NGU Home Lettings

Another Alternative Exit Strategy!

What is it?

Rent to Buy is a fantastic way for a tenant to buy the property they are currently renting while offering the landlord a long term rental and exit strategy.

What are the benefits to you the seller, of doing a Rent to Buy?

• With a tenant buyer you eliminate voids while the tenant accrues a deposit to purchase your property.
• You will have a reliable tenant who has a huge incentive to pay their rent on time.
• You will benefit from a future sale of your property, at a pre-agreed price with an inflationary increase per year.
• We recommend that you analyse your portfolio and decide which properties you wish to sell within the next 5 to 10 years and offer a Rent to Buy facility on these.

Why would your tenant want to do a Rent to Buy?

The main reasons tenants will do our Rent to Buy scheme is that they want to buy a house or are settled in the house they’re living in but are not in the position to purchase because they:

• Can’t currently get a mortgage for whatever reason – credit issues, self-employed, work history for example.
• Haven’t got the deposit needed for a mortgage at present.

What rent does the tenant pay under the Rent to Buy scheme until they purchase the property?

An Assured Short Hold Tenancy Agreement is offered at a fixed rent for a time period of 6 months to 5 years.

Time Periods

Time periods are typically designed to allow the tenant the opportunity to save up for the deposit for the property if they don’t have it or if they do, the time frames are set to allow a tenant to be accepted for a mortgage.

What happens to the deposit the tenant is saving each month?

The deposit the tenant is saving each month is protected and is paid into a client account. There will be two payments each month; the rental amount and the “over payment” which will be the money for the tenants deposit.

The deposit the tenant is saving each month is protected but it does have a default clause to it. If they do not buy your property in the agreed time frame, 30% of the deposit (minimum of £2,000) is none refundable and is paid to you the seller.

If they default on your rent during the Rent to Buy period, this also activates the deposit default clause (any loss of rent, eviction costs and landlord legal costs will be deducted from this overpayment).

In a nut shell, in the event that the Rent to Buy agreement is breached by both parties, whichever side has breached the agreement, the 30% overpayment towards the deposit will be paid to them.

How is the market value of your property decided?

The current market value of a property is decided in either two ways. Your Tenant Buyer can pay for an independent RICS Chartered Surveyor to value your property or our Estate Agency (NGU Homesalesonline.co.uk) will look at comparables of other similar properties on the market for sale or recently sold ones to produce a valuation.

For each year of the Rent to Buy agreement, the agreed market value will be subject to an inflationary increase each year.  For example 1%.

E.g.   Agreed current market value                        £85,000

Year 1 =           1% increase in value                        £85,850
Year 2 =           1% increase in value                        £86,709
Year 3 =           1% increase in value                        £87,576
Year 4 =           1% increase in value                        £88,451
Year 5 =           1% increase in value                        £89,336

Maintenance

You are still responsible for all category 1 repairs to the property during the Rent to Buy period (health and safety issues).

You still need to carry out your statutory requirements such as an annual gas safety check and an energy performance certificate, if required.

Before the tenant moves into the property, you will also need to carry out an electrical periodic inspection to confirm that the electrics are safe. Any points that come out of this inspection that are health and safety issues will need to be rectified.

Any general wear and tear to a property that is not classed as category 1 (health and safety issue) is the tenants responsibility. An example of this could be an internal door that has slightly dropped and needs shaving to close. This would be the tenant’s responsibility to rectify.

Sellers Commitments

The seller is committed to pay the mortgage, if applicable, and insurance during the Rent to Buy period and to only sell the property to the tenant buyer at the pre-agreed prices.

Example 1

Property Value £85,000.

Your new Tenant Buyer doesn’t yet have the deposit needed to buy your property. 10% deposits are generally a starting point as they are normally the lowest requirement for a residential mortgage.

To be able to get the deposit required to buy your property, you and the tenant buyer have agreed a 5 year Rent to Buy period.

