Sale and Leaseback Advantages and Disadvantages: What Every Homeowner Should Know

Amidst economic uncertainty and with property values trending ever-upward, many Americans are looking for ways to get the most out of their property ownership investments while they can. While some homeowners are converting their homes (or portions of their homes) into leasing and rental properties, others are selling their homes altogether — downsizing, but also leaving behind the countless memories made in their former home.

For homeowners looking to cash in on their real estate investment without uprooting their lives, taking in roommates, or adding “landlord/housekeeper” to their resumés, there is an alternative: a sale-leaseback transaction (SLB). These agreements have grown increasingly popular in recent years, and present an opportunity for financial freedom that many Americans dream of. In this blog, the team at Truehold explores sale and leaseback advantages and disadvantages — empowering homeowners to make the right decision for their financial futures. 

What are Sale and Leaseback Transactions (SLB)?

So, what is a sale-leaseback? A sale-leaseback is an arrangement in which a homeowner sells their real estate property to another party to unlock the equity they have accumulated in the home. With cash-in-hand and the newfound financial freedom it brings, homeowners then lease and rent their home back from the buyer at market value. 

For many homeowners, the sale-leaseback process can feel like starting over with a stacked deck. That said: This transaction isn’t for everyone, and understanding the full list of sale and leaseback advantages and disadvantages is vital for homeowners. 

Why Should Homeowners Consider a Sale and Leaseback Arrangement?

There are a number of reasons why a homeowner might elect to pursue a residential leaseback agreement, with the most common one being the ability to reap the benefits of an investment well-made without the hassle of finding a new place. Between the lack of inventory and the prevalence of vicious bidding wars, buying a new home might be harder than ever.¹ With a sale and leaseback agreement, however, homeowners can avoid jumping through these new home hoops — and avoid hiring movers — while still capitalizing on a feverish housing market and acquiring an operating lease. A sale leaseback will provide the previous owner with the opportunity to unlock capital that was previously tied up in the ownership of the asset. This newly available money can be used for any purpose the lessee desires, whether it's to expand their business or pay off debts with your home equity. If you’re wondering if a sale-leaseback agreement is the right fit for you, make sure to read up on how to evaluate a sale-leaseback agreement so that you can learn everything there is to know when considering this option.

These are far from the only sale and leaseback benefits, and our list continues below. 

Advantages of a Sale and Leaseback

More Equity Than Home Equity Loans

Truehold offers a superior alternative to traditional home equity loans by providing the opportunity to unlock more equity upfront in cash. With Truehold, you can access a larger portion of your home's equity and benefit from a flexible and hassle-free solution for your financial needs. Use our free home equity loan calculator to explore your options today.

Recoup Your Investment

One of the most significant advantages of a sale-leaseback agreement is that an SLB allows a property owner to get every penny out of their home that they have already put into it (and then some.) In this way, a sale-leaseback agreement functions almost like a savings account — if a savings account could also put a roof over your head. Further, considering a sale-leaseback agreement allows homeowners to profit from a booming housing market at a fair price, and you’re able to more than recoup your initial investment and working capital. 

Free Up Your Finances

A sale-leaseback deal can benefit those who are no longer able to afford their home due to any number of financial circumstances, but the benefits of an SLB are far from limited to those struggling to make ends meet. By unlocking 100% of the equity tied up in your home, you’re able to free up your finances and begin living life on your terms. Travel, experiences, hobbies — anything that a mortgage once prevented becomes free game through a sale-leaseback agreement.  

Sell and Stay Put

As mentioned above, shopping for a new home in 2022 can feel like a full-time job. Plus, even after jumping through the necessary hoops (at a breakneck, Black Friday pace, no less), buyers still risk being outbid. Should you manage to somehow beat out other buyers, you then have to deal with moving and letting go of a home that contains decades of memories. With a sale-leaseback agreement, homeowners can cash out without packing up; enjoy the benefits of downsizing without losing their place of refuge. 

Secure a Fair Rate

In 2021, rents rose at a national average of 11.3 percent² — with rates continuing to follow this upward trajectory well into 2022. With so many renters at the mercy of greedy landlords, the modern rental market can be a bit of a minefield. Through a sale-leaseback agreement, homeowners can get the best possible fair market value for their home while also locking into a current market rate. If rates do increase, they’ll be raised at a fixed percentage as opposed to the price-gouging, which has become all-too-familiar among renters. 

Disadvantages of a Sale and Leaseback

Capital Gains Pains

Considering taxes are one of the only true certainties in life, it should come as no surprise that a sale-leaseback transaction can come with unwanted capital gain taxes from the Internal Revenue Service, or the IRS. Freeing up potentially hundreds of thousands of dollars through an SLB could expose homeowners to a capital gains tax in the event that the home is worth a significant amount more than its purchase price. There are potential workarounds, however, and a sale-leaseback transaction with the right buyer can help limit the sting.  

Loss of an Asset

For many, being a property owner is a major component of the American Dream — with 91% of Americans³ saying they would like to one day own a home as a real estate asset. This means that homes have become less of a utility and more of a status symbol, and owning a home is unarguably a significant achievement. Therefore, one of the biggest disadvantages of a sale-leaseback agreement is the fact that you exchange home ownership to cash out on home equity. 

Those who have dreamed of leaving their home as a family heirloom may reconsider forfeiting this underlying asset. However, those who recognize that time is the most valuable asset may see that the advantages of taking on a lease agreement far outweigh the disadvantages. 

How Truehold Makes a Difference 

Though a traditional sale and leaseback arrangement presents its own set of advantages and disadvantages when it comes to conventional financing, Truehold’s transparent approach to these agreements piles on the perks. Truehold offers homeowners the same benefits mentioned above, while also creating a renter experience that aims to make life as easy as possible. 

When you enter a sale-leaseback agreement with Truehold, you create a relationship built on transparency and honesty. We’re not interested in pulling the rug out from under you or trapping you. Rather, we want to empower you to take control of your finances while enjoying life in the home you love. Truehold covers your property taxes, property insurance, and essential repairs.

Is a Sale-Leaseback Right for You? 

After exploring the sale and leaseback advantages and disadvantages above, you should have a good idea of whether this approach is right for you. If you’re still on the white picket fence, however, the team at Truehold will be transparent about our service and what other options we are aware are available to you.

To discover the impact a sale-leaseback agreement can have on you — and your future — get started with Truehold today. 

Sources:

1. CNN. Why it’s so hard to buy a home right now. https://www.cnn.com/2022/04/13/homes/us-real-estate-biggest-obstacles-to-buying-feseries/index.html   

2. Washington Post. Rents are rising everywhere. See how much prices are up in your area. https://www.washingtonpost.com/business/interactive/2022/rising-rent-prices/  

3. Nerdwallet. 2018 Home Buyer Report. https://www.nerdwallet.com/blog/2018-home-buyer-report/