After the red-hot run of the last few years, the housing market is showing signs of cooling slightly — but it’s still a seller’s market, in which sellers have a ton of leverage and a ton of options. One of the lesser-known options is a home sale leaseback, an arrangement that allows homeowners to sell their home and cash in their equity — and stay in their home for as long as they want.

A leaseback is an appealing option where homeowners can seemingly have their cake and eat it too. But are leaseback programs truly as much of a win-win as they appear to be? Let’s dive into what a leaseback is, its pros and cons, and whether or not a leaseback makes sense for sellers in today’s market.

What is a leaseback?

A home sale leaseback is when a homeowner sells their home while simultaneously making an agreement to rent it from the buyer. Traditionally, this was a short-term arrangement used when sellers were having trouble closing on their next home, or if construction on a new home had taken longer than projected.

They could sell their home to a new buyer, and rent weekly or monthly until they were ready to leave. In competitive seller’s markets, many buyers were willing to make this concession to prevail in what might have been a bidding war, especially if that buyer could just stay in their rental for as long as they needed.

Nowadays, the pandemic has increased financial pressures on millions of Americans and many others have been priced out of a hot housing market. As a result, Americans are focusing less on risky investment schemes buying undervalued or distressed properties, renovating them, and reselling them — and more on options that offer security and fixed costs. So it’s no surprise that home sale leasebacks are exploding in popularity.

New companies like Rentback and EasyKnock will buy your home and, depending on which options you choose, offer you leases of various lengths, with the potential to renew indefinitely. Invitation Homes, the biggest rental company in the U.S., is planning on launching a home sale leaseback program, and companies like Divvy Homes will buy a house for you if you can’t qualify for a conventional mortgage, and then rent it to you with an eventual option to buy.

Clearly, a home sale leaseback allows you to avoid one of the most stressful events in life — moving — while letting you cash in your home equity. But is it worth it?

Pros of a leaseback program

A home sale leaseback has advantages and disadvantages — let’s cover some of them so you can make an informed decision.

A big cash infusion

After years of double-digit home value increases, many homeowners are “house rich” but cash poor — meaning that a lot of their wealth is tied up in home equity. A home sale leaseback converts that wealth into cash while allowing them to stay in their home.

Relief from homeowner costs

If you’re having trouble making your mortgage payments, or you’re just tired of spending so much money on your home, a home leaseback allows you to keep the main benefit of homeownership — a roof over your head — without the financial burden of mortgage payments, home insurance, property taxes, and maintenance.

Avoiding a downturn

For homeowners who are worried that the market is going to decline and their home will decrease in value, a home leaseback lets them “cash out” without going through the trouble of a conventional home sale.

Avoiding a tight market

Many home sellers get very excited about selling in a strong seller’s market, where they have all the leverage and are likely to sell their home for well above the asking price. Then they find themselves entering that same market — this time as buyers — and realize it’s going to be very difficult, and very expensive, to find a new home. Buyers with deep pockets are everywhere, and with a low inventory of available homes, even finding properties off the market can be tough. Home leasebacks are a way to avoid this hypercompetitive market.

Fast closing

A conventional home sale can take a long time — perhaps several months. A home leaseback can be completed in just a few weeks.

Cons of a leaseback program

You likely won’t get the best price possible

In a conventional home sale, multiple buyers compete for your home, driving up the price — which is great for sellers. Especially in hot markets like the current one where homes routinely sell far above the asking price. If you sell in a leaseback, you’ll likely get a decent price for your home, but nowhere near as elevated as it would be if it was a traditional home sale.

There are closing costs

While you won’t need a real estate agent if you’re selling your home in a leaseback, you can expect to pay significant closing costs. This could be a significant obstacle if you’re selling because of financial problems in the first place.

You’re losing out on future appreciation and equity

The moment you sign your leaseback agreement, you’re forfeiting all future appreciation and equity. The monthly payments you make are rent, not equity-building mortgage payments. You’re now a tenant — not an owner.

Is a leaseback a good idea in this market?

The main benefits of a home sale leaseback are convenience and continuity. A leaseback takes much less time than a conventional home sale and has none of the uncertainty that comes from waiting for a qualified buyer. It also allows you to stay in your home while also cashing out your home equity — in some sense, letting you have your cake, and eat it too.

But then there are financial downsides. You likely won’t get as good a price for your home in a leaseback as you would on the open market. And once you sell, you’re no longer an owner; you’re a tenant. If your home doubles in value, you don’t benefit from that one bit. In exchange for giving up that future potential, you’re securing a lower, more predictable monthly lease. A beginning real estate investor probably wouldn’t advise you to do it, but it does offer some peace of mind, especially if you’re facing unsavory possibilities like foreclosure.

In the end, whether or not a home sale leaseback makes sense for you is going to depend on what you want out of your home sale. If you value the convenience and continuity of not having to move or have regrets about the home you bought, then it could be a fantastic option. If you’re more concerned with getting the most value out of your home, you may want to look into a conventional sale.

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Article last modified on September 23, 2022. Published by Debt.com, LLC

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Ben Mizes

Expert contributor