What is a sale leaseback in real estate?

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A sale-leaseback — also referred to as just a leaseback — is a transaction in which a homeowner sells their house, but leases it from the new owner and continues to live there. This is often a mutually beneficial agreement in which the previous owner gets to cash-out on the property while continuing to use it, and the new owners get to assume ownership of the property as an investment. They can be useful strategy for people who are buying and selling a house at the same time.

How does a sale-leaseback work?

There are two key parts of the sale-leaseback process: the sale and the lease. First, the seller agrees to sell their home to a buyer. To do this, the seller follows the typical home selling process (a sale-leaseback is sometimes the goal all along, but sometimes it’s offered by the buyer as a benefit to the seller). 

The terms of the agreement are usually discussed by both parties during the negotiation of the sale to ensure the agreement will benefit both the seller and the buyer. Once an agreement is reached and the home is sold, the buyer sends the seller a lease that allows them to remain in the space. 

The sale-leaseback could be a short-term or long-term agreement, depending on what both parties are looking for. Some lenders, however, only permit sale-leasebacks up to two months unless the borrower applies for a loan as an investor. In those rare cases in which an investor doesn’t intend to ever live in the house, the seller can stay long-term as long as they pay rent.

If the buyer wants the property as an investment for their portfolio, they might agree to a long-term lease. After all, the previous owners are already settled and are likely to take great care of the property. Alternatively, if the buyer wants to move into the property as their full-time residence, they may only agree to a short-term lease while the sellers look for their next home.

If you’re thinking about selling your home for an influx of capital but you don’t want to leave or start searching for a new home, a sale-leaseback is a compelling option. However, it’s very likely that a professional investor or real estate group will be the only buyers with enough cash to buy a house and not live in it. Be careful who you choose to be your landlords.

When and why people use leasebacks

There are many reasons why either sellers, buyers, or both, may want a sale-leaseback agreement. The most common instances include:

  • The seller wants to cash out on their equity. A sale-leaseback allows the seller to stay in their home while giving them an injection of cash. Although they lose ownership, they can use the cash for their other needs or investments.
  • The seller wants to take advantage of current market conditions. A seller might want a sale-leaseback agreement if the market is hot but they aren’t ready to move yet. The agreement allows them to take advantage of the demand for their home while they decide where to live next. Typically, the agreement is short term and the seller will pay rental payment for a few months and then move to a new place.
  • The buyer offers a sale-leaseback to win a bidding war. In a competitive housing market, buyers are incentivized to submit a compelling offer. By allowing the sellers to stay in their current home while they look for a new one, or during the moving process, will sometimes push a buyer’s offer over the edge. 
  • The buyer sees the home as an investment property and doesn’t plan to move in. Buyers and sellers may agree to a long-term lease if the buyer doesn’t have plans to move in and is simply adding the property to their investment portfolio.
  • The buyer wants to buy a home to lock in the current price and interest rate. During times of rising interest rates (or rising home prices), it’s beneficial for buyers to act sooner rather than later. A buyer might put an offer in on a house, even if they don’t plan to move in for a period of time. This allows them to lock in the current home price and interest rate while the current owners stay in the house.

→ Related: Should I sell my house now?

What are the pros and cons to doing a sale-leaseback?

There are advantages and disadvantages for both buyers and sellers when they carry out a sale-leaseback contract.

For home sellers

  • Benefits: The seller, who becomes the lessee or renter, gets to cash out on their home and continue using it for a period of time. Since they don’t have to move immediately, the seller can continue their life in their home as-is, and they have an influx of cash thanks to the sale. Plus, they may not be responsible for maintenance costs, property taxes, and other homeownership complications during the leaseback period. Leasebacks are one way for sellers to stay in a house after closing, which can be useful if they haven't found their next home.
  • Disadvantages: After the transaction, the seller has much less control over the home during a lease-back. Just like any tenant, they are not typically allowed to do renovations or make major changes to the home. They are also only allowed to stay in the home for the designated, agreed upon time period. If they want to extend their lease, they will have to discuss renewal options with the new owner.

For homebuyers

  • Benefits: Offering a sale-leaseback arrangement can give the buyer, who becomes the lessor, a leg up if there is a bidding war on a home. Additionally, if a buyer wants to make an investment, they can add a property to their portfolio that’s already occupied by someone they know respects the space. They won’t have to search for a tenant to start receiving rent right away.
  • Disadvantages: If the buyer wants to move into the house, they aren’t able to do so until the end of the leaseback period. They will also have to take out a mortgage on the new home while managing their current mortgage, since they need a place to live until they can move into their new house (although much of this expense is made up in the lease payments from the seller/lessee). The buyer is also responsible for the property just like any homeowner or landlord. They are required to handle maintenance issues, pay property taxes, and handle any complications.

→ Learn where to live between buying and selling homes

What are other types of sale-leasebacks?

Sale leasebacks are used in most industries that handle expensive, fixed assets. Companies utilize sale-leasebacks for the same reason homeowners might. They are a way to receive an injection of cashflow without taking out a loan, while continuing to use the equipment and real estate they need. 

The transportation and commercial building industries are two industries that frequently use sale-leaseback agreements. For example, if a transportation company needs to free up their cashflow, the business owners may sell an asset (such as a truck or warehouse) but continue to use them via a lease. These agreements typically use operating leases that allow the company to continue using the assets without actually owning them.

Equity financing is also a type of sale-leaseback that many companies use. When a company issues stock (equity in their company), they get an influx of cash without having to take out a loan. This type of financing differs slightly from other forms of sale-leasebacks because a company is typically beholden to decisions and input from their shareholders, but the overall concept is similar: the company gets to continue operating as-is, with additional cash and without having to take out a loan.

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