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.
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.
There are many reasons why either sellers, buyers, or both, may want a sale-leaseback agreement. The most common instances include:
There are advantages and disadvantages for both buyers and sellers when they carry out a sale-leaseback contract.
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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