What Are The Advantages And Pitfalls Of A Home Sale And Leaseback?

What Are The Advantages And Pitfalls Of A Home Sale And Leaseback?

In a seller’s market, it can be easy for buyers to develop some anxiety about whether and when to say “no” to a seller’s request. And with demand still outstripping available inventory, there’s no question that sellers have felt empowered to ask for what they want. From forcing potential buyers to adopt the sellers’ pets to demanding that they be permitted to remove $10,000 toilet seats from the home, it’s clear that no request is too strange for some home sellers.

A common request from sellers is the sale and leaseback arrangement. If a seller has not yet found a new home, is waiting for the completion of construction, or is involved in a contentious or extended closing, they may ask a buyer to consider a home sale and leaseback arrangement. 

As a buyer, it can be intimidating to consider these requests — after all, buying a house is about more than just a financial investment, it’s about choosing a place to live, hopefully for a long time — the place where you’ll come home after a long day at work, the place where your children will go to school, make friends, and participate in youth activities. In a hot market, it can be tempting to simply accept every buyer request to get your dream home in your dream neighborhood. However, even the most eager buyer needs to try to keep a cool head when faced with these requests, which can have ripple effects on every aspect of the homebuying process. Understanding the pros and cons of a home sale and leaseback can help a buyer evaluate whether such an arrangement is worth it in the short and long run.

What Is A Sale And Leaseback?

A sale and leaseback, also known as a sale-leaseback or simply a leaseback, is a contract for a home purchase in which the buyer agrees to permit the seller to remain in the property after closing for some period of time at a rent agreed upon by the parties. A leaseback can be short-term, allowing the seller to resolve an issue before moving, or long-term, in which ownership of a property changes hands, converting a homeowner into a long-term tenant.

Why Consider A Leaseback?

For sellers, the advantages of a sale and leaseback are obvious. If the seller is seeking to buy another home, this arrangement allows the seller to avoid awkward timing at closing, and to have the funds from the property sale available to fund a new purchase. The rent contemplated in a leaseback can be “prepaid” with a reduction in the home’s purchase price, if both parties agree. In a hot market, this arrangement can also allow the seller additional time to shop for a new property, potentially relieving some pressure to buy a new property quickly. Finally, a sale and leaseback can also allow the seller to avoid seeking a “home sale contingency” in a purchase contract.

Less obvious are the advantages of such an arrangement for a buyer. After all, a sale and leaseback requires the buyer to close on a home they don’t get to live in right away, instead turning the buyer into a landlord for some period of time. However, a sale and leaseback can have some important benefits for buyers as well as sellers. First and foremost, this type of arrangement can help a buyer’s offer stand out in a competitive market, particularly if the buyer is competing against multiple offers. Further, in an environment of inflationary pressures and rising interest rates, many buyers would prefer to “lock in” a low interest rate and close on a home immediately rather than facing further reduction in their purchasing power.

In addition, this type of contract can work for a buyer who won’t be able to move into the property right away due to job or school needs, guaranteeing that the buyer will receive some amount of income from their new property to help defray the costs of a delayed move. Finally, for a buyer looking for an investment property that won’t be the buyer’s primary residence, such as a vacation home or investment property, a long-term sale and leaseback can provide a built-in, immediate tenant, ensuring that the new buyer maximizes the value of their new investment.

What Are The Pitfalls Of A Leaseback Arrangement?

For sellers, there are few potential drawbacks to a leaseback agreement, but whether a particular arrangement benefits the seller depends on the terms of the parties’ agreement. Sellers should be on the lookout for arrangements that charge a high rental rate, or that don’t clearly spell out the parties’ expectations during the lease period.

As for buyers a sale and leaseback arrangement can be an advantage for some buyers, but for most it presents some serious drawbacks. Most buyers don’t want to make a major investment in a home, paying closing costs and incurring substantial debt, only to be kept from immediately occupying the property. In addition, a sale and leaseback agreement immediately makes the buyer the seller’s landlord, with all of the attendant risks and responsibilities that status confers. From “what happens if the property is damaged between the closing and when I move in?” to “what happens if I need to try to evict my ‘tenants’ at the end of their lease period?” these questions can and do arise from time to time, and homebuyers should consider potential risks in assessing the value of a leaseback arrangement.

Buyers should also seek advice as to the possible collateral effects of a sale and leaseback on their tax liability, homeowner’s insurance, and financing. If the buyer intends to occupy the property as their primary residence, most mortgage lenders require that the buyer actually occupy the property within a designated period of time after closing, typically 60 days. Similarly, failing to occupy the property can jeopardize a buyer’s homeowners insurance coverage. While a short-term sale and leaseback may still be possible, buyers considering this type of arrangement for a primary residence should consult with an experienced broker or attorney before proceeding. 

When Home Means More, You Need A Team With More To Offer

Whether you’re buying or selling your Chicagoland home, we know that home is about so much more than just four walls. Buying or selling a home is a big deal, and our homes have never been more important. That’s why your local Baird & Warner agent is with you at every step of the way, from finding the perfect home to connecting you with local experts in mortgage and title. Whether it’s the beginning of a story or the end of a chapter, we’re here to help.

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