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Sale and Leaseback - Is It Right for You?

Everything You Need to Know About the Sale and Leaseback Process

February 10, 2019

By

Bridget Houlihan

on

Jan 22, 2019

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There are various reasons why a sale and leaseback could be beneficial to homeowners-- sometimes traditional methods such as bank financing just don’t make sense or meet their needs. Depending on the situation, this could be an ideal solution to any number of real estate demands.

We’ve put together a list of all the advantages of the sale and leaseback process. Read on to see if this process could be right for you! In this article, we’ll cover:

  • What is the sale and leaseback process?
  • The advantages for homeowners
  • Who can benefit from this solution?

What is sale and leaseback?

A method of real estate transaction that has been gaining in popularity over the past couple of years is what is known as the sale and leaseback option, or just leaseback.

This is an arrangement where a homeowner sells their home to a lender and immediately leases it back for a stipulated amount of time, often with reduced monthly payments. This is popular option for homeowners who are looking to generate capital from their real estate. There are various reasons why someone would want to generate cash quickly, and if you’re in this situation, this might be an option to discuss with your lender.

Most sale and leasebacks begin by following these steps:

  1. Determine the open-market value of your property. You can do this by reviewing your assessments in the county records department or hire your own assessor
  2. Figure out the prospective cash flow to be generated from the leaseback
  3. Create the deal and the terms of the sale/leaseback including the term of the tenancy, the rate of rent, and when rent would be due

As long as you are able to determine that this scheme is appropriate and mutually beneficial for both lender and lessee, a sale and leaseback could help out substantially.

Looking into a sale and leaseback could be the option you’ve been looking for to help generate some cash.

Sale/Leaseback VS Reverse Mortgage, HELOC, & Traditional Buying/Selling

In addition to sale and leaseback, there are also other options available to homeowners looking to change their circumstances which are worth consideration. Again, these options are situation dependent and might not be the best option for all homeowners.

Reverse Mortgage

If you have paid off your home, or have a small balance on the mortgage, and meet a few other qualifications, you might be interested in a reverse mortgage. This plan also allows you to generate cash quickly by using the equity in your home as cash. This is mostly marketed towards older homeowners who might be strapped for cash or worrying about how they will survive without a consistent income. Payment can be offered in a lump sum or dispersed as monthly payments.

With this option, you will no longer be required to make monthly mortgage payments, and instead you would receive payments from the liquidized equity. You get to stay in your home and can count on your payments from the reverse mortgage being tax-free.

HELOC

Another tool that homeowners can use is a home equity line of credit, which is essentially like taking out a second mortgage. This also uses the available equity in your home and allows you to borrow against it. It’s helpful for people who need access to money, and perhaps want to redo a room in their house or make other large, structural changes. You are guaranteed access to a certain amount of money for a set amount of years, and can access this pool of money consistently as it is paid back.

Traditional buying and selling

When we think of buying a new house, we usually just think about getting a loan from a lender and closing the sale. And this is still the most popular way people continue to buy and sell real estate. But as we’ve seen, sometimes there are circumstances where a sale and leaseback or a reverse mortgage is a better fit for a homeowner.

Ways to Tell if the Sale/Leaseback is Right For You

1. You need cash now

This seems to be the number one reason that homeowners seek out a sale and leaseback. By selling their home to a lender, they are getting instant access to the money made from the sale. Sometimes people are in a situation where having money makes more sense than having real estate. This could be due to a recent job loss or other life event where you’d prefer to not have a long-term investment like a house. When you’re paying on a mortgage, you’re increasing the equity in your home each month. This would stop once you finalize the sale and leaseback, but you would have peace of mind knowing you now have a good amount of cash on hand.

One huge advantage of a sale and lease back, is that it gives you access to cash. No longer tied up in real estate, you’ll be able to use that money for whatever you might need.

2. You’re not ready to move, but want to keep your home

This tends to happen when homeowners are thinking about moving but not quite ready to put their house on the market. They don’t want to sell it just yet and would instead rather see in what direction the market goes. By selling their home and leasing it back, they have the freedom to not worry about a mortgage anymore and the security of knowing that their payments will be lower as a lease. This way people can stay in their homes while they start to figure out their long term plans.

3. Building or searching for your dream home

If homeowners are dreading the buying of a new home while selling their old one at the same time, a sale and leaseback might offer them some time to accomplish this. No one is interested in paying two mortgages, and sometimes it takes longer than you think to either find a new home or sell your old one. By entering into a sale and leaseback, there is no worrying about the mortgage anymore. Homeowners can take their time and search out their dream home or build one from the ground up. The payments on a leaseback are usually less than a mortgage and are also for a  shorter amount of time. Even if they just have an idea of how long it will take to build a home, or how long they intend to search for one, it would make sense to go with the lease option.

4. Take advantage of the housing market

Sellers that are worried they won’t get the amount they want for their house might also seek out a sale and leaseback option. If the housing market is good and the lender agrees to pay them the amount they want, there is no worrying about what might happen next year. With the sale done, the former owners have already done their part and got the price they wanted. Now they can concentrate on finding a new home instead of wondering if the market will change away from their favor.

5. A better option for low credit homeowners

Sometimes homeowners find themselves looking for help from sale and leaseback options when unexpected bills or other life event like the loss of a job happen. It’s hard for those with low credit to refinance or get a HELOC, but they might just be able to get access to the cash they need with a sale and leaseback. It can be helpful to families who need time to recover from an unexpected event-- time to get them back on their feet again. By selling and leasing back, they can do just that.

The lower lease payments will help them save money each month, and they get to stay in their current home. Sometimes lenders even offer a buy back option if the owners wish to buy their home back after their lease period is over.

The sale and leaseback option might be a great choice. Just be sure to do your homework, and know what your long term financial goals are.

Is this right choice?

Like any major decision, homeowners should sit down and make a list of what their needs are. Then, they can evaluate all their choices and see which one is the best fit for their current situation. A sale and leaseback might be a good option if you need to get access to cash, due to any kind of unforeseen circumstance. It can lower your monthly payment if you need time to recover after a job loss or hospital stay. If you’re not quite ready to move, or would like the freedom to sell your home in a good market, then look to buy or build, this also might be a great option for you. Homeowners can get benefit from a sale leaseback situation, but it is best to take the time and speak with an expert regarding their particular situation.

Sale and leaseback’s popularity has recently increased in the past couple of years, with homeowners deciding to try this option as a way to meet their needs. It still is relatively unknown to most outside of the real estate business, but if you would like to discuss this as an option, talk to the experts at HER Realtors. Our agents are well acquainted with this type of sale and will be happy to explain the process in further detail or start you on your way to a sale leaseback of your own.

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