Everything You Need to Know About a Home Sale-Leaseback.
The Benefits of a Home Sale-Leaseback
Let’s talk about why a home sale-leaseback is a powerful solution for homeowners on a mission to reset their debt.
1. Quick Access to Your Equity
When you’re in a financial pinch, you often need to fix your money issues quickly. If you don’t have the means to afford your mortgage, you may be hoping to tap into the equity of your house to get out of a financially-straining situation.
Residential sale-leaseback arrangements allow for faster access to your home equity. You can often receive and use the money for your home within just a few short weeks of initiating the sale and leaseback process.
Even if you are not struggling to afford your mortgage, a home sale-leaseback can allow you to get the most of your home’s equity when its market value is high, without forcing you to move right away.
2. Added Time
Opting for a home sale-leaseback can give your family so much more value than a traditional home loan: it gives you more time in your house without accumulating more debt. While you become a tenant, you can stay under the comforts of your own roof without worrying about looming loans to pay off. This added time allows you to avoid disruption as you plan for a brighter future.
3. No Loans
You might feel forced to consider refinancing or reverse mortgaging to afford your home, but, ironically, these lending options dig you more into debt. That’s because they are, in fact, loans— and loans must be repaid.
Let’s compare this to a sell-and-leaseback arrangement. When opting for a residential sale-leaseback, you are not taking out any loans; you are selling your home and instantly gaining access to the money tied up in your equity— while still being able to live in your same house by paying a reasonable monthly rent.
4. Maintaining Your Dignity
When managing financial problems, it doesn’t take long for the dominos to start falling. News of money issues often spreads rather quickly amongst family, friends, the office, and the neighborhood. If you see moving as your only solution, it can be especially hard make this announcement. Accepting a home sale-leaseback offer allows your family to stay in your original home and financially recover with added privacy.
5. No Immediate Moving or Relocation Costs
If you decide to sell your home and instantly have to move, you have immediate costs to consider, like paying for moving services, travel arrangements, and unforeseen expenses on the new home such as repairs, renovations, refurbishings, etc. a Home sale-leaseback offers, however, allow you to get instant cash for your home without moving right away, therefore shouldering these extra costs.
6. Potentially No Monthly Rent or Mortgage Payment
If you have your monthly rent cost pulled out of the original offer for your home, you can avoid a monthly “mortgage” or “rent” payment throughout the terms of your home sale-leaseback. Because the payments are taken out of your original equity return, there’s no additional money you need to worry about paying each month.
7. Cheaper Insurance
After selling your house in a home sale-leaseback arrangement, the new owner is responsible for the homeowner’s insurance policy. Tenants only need to cover the cost of renter’s insurance, which is typically a more cost-efficient policy.
8. No Credit Check Required
Struggling homeowners may have considered other lending options only to realize they cannot get approved. If their credit score is low or they have a high debt ratio, banks may not approve their reverse mortgage or refinancing request. When this is the case, a residential sale-leaseback is really the most realistic choice, since most home sale-leaseback programs in residential real estate are not credit-based. Because the homeowner would be selling their home— and that does not require any credit checking— no credit score is too low to qualify for most sale-and-leaseback programs.
How Does A Home Sale-Leaseback Work Exactly?
In a residential sale-leaseback arrangement, you sell your house to a third-party who becomes the new property owner and landlord. You, as the original homeowner, become a tenant until a lease agreement comes to an end.
But how exactly does this leaseback deal work? Let’s answer a few core questions:
What Is Home Refinancing?
If your current mortgage cost or interest rate is too high for your liking, you may consider getting a whole new mortgage. There are two types of home refinancing options:
Rate & Term Refinancing
In a rate and term agreement, you are changing the interest rate and terms of your mortgage to lower your monthly payments. When lending rates fall to market lows, refinancing can allow you to quickly pay off your mortgage. But here’s the catch: it is still a loan. Oftentimes, you are adding time to pay off your home in exchange for the lower mortgage payment. For instance, instead of taking 30 years to pay off your mortgage at a higher interest rate, you may take 40 years to pay it off with a lower interest rate and monthly payment.
With cash-out refinancing, it’s like rate and term arrangements, except you take out an equity loan for a larger amount than you owe on your mortgage to tap into your home’s increasing value and equity. Cash-out refinancing loans can have a 125% loan to value, meaning the loan covers your mortgage but gives you 25% more in cash payout, just like a personal loan. In these situations, you can use the “extra” loan money however you’d like, giving you spending money. However, it’s important to remember that this money needs to be paid back.
What Makes a Home Sale-Leaseback Different?
As we addressed in the reverse mortgage section above, a home sale-leaseback arrangement is not a loan. You are selling your home and staying for a predetermined period of time as a renter. Through this process, you are not creating more debt; instead, you use the money from the home sale to pay a lower temporary monthly rent cost while you look for your next home.