Housing Buy Backs and the Pitfalls

A “housing buy back” is when a home owner sells their home to a financier, and then pays rent in order to remain living in the home. The idea is that the homeowner has the use of the money from the sale of the house, and then buys back the house a few years later once they have overcome the financial problems that led them to selling the house to the financier in the first place.

These housing buy back schemes have become notorious in some areas (mainly in South Auckland at this stage). The problem is that the homeowner if often unable to afford to buy the house back and therefore it remains in the hands of the financier.

Housing buy back schemes are a form of consumer financing, generally targeted at low income people who lack the credit rating to obtain finance elsewhere. Recent examples have included high initial fees, repayment amounts that the homeowner will never be able to meet, and an inflated price for purchasing the house back at the end of the transaction.

The process of transferring the property to the financier has been done in a way that gets around the remedies given by law against oppressive credit contracts since the transaction is a property transfer rather than a loan.

A new law has come into force to prevent these transactions from occurring. The new law makes sure that the homeowner has full information about the transaction, and understands what they are entering into. The information that must be given to the homeowner includes:

• Details of the right to occupy the home.
• The terms of the right to repurchase the home including the method of calculating the purchase price.
• The description of fees and charges that are, or may, become payable.
• The detail of payments required.
• Details of any default fees including how and when such fees become payable.

If the financier does not provide the above information, they can be charged with a criminal offence that carries a maximum penalty of $30,000.00. The homeowner could also claim damages from the financier.

You should beware of:

• Any financing scheme where you have been approached after an advertised mortgagee sale of your property. The promoters of these schemes are trying to identify homeowners in financial difficulty.
• Promoters coming with you to see your lawyer, and staying with you while the lawyer gives you advice.
• Promoters introducing you to third parties who will own the legal title to your property.
• Promoters who want to be trustees of family trusts to be formed as part of the proposed arrangement.