Agreed current market value                                  £85,000

Year 1 =            1% increase in value                       £85,850
Year 2 =            1% increase in value                       £86,709
Year 3 =            1% increase in value                       £87,576
Year 4 =            1% increase in value                       £88,451
Year 5 =            1% increase in value                       £89,336

Therefore if the tenant buyer buys it in 5 years’ time, a 10% mortgage deposit is required – 10% of £89,336 = £8,934.

This means the tenant needs to save £1,787 per year, or £148.89 per month.

You have agreed a fixed market rent for this period of £485 pcm.

Therefore the tenant will pay £485 pcm for the rent and £148.89 pcm towards the required mortgage deposit.

After 5 years of having a reliable tenant, the tenant will be in a position to buy your property.

Example 2

Property Value £90,000

Your new Tenant Buyer has the deposit but can’t get a mortgage because they are self-employed and needs 2 years of tax returns.

You therefore have agreed a 2 year Rent to Buy period.

Agreed current market value                                  £90,000

Year 1 =              1% increase in value                     £90,900

Year 2 =              1% increase in value                     £91,809

In 2 years’ time the Tenant Buyer is looking to buy your property via a residential mortgage that requires a 10% deposit of £9,181. They have the deposit now, so as security we hold 30% of the deposit in a client account – £2,754 until the property is purchased.

After 2 years have passed, the tenant now has 2 years of tax returns to give the bank and can now be accepted for a mortgage. The tenant buys your property.

If the tenant doesn’t buy your property after 2 years, you will receive the 30% deposit held in the client account £2,754 because the deposit clause will have come into effect.

How much does this scheme cost to enter into for the buyer, so I know they are serious?

• Rent to Buy administration fee: £750 plus VAT each.
• The first month’s rent £0 (the first month is a rent free period).
• Solicitor fees range from £400 plus VAT to £650 plus VAT
• If a Tenant Buyer decides not to use a solicitor they must sign a waiver but we strongly recommend they use one.
• RICS Chartered Surveyor fees range from £125 plus VAT- £300 plus VAT
• If a Tenant Buyer decides not to use a surveyor they must sign a waiver but we strongly recommend they use one.
• Home Survey fees ranges from £200 plus VAT to £400 plus VAT
• If a Tenant Buyer decides not to instruct a surveyor they must sign a waiver but we strongly recommend they use one.

How much does this scheme cost to enter into for you the seller?

• Rent to Buy administration fee: £750 plus VAT each.
• The first month’s rent £0 (the first month is a rent free period).
• Solicitor fees range from £400 plus VAT to £650 plus VAT
• We can recommend solicitors to you if needed (if you decide not to use a solicitor you must sign a waiver but we strongly recommend you use one).
• Electrical periodic inspection £150 (including VAT)
• Annual gas certificate £72 (including VAT)
• We take an Estate Agency fee from you the seller once the property has completed at the end of the Rent to Buy period.

How do we find out if your tenant is interested in a Rent to Buy?

• If you like the idea of our Rent to Buy for your tenants, we will approach your existing tenant at their 12 month review to see if they are interested in converting into a tenant buyer via this scheme. Or we will advertise your property to any new tenants when vacant, as a Rent to Buy.
• If your tenant is interested, we will ask them to fill out a Rent to Buy fact finding form to see if they qualify.
• We will then negotiate with you and the tenant a price, with inflationary increase, to buy your property in the future.
• We will also negotiate with you and the tenant a fixed time frame for the tenant to have the “right to buy” your property.

Summary

• You will have a reliable tenant who has a huge incentive to pay their rent on time.
• A future agreed sale with an inflationary increase in price per year.
• We recommend that you analyse your portfolio and decide which properties you wish to sell within the next 5 to 10 years and offer a Rent to Buy facility on these.

Rent to Buy – Seller Information

If you would like us to approach your current tenant or new tenant about a Rent to Buy, please email our Rent to Buy team via the following email address: rent@nguhomelettings.com.

Tyne & Wear: 0191 491 0344 | Teesside: 01642 312 312 | Darlington: 01325 353 222