Better Living at Home

What Is a Residential Sale Leaseback?

September 30, 2022
What Is a Residential Sale Leaseback?



The sale leaseback is becoming an increasingly popular option for homeowners looking to access their home's equity without moving.

If you’re a long-time property owner, chances are you’re already familiar with the usual paths to unlocking home equity: HELOCs, home equity loans, reverse mortgages, and selling your home outright.

However, when you sell your house, you’ll have to find another one that meets your needs, which can be time-consuming and unpredictable. Plus, moving is one of the most stressful things a person can do, and it gets harder the older we get.

Fortunately, there’s a new option that many homeowners are turning to; the residential sale leaseback agreement. Unlike a home equity loan, HELOC, or reverse mortgage, a sale leaseback (SLB) allows homeowners to unlock 100% of the equity they have stored in their home without moving or carrying additional debt. 

Exactly what is a sale leaseback and how does it work? Understanding a little more about it will help you learn how to evaluate a sale leaseback and determine if it’s a good option for you.

History of Sale Leasebacks

The sale leaseback transaction was first popularized in the arena of commercial real estate. It provided business owners with an attractive option for eliminating debt on their property while simultaneously liquidating the equity. 

Companies that chose this option could maintain their possession of a real estate asset without the burdens of ownership. It allowed business owners to free up capital to reinvest in the company.

For example, a small manufacturing firm owns a factory that makes motorcycle parts. The demand for these parts has grown, and the company would like to purchase additional manufacturing equipment. If they were to sell the building, they’d free up the cash, but relocating would be prohibitively expensive. Securing a mortgage would be another option, but the proceeds of the loan wouldn’t yield enough money. 

So instead, they choose the sale leaseback process. They sell the building to a real estate firm that then leases it back to them for a negotiated term. With the cash flow now available, they can purchase the equipment needed to grow their business.

This arrangement, once found only in commercial property, is now available to residential homeowners with products such as Truehold’s Sale-Leaseback.

Benefits of a Sale Leaseback

There are many sales and leaseback advantages and disadvantages. Sale leasebacks are growing in popularity as more brokers and homeowners learn about these benefits, which include: 

  • Quick sale and closing without home staging, viewings, or open houses
  • Access to 100% of your home equity
  • No more worry, stress, and time spent on repairs and renovations
  • Freedom from property ownership liability
  • No more property taxes or property insurance payments
  • New owner pays for home maintenance and necessary upgrades 
  • Freedom from housing debt

Why Would Someone Need a Sale Leaseback?

If you need or want ready cash, want to continue living in your home, and are open to the changes that come with a switch from homeowner to renter status, then you’re a potential candidate for a sale leaseback. Common reasons for entering a sale leaseback arrangement include:

  • Early retirement – If all the usual reasons for seeking a reverse mortgage are in place, but you’re under the 62-year age minimum, an SLB is an option that offers access to home equity funds while allowing you to keep living in your home. 
  • Financial opportunities – An SLB is a path to convert home equity into start-up funds for a new business, investments, or education, without moving out of the family home. 
  • Financial challenges – Employee layoffs, business closings, and unforeseen medical expenses are situations that many families face. The ability to unlock 100% of your equity quickly without having to leave the family home and school district provides critical flexibility, financial opportunities, and cash flow during challenging times. 
  • Interim housing – Although we’re focusing on long-term arrangements in this article, SLBs are also used as a step between houses for some sellers or buyers.

    If, for example, you want to sell your home and buy a new one, you may opt to negotiate with a potential buyer to include a short-term SLB that allows them to close on the house and then lease it back to you for an agreed-upon period. 

Sale Leaseback Requirements

When you shop for a mortgage or loan, you’ll find fairly consistent standards among lenders based on credit score, debt load, employment history, and so on. A mortgage lender is taking a gamble that the property you’re buying is worth what you want to pay and that you’re a reliable candidate that can meet the loan obligations. 

