Rent-2-Buy out to beat homes logjam.
A leading letting agent in the north west of England has devised a prototype rent-to-buy scheme intended to overcome the logjam in the housing market by bringing together reluctant landlords and would-be first-time buyers.
"Rent is usually seen as dead money by tenants, so I tried to devise scheme to give first time buyers an eventual discount on purchase price linked to how much rent they pay," says Robert Jordan of Jordan's, an established letting agency with five offices ranging from Manchester to Bolton.
"It also means that tenants - when they become buyers - will usually need a smaller mortgage. Feedback so far has been very good."
Rent-2-Buy also assumes that plenty of 'amateur' landlords, who may have built small portfolios while property prices surged ahead, will be keen to exit the sector in the next few years.
One report this week predicted the volume of buy-to-let lending could plunge from pounds 120bn to pounds 44bn within a few years.
"Many people who invested in bricks and mortar in recent years, perhaps as an alternative to pensions, may be having second thoughts," Jordan says.
"The guaranteed rental has gone, void periods are a worry and the cost of mortgage finance is going up."
Under Rent-2-Buy, tenants take an Assured Shorthold Tenancy (AST) for any period from six to 12 months.
They also sign an option agreement, which adds an extra 10 per cent to monthly rental - that's pounds 50 on a pounds 500 monthly rent - which is absolutely binding on the landlord and compels him to sell when a tenant is ready and able to buy at any time during the first six years of a tenancy.
The price of the purchase will either be the base value written into the option agreement, or open market valuation when the sale goes through, whichever is the higher figure.
At the point of purchase, the tenant gets a discount equivalent to half total rent paid during their period of tenancy: for instance, if they pay pounds 500 a month, that's pounds 6,000 a year, and pounds 24,000 in four years, making a discount worth pounds 12,000 after four years.
The discount is based on total rent paid, not including the monthly option fee.
Jordan was obliged to include the option fee in his scheme to escape the attentions of the Inland Revenue - which might otherwise slap a tax bill on the tenant for receiving a "gift". The option fee means the tenant has paid a price to collect the eventual discount - and won't be liable to tax on it.
During the rental period, the tenant can also make a small monthly contribution to a compensation fund: this guarantees that the option fee is repaid if the landlord's mortgage company has to repossesses it.
The scheme at present is a blueprint. But Jordan says two or three properties on his books have seen agreement reached between landlord and tenant. He expects more will do so as storm clouds gather over the residential sector.
"In return for their monthly option fee, tenants could eventually enjoy a discount which greatly exceeds the total cost of the option.
"The landlord collects the monthly option fee, which reduces the management fee, while the letting agent continues to collect management fees until the property changes hands.
"Of course, the scheme does assume there is a letting agent standing in the middle. If there isn't, the scheme might be harder to negotiate and set down in a binding form."
Of course, it is also possible that the housing market gets so grim that the tenant wants to walk away without buying. After the initial fixed term of the AST, a tenant can walk away after giving one month's notice, and the right to buy option lapses - but they would have lost the rent money anyway, and will only be out of pocket on the option fee.
Can the landlord walk away from an agreed deal? If they do, they must repay both the option fee and the potential discount (that is, half the rent already paid) to the tenant.
BE SURE YOUR HOLIDAY HOME TENANTS AREN'T SAGA LOUTS
Owners of holiday homes abroad are usually happier letting to friends and family - and are more reluctant to have "unknowns" as guests unless they are older and more mature.
That's the finding of a report from Saga Holidays - which says that 31 per cent of owners surveyed were 'very comfortable' to let to someone in their 60s, while just four per cent felt the same about letting to tenants in their 20s.
Saga has therefore decided to launch its own Saga Property rental service - which enables Saga customers to advertise holiday homes for just pounds 50 a year for rental to other Saga customers.
As an additional cost to the renting of the villa, Saga is also ready to package up Xights - although customers are also free to make their own arrangements.
