property market

The number of property sales in the UK has dropped by 53% in the past year, says HM Revenue & Customs. Only 59,000 homes were sold in September compared with 126,000 in September 2007.

House prices will have fallen 35% from last year's peak by next autumn, according to Capital Economics.

335,000 homeowners will be in negative equity by the end of this month, says rating agency Standard & Poor's.

Mortgage lending is now at its lowest for more than three and a half years. £17.7bn was loaned last month, 42% lower than in September 2007 and 10% lower than in August. It is the lowest monthly figure since January 2005 and the worst September since 2001. The Council of Mortgage Lenders now estimates that lending for the year will be £255bn, the lowest annual total since 2002, and down 30% on last year.

An estate agent in London is abandoning sales commission in an attempt to attract business. Lauristons is offering new customers the choice of either paying a £999 up-front fee when they put their home on the market, or 2-3% commission when the property is sold. If customers opt for the flat fee and the property doesn't sell, they don't get a refund but can offset the sum against Lauristons' fees for letting the property instead.

Asking prices have risen by 1% in the past month as people are still failing to price their properties realistically, reckons property website Rightmove. "Any potential buyer will drive a hard bargain, so the temptation for sellers to price up and negotiate later may seem a good idea," Miles Shipside, Rightmove's commercial director, tells Yahoo.com, but he warns that prices have further to fall. The average number of unsold property on estate agents' books remained at an historic high of 76 as the gap between what buyers will pay and what sellers think they can get away with remains substantial.