Sale leaseback providers, however, don’t have to assess that level of risk. SLB providers are investors who buy your property outright based on appraised and market value. They work with you to ensure you can cover monthly rent payments as long as you’d like to stay in your home. If you choose to walk away from the home, a sale leaseback provider can lease the house to another renter without losing money. 

Since long-term SLBs are fairly new to residential real estate, requirements vary between providers. At Truehold, we typically work with individuals and families who have: 

  • A single-family home valued between $100k and $500k
  • A combination of home equity and liquid assets that can cover three or more years’ rent

Our advisors connect with you one-on-one to help you decide if Truehold’s Sale-Leaseback is right for you and discuss your overall financial picture, your home’s value and condition, and how an SLB fits into your goals and plans.

How Do Residential Sale Leasebacks Compare to Reverse Mortgages?

Other than selling a home, a reverse mortgage is usually the first thing people think of when they’re looking for ways to free up accumulated equity. But while a reverse mortgage involves taking on new debt, Truehold’s Sale-Leaseback offers a debt-free alternative.

A No-Debt Solution

Reverse mortgages are a loan. When you take out a reverse mortgage, your credit report reflects the debt. In the long run, this affects your ability to get approved for new credit cards, loans, or an increased credit limit. 

When you opt for a sale leaseback arrangement, you access 100% of your home equity upfront with zero debt. You can then use a portion of your unlocked equity to stay in your home as a renter and use the remaining cash however you’d like.

Minimize Upfront and Recurring Costs

In addition to debt, reverse mortgages come with several upfront costs. With a reverse mortgage, borrowers will typically be subject to: 

  • Origination fees
  • Real estate closing costs
  • An initial mortgage insurance premium

After the loan has been finalized, borrowers will be responsible for several recurring costs, including: 

  • Monthly interest payments
  • Servicing fees
  • An annual mortgage insurance premium
  • Homeowner’s insurance 
  • Property taxes

In contrast, Truehold’s Sale-Leaseback has only one upfront cost: a 5% transaction fee. At the time of the sale, you will pay a 5% total transaction fee (less than a typical home sale) to cover legal fees, brokerage costs, and closing costs. 

After the initial transaction, there are no fees to work with us. Once the home sale is finalized, the only recurring fee will be your monthly rent payment. Truehold residents are not responsible for interest payments, home maintenance costs, homeowner’s insurance, or even property tax.

Unlock More Cash

Typically, a reverse mortgage only unlocks between 40 and 60% of your home’s property value. Truehold’s Sale-Leaseback allows homeowners to access 100% of their home’s market value in cash.

No Age Requirements

Reverse mortgages are only available to adults above the age of 62. If you’re a younger homeowner hoping to tap into your home’s equity, you can either wait until you’re eligible for a reverse mortgage or consider another home equity unlock product. 

Conventional mortgage financing options like home equity loans, HELOCs, and cash-out refinancing have no age requirements but often require borrowers to provide proof of income, high credit scores, and specific debt-to-income ratios—plus they result in more debt. 

With Truehold, there are no minimum age requirements, income requirements, or debt.

How Do Residential Sale Leasebacks Compare to Other Home Equity Unlock Options?

Reverse mortgages are just one way older homeowners can access their home’s equity. Other home equity unlock products include cash-out refinancing, home equity lines of credit (HELOCs), and home equity loans. 

Here’s how each of these conventional mortgage financing options compare to Truehold’s Sale-Leaseback. 

Cash-Out Refinancing

Cash-out refinancing allows homeowners who meet financial guidelines to access up to 80% of their home’s value. This may be a good option for property owners who have: 

  1. At least 20% equity in your home
  2. A credit score of 620 or more1
  3. A debt-to-income ratio of 43% or less, including the new loan
  4. Verifiable income and employment

Eligible homeowners should be prepared to pay closing costs upfront and make monthly principal and interest payments on their cash-out refinancing loan. 

HELOCs

Home equity lines of credit (HELOCs) provide credit, which is secured by the equity in your home. You’ll have a specific draw period during which you can access up to specific monthly limits, and then a set date when the repayment period begins. 

