In many cases across the UK, elderly home owners purchased their property many years ago and have seen the value of the property increase massively. Many of them would like to take some of this capital gain but now remain unwilling to sell their homes.
This is where home reversion is used. The home-owner has the option to sell the property at a fraction of the market price and the occupant can remain in their home rent free for the rest of their life as tenants to the new owner.
Once the occupant has passed away, the new owner can deal with the property as they wish.
In the past, companies that arranged these lifetime leases have sold them to pension funds or large property investors. But over the past year, these properties have been made available to private investors in auctions. The question for investors is whether or not such properties are a good buy.
An obvious benefit is that it allows investors to buy into the property market a a much cheaper price. Typically the “guide price” for reversion is around 40% of the market price.
Investors don’t get an income from the property, but by purchasing it at a fraction of its current market value it offers potential for capital growth
The price at which these properties are sold depends on the age of the current occupants; the younger they are the larger the discount will be as, statistically speaking, it should be longer before buyers will see a return on their initial investment.
It should be noted that, as these properties are sold at auction, they can sell for more than the guide price.
Lenders won’t grant mortgages on properties that were not vacant. This means buyers will need to have the cash to buy the property outright.
An obvious risk is if tenants live far longer than expected it could be a very long time before investors see any return on the initial outlay. Most institutional investors reduce risk by owning a large number of properties, but for individuals who are unlikely to have enough cash to purchase more than one property this can be a problem.
Investors should factor in the “lost” income they would have got from buying a similar but vacant buy-to-let. How many years would it take to recoup the additional upfront expense in rental payments? If this is less than the time you could reasonably expect to get access to the property, then massive discounts on the purchase price may not look quite so attractive.
There is also the risk that the owners won’t keep the property in good repair, potentially damaging your long-term investment. Of course, the contract they have signed stipulates that they should do this – will a private investor want to take an ageing widow to the small claims court?
Eyam Rose Cottage by Michael D Beckwith is licensed and edited under creative commons