Residential Sale-Leaseback: Evaluating the Why, When, and How

If you search for “sale-leaseback” online, you may end up with pages of articles on commercial property and corporate investment. Selling an asset and then leasing its ongoing use has been a common practice with commercial real estate and major business assets for decades, but it’s relatively new for residential real estate. 

The largest investment in most homeowners’ lives is their home property, and a sale-leaseback (SLB) with a longer lease term is one of several options to turn home equity into cash while remaining in the home.

Let’s review the major questions for homeowners: why you might consider sale-leaseback transactions, the best time to do so, and how to evaluate a sale-leaseback. 

Why Should a Homeowner Choose a Sale and Leaseback Transaction?

Once reverse mortgages became a national trend, both lenders and borrowers began to chafe at the age and credit restrictions on this type of at-home equity transaction. Long-term residential sale and leaseback contracts are in part a response to those limitations. So, what is a sale-leaseback? Residential leaseback agreements remove age barriers and allow for greater credit score fluctuation. 

There are several sale and leaseback advantages and disadvantages. The advantages that would lead a business owner or homeowner to decide on an SLB are because they: 

• Want or need to convert the total amount of their home equity to cash flow
• Value staying in the home as opposed to owning the property
• Are under the retirement age limit on reverse mortgages
• Have a financial picture that allows for making ongoing monthly rental payments
• Want to be relieved of ownership costs and responsibilities such as major repairs

Additionally, homeowners may choose sale-leasebacks because they don’t want to: 

• Relinquish homeownership to heirs
• Take out a new loan to pay off
• Leave the financial burden of unpaid debts to children or grandchildren

When Is the Right Time to Go Into a Sale-Leaseback Transaction?

If you fit most of the “why” parameters above, then let’s talk about timing. Ideally your personal, family, and financial needs would all converge with the state of the residential real estate market and neighborhood property values so you can end up with more cash than you can carry from your home sale. 

In reality, there are timing factors you can’t control in terms of the marketplace, governmental regulations, and seller motivations—but being aware of these will help you plan the right time to begin the sale-leaseback process. 

#1 The Real Estate Market Balance

Remember that an SLB starts with selling your home, and the best time to do so is during a seller’s market. 

No one is expecting a return to the craze of 2020 soon when home sale prices were exploding, the mortgage interest rate hit a historic low, and the stay-at-home lifestyle blossomed into a flurry of home upgrade purchases. 

But even with the 30-year fixed rate average hitting 5.51% as of July 14, 2022, demand continues to outpace supply.¹ Real estate value has stabilized but not dropped, and the market continues to be positioned in favor of sellers. 

#2 How Your Home Connects to Your Current Lifestyle

One reason homeowners enter a sale-leaseback transaction is their desire to simplify their lives. This may be a result of:

• Less interest in home-based hobbies and entertainment
• Desire for relocation
• Wanting to be free of the way your home “owns you,” such as maintenance and repairs

#3 Your Readiness to Shift to Renting

Let’s take a quick quiz: Does the thought of a new remodel project in your home make you gasp with delight and get out your colored pencils or groan in horror and hide beneath the bed? 

While you’ll be able to continue living in your house—the one you’ve had under your complete control to paint, decorate, tear down, and build up for years—you need to be done with remodeling plans before you opt for a sale-leaseback arrangement. 

It can be more of a culture shock to shift to a monthly rental payment when you stay in your current home than for people who sell and move to an apartment because you’re so accustomed to having the right and responsibility to make all decisions. 

Be certain you’re done with remodeling and significant changes to your property before you enter an SLB, and take care to read (and negotiate) each lease term around what you can and cannot do.

#4 Home Equity Growth Opportunities

A sale-leaseback arrangement can unlock the full amount of your home equity and convert it to cash flow for you to use however you want or need. But before you solicit an offer, consider whether you can increase your home equity dollars through: 

• High-return renovations
• Ensuring potential bedrooms have the closets and exits to count as such
• Covered maintenance and cosmetic detailing
• Fixing anything covered by insurance, such as hail damage to your roof

Renovations rarely offer a full return on cost, and you don’t want to invest in changes that don’t give you at least an equal boost to your home value. But if you have a contractor, electrician, or plumber in the family, or another way to lower consumer costs, you may be able to boost your equity before the sale.

Also, keep in mind that appraisers are human—just like anyone else, they will be influenced by walking into a dirty, disorganized, dim house and carry that impression into their inspection of the structure and systems of the property. Make your home as clean, bright, and streamlined as possible before your appraisal. 

#5 Your Credit Score

Finally, understand that your credit score can impact your SLB offer—as well as any other sale or equity unlocking path you choose—and there are steps you can take to improve it. From the basics of cleaning up any incorrect credit records to making longer-term improvements, you can come up with a plan to improve your credit score over the course of a year. This may include:

• Altering your mix of available credit
• Paying off student loans, credit cards, or other debt
• Restructuring or consolidating debt 
• Working with a nonprofit credit counselor

What Should Every Homeowner Know Before Going Into an SLB Transaction?

Like any real estate transaction, your level of preparation will affect your outcome. Do some research, talk to a real estate professional or two, and come to the negotiation with: 

• An overview of the current real estate market
• Rental prices and trends in your town and neighborhood
• Familiarity with your current property value and home equity
• Your credit score and an explanation of any irregularities
• An understanding of other equity unlock options and why an SLB is best for you
• Any tax implications of an SLB that will affect you

You should also be able to negotiate your rental needs and fully understand any lease agreement before you sign, including: 

• Rental cost – What is the monthly rental payment? How often can that amount change in the future, and are there limits to the amount of change/increase? Is rental price based on a specific calculation you’ll be able to anticipate?

• Utilities – Which utilities are you responsible for? 

• Maintenance – Who handles each aspect of upkeep, maintenance, and repair, from shoveling snow to replacing an appliance? What is the process or service for each, and will that change your day-to-day living?

• Use of property – How much control will you have over minor changes such as altering interior paint colors, hanging a picture or a shelf, or adding a new tree to the front yard? 

Alternatives to Unlock Home Equity

Sale-leaseback financing isn’t the only way to access your home equity without leaving your home. Alternative options include: 

• Cash-out refinance – A new and larger mortgage loan that provides cash back
• Home equity line of credit (HELOC) – Loan with a draw period and repayment period
• Home equity loan – A second mortgage at a higher interest rate
• Reverse mortgage – A loan to be paid by heirs or eventual house sale proceeds

Truehold’s Sale-Leaseback

Were you nodding your head along with several of the notes on when, why, and how to evaluate a sale-leaseback above? If you’re ready to learn more and find out if a sale-leaseback is right for you, contact Truehold today. 

We’ll review your credit score, financial picture, and property situation and offer our suggestions on the best path for you to unlock your home equity. Truehold offers full home equity upfront and in cash, unlimited lease periods so you can stay in your home as long as you want as a renter, and acquisition of maintenance, repair, property tax, and insurance responsibilities.

Call (314) 353-9757 to get in touch with one of our advisors or request an info kit to learn more about our offerings. Our mission is to help homeowners unlock their equity and stay in their homes, and we’d love to help you plan the next stage in your housing journey.

Sources: 

1. Freddie Mac. Mortgage Rates Shift Upward. https://www.freddiemac.com/pmms

2. Investopedia. Leaseback. https://www.investopedia.com/terms/l/leaseback.asp