You’ll usually need: 

  1. At least 15% equity in your home
  2. Credit score in the mid-600s or higher, at least 720 for the best rates2
  3. Debt-to-income ratio varies, between 36% and 43% or less, including the new loan
  4. Verifiable employment and income 

Eligible homeowners will be able to access up to 85% of their home’s equity through a HELOC.

HELOC interest rates are variable, and depending on the type of HELOC you choose, you may need to make minimum payments of interest or interest plus principal.

Home Equity Loans

Unlike HELOCs, home equity loans are straightforward mortgage instruments with a set amount of money borrowed and a monthly repayment schedule that begins immediately. They tend to have lower interest rates than HELOCs.

Home equity loan requirements are the same as noted for HELOCs, above.  

As with a HELOC, eligible homeowners will be able to access up to 85% of their home’s equity through a home equity loan.

Home equity loans have fixed interest rates, and some impose a prepayment penalty. This means that if your financial situation changes and you’d like to pay off the loan quickly, you’ll have to pay an extra fee.

Rates for both home equity loans and HELOCs are on the rise in connection with rising inflation.3

Sale Leaseback Tax Considerations

When signing a sale leaseback on your home, there are several contractual and tax considerations to take into account. That said, a sale leaseback consists of pairing two separate legal contracts. You’ll sign: 

  • The sale of your home, which includes the dissolution of your current mortgage
  • A lease agreement, which incorporates a renewal option to extend the lease term

With Truehold’s Sale-Leaseback, you’ll receive the contractual right to continue renting your home as long as you like. You can remain for a year or two before a move or stay in your home permanently under a long-term lease agreement. 

The conversion of your real property to cash and the switch of your status from a homeowner to a renter can have several tax implications based on the value of your home, your state and local regulations, and your filing status. These may include: 

  • Inability to claim itemized deductions for property tax and mortgage insurance
  • Capital gains tax for profits over $250k for single filers or $500k for married
  • Loss of access to state or local property tax refund programs

Plus the most important change of all: you’ll no longer have to pay any property tax. 

Consider speaking with a tax or financial advisor before finalizing your decision to ensure that you’re well-educated on your unique tax situation.

How Do Sale Leasebacks Impact Equity?

Equity grows slowly as you pay off your mortgage or by an increase in your home’s market value.

At the time of the SLB closing, the equity that has built up while you’ve owned your home is converted fully to profit. A home sale is the only way to unlock 100% of your home equity. 

Once you enter a sale leaseback, you are switching from an owner to a renter, and you will no longer be making monthly payments or property investments that contribute to building equity. However, you will be able to unlock your home’s current equity and convert it into cash through a sale leaseback agreement.

Truehold’s Sale-Leaseback

Our Sale-Leaseback is not a debt, which means homeowners who choose this option will avoid fees and penalties typical of other home equity unlock products. Additionally, all Truehold residents access 100% of their home’s equity upfront. The only recurring obligation is monthly lease payments, set at fair value based on other rental homes in your neighborhood.

The best way to find out if Truehold is a good fit for you is to reach out to us! Fill out the form below to request a complimentary copy of our info kit. Alternatively, you may get in touch with a Truehold Advisor directly at (314) 353-9757 or via email at hello@truehold.com.

Sources: 

1. The Mortgage Reports. Cash-out refinance guide: Requirements and rates for 2022. https://themortgagereports.com/68932/cash-out-refinance-guide-rules-rates-requirements#requirements

2. Nerdwallet. Requirements for a Home Equity Loan and HELOC. https://www.nerdwallet.com/article/mortgages/what-are-the-requirements-for-a-home-equity-loan-and-heloc

3. NextAdvisor. Rising Inflation Keeps Pushing Home Equity and HELOC Rates Up. https://time.com/nextadvisor/loans/home-equity/average-heloc-home-equity-loan-rates-july-14-2022/

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