"Many of our customers have holiday homes abroad but often feel nervous about renting them outside of friends and family," says Saga chief executive Andrew Goodsell.
"We hope our new service allows them to feel condent that customers using their homes are like-minded individuals."
PRICE FALL MAY HAVE SUNK SAVINGS OF NEW LANDLORDS
Thousands of people who bought homes as an investment in 2007 to earn rental income may have lost a sizeable chunk of their savings since prices began to slide, says a new analysis.
The report from Bristol-based financial advisors Hargreaves Lansdown claims an investor who bought at the peak of the market in October 2007 with a 90 per cent loan could have lost 90 per cent of their deposit in barely 10 months.
With an 85 per cent loan, they have lost 60 per cent of their savings; with a 50 per cent loan, they have lost only 18 per cent of their savings.
The report says that buyers who bought a pounds 200,000 property with a 10 per cent deposit might have to subsidise their mortgage repayments for 11 years to the tune of pounds 23,322.
The main thrust of Hargreaves Lansdown's report is that boring old pensions, boosted with Government tax breaks and employer contributions, compete more effectively than most people realise with sexy bricks and mortar over a long period.
However, the chances of Kirsty Allsopp and Phil Spencer getting a TV series to boost the image of pensions are slim to non-existent.
"The real test (for property investors of 2007) will only come when they come off two and three-year fixed rate mortgage deals in 2009/2010," Hargreaves Lansdown warns.
"At that time, if house prices have not improved or deteriorated further as is the growing consensus, recent investors with low amounts of equity may find it hard to remortgage."
The financial advisor also says property investors can also face awkward decisions on when to 'decumulate' property assets in retirement. Some might sell ahead of retirement, and reinvest profits in their pension pot.
However, Malcolm Harrison, spokesman for the Association of Residential Letting Agents (ARLA), says: "The Xaw in predictions of doom for Buy-To-Let is that the average Loan to Value of property owned by investors is about 70 per cent, and we estimate that around 50 per cent of the market is portfolio landlords holding dozens of properties with a substantial cushion of equity.
"The typical buy-to-let investor is cautious, has a sizeable deposit and realises we are now in a landlord's market with rents rising. Experienced landlords are keeping their eyes open, and buying more when the right properties come on sale in the right place."
"The sector at greatest risk are those investors who were persuaded to buy brand new properties off-plan, often in Northern city centres, with a rental guarantee for two years and not knowing what the real rental valuation was in the first place," Harrison says. "But they form a very small proportion indeed."
HOW LANDLORDS CAN SURVIVETHE SQUEEZE
One year into the credit crunch, the National Landlords Association (NLA) admits some of its 20,000 members are "increasingly concerned about their financial situation" after the barrage of shock horror headlines.
It says that in some cases their fears have not been allayed by increased demand for rental properties and, in many areas, higher rents.
So the NLA offers this checklist to keep landlords out of financial difficulties:
Research the market to get the weekly rental right
If repayments are a problem, ask your lender or a broker to arrange an easier
Keep void periods to a minimum by marketing the property before present
tenants move out
Pick tenants with care - only hand over keys after carrying out credit checks,
bankruptcy searches and previous residency information
Keep tenants happy, with good communication and by sorting out problems fast
Follow new rules to protect tenant deposits - and from this year, the law requires
a new tenant to receive an Energy Performance Certificate (EPC) on the property
Draw up a clear and simple inventory to avoid disputes at the end of the tenancy
Get decent insurance against a range of problems, including injury to tenants
and their guests, avoiding void periods, along with buildings cover
Start a rainy day fund - put a sum of money aside monthly to cover cost of a new
boiler or windows
Get the right advice - possibly from a landlords' association
A letting agent's rent-2-buy idea may give first-time buyers a leg up onto the housing ladder
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|Publication:||The Birmingham Post (England)|
|Date:||Aug 21, 2008|
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