Solicitor Peter Esders
If there is one thing that tends to get my back up, it is guaranteed rentals. On the face of it, guaranteed rentals were the ideal solution for investor clients. They bought a property with a minimal deposit and financed the rest with a mortgage.
With interest rates being low they could cover the cost of the mortgage from the ‘guaranteed’ rental and they were instantly ahead of the game without having to work too hard at anything. The guarantee is often X percentage of the price paid or sometimes a certain amount per year. Then when they came to sell they also benefited from an increase in the price to make a Capital Gain.
That all sounds perfect, so why don’t I like rental guarantees? Quite simply because when I carry out due diligence for clients I find that most of them didn’t have any substance behind them. I remember having a meeting with a developer once. The developer was promoting ‘guaranteed’ rentals of their properties.
When I asked what was behind the guarantee I was met with blank faces. I then clarified what I was asking. Why is this guaranteed? How can the buyers be 100% sure that that rental will be paid out? “Because that is what we expect the rental to be,” came the answer. “So this isn’t actually a guarantee, but more an indication of future expectations then?” I asked. Cue more blank faces.
It seems to me that some people simply don’t understand what a guarantee is and simply think that it is an expectation. The buyers don’t though – they think that it is a certainty, that it is going to happen. They think that if the rent doesn’t materialise somebody will put their hands into their pockets to make up the difference. The person giving the guarantee often thinks very differently
Renting out the property
To my mind this shows how many of the so-called guaranteed rental schemes don’t actually mean much and the people behind them don’t mean that the rental is guaranteed.
The second reason why I don’t like rental guarantees is that sometimes there is actually a real guarantee in that you will get your money back, but that the economics don’t work out. Several years ago I saw a firm promoting a certain development.
They advertised that they gave a rental guarantee for the first two years of ownership. They would also sell the property to you without a rental guarantee if you wanted. However, the difference between one price and the other was the amount of the ‘guarantee’. Therefore if you bought a property with the rental guarantee you paid too much for the property and then simply received your own money back over a period of two years – without interest! So let me get this right – I pay too much for the property and over a period of two years you drip feed me my money back without interest and in the background you are renting out the property and keeping the rent that you receive from that? No thank you very much.
Banking crisis
If you're buying a home abroad, make sure you take independent legal and financial advice
The third reason that I don’t like guaranteed rental schemes is that although some of them have all good intentions of paying any shortfall between actual rental received and the guaranteed rental the companies behind the guarantee are not strong enough or financially viable enough to stack up.
If there was a big shortfall and all their clients claimed for the guarantee they would go out of business. If the banking crisis that started the global recession has taught us anything it is that there is no such thing as a 100% guarantee (the phrase ‘money in the bank’ doesn’t have the secure feeling that it used to have), but there has to be some substance to the guarantee.
There are some good rental guarantee schemes, but many of them don’t seem to have any substance behind them. Because of that I always take the view that you should assume that any guarantee is worthless and that if it turns out to be true then this is a bonus. I am not normally a ‘glass half empty’ sort of person but when it comes to Guaranteed Rentals I think that it is prudent to think in this way.
Peter Esders is a UK solicitor who studied Spanish law in Spain and who has been dealing with Spanish law for over 15 years. He can be contacted at Chebsey & Co, 51 London End, Beaconsfield, HP9 2HW www.chebsey.com Tel; 01494 670440 Fax; 01494 670276 Email pje@chebsey.com
There is nothing like doing your own research BEFORE committing yourself to a purchase. It is suprising how many people step into the overseas property market without doing their homework and then they come a cropper. Always use a lawyer independent of the developer – and talk to as many other people as you can – those who have already bought, the locals, check tourist figures yourself, find out what development is being planned for the area – get a real feel for the place before you sign anything! Never trust a guarantee…