Imagine the following: You need to get a lot of money very quickly. Luckily, you own your house (without any mortgage), and your brother John (as you are siblings you have the same parents), offers to help you out. John values your house at £600,000. You agree to sell your house to John at that value. John will pay you £600,000 in instalments over the next few years. In return, so you can still live in what used to be your house, you also agree a rental contract with John. You pay John £25,000 rent each year, for 30 years. The total value of your payments to John over that period will be £750,000.
Is this a good deal for you to make?
It might well be if you are desperate for the cash. It might be an even better deal if you used the money from John to invest wisely producing several new income streams from which you can easily pay the rent. Plus, as John is your brother, he will make sure you are ok. Nothing to worry about, right?
Maybe, but maybe not.
In making the decision, you can’t possibly know how the future will develop and the situation might look very different then. Most importantly, you’ve lost ownership of the asset that used to be yours.
Did you consider the issues below in making your decision?
- Remember, before your agreement with John, you lived rent and mortgage free as the house was paid for. This meant you could have spent the extra money you have on a better car, or nicer holidays or improving your house and garden to make it a more pleasant place to live. Now as you must pay rent, you will have less disposable income to pay for these items.
- At the end of the 30 years, you will have paid £750,000 to John in rent and John will have paid you £600,000 for your house. With a low average annual inflation of around 2%, the £750,000 you will pay to John is worth around £600,000 now. However, despite the fact you have paid each other the same amount (John lent you some money and you paid him back), John now owns the house, and you don’t. You used to own an asset, which you could have borrowed against or rented rooms out to give you extra cash, but you can’t now because you no longer own the house. John has essentially got the house for free.
- At the end of the 30 years there is no guarantee that John will let you live in the house anymore. John might increase the rent to a high level you cannot afford. Or John could ask you to leave so he could sell the house, or convert it into something else such as a shop, leaving you to find somewhere else to live.
- What happens if you and John fall out? Depending on the wording of the rental contract, John may be able to evict you. John may think he can earn more money from renting the house to someone else.
- What happens if after you sold your house to John, he takes a loan out from one of his friends, which is secured on the property. Due to John personal finances, he defaults on the loan and John loses the ownership of the house. John’s friend now owns the house. What if John’s friend wants to sell the house to recoup his money? What if John’s friend wants to increase the rent?
After considering the above, do you still think you have agreed a good deal?
You may think this is an unrealistic scenario. However, swap the following into the scenario above:
- You become Sheffield Wednesday FC
- Your house becomes Hillsborough Stadium
- John becomes Sheffield 3 Limited (owned by Mr Chansiri)
- Cars, holidays, and home improvements become players, managers, and infrastructure improvements to the academy and training ground.
- John’s mate becomes New Avenue Projects Limited
- £600,000 becomes £60,000,000
- £750,000 becomes £75,000,000
Once you read the blog again, does the scenario sound familiar? Of course it does! This is the current situation with Hillsborough Stadium.
Are you worried now?
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