Calif Desert Realty, La Quinta CA Homes for Sale in La Quinta CA, PGA West and other gated communities

Residential Sale / Leaseback


A win-win for homeowners and investors.
 
If you are feeling “house rich and cash poor” lately, you are not alone. As the current housing and economic crisis continues to worsen and expand, many homeowners previously unaffected are beginning to feel its effects.  Household income is dropping as more and more jobs are affected, savings are being tapped into and investments portfolios are losing value in the volatile stock market. What was once a comfortable mortgage payment is now becoming a struggle. A potential solution for many of these homeowners may be a residential sale-leaseback where they cash out the equity in their home, typically by selling to a family member or investor, then turn around and lease the home back for a fixed period of time.
 
Sale-leasebacks are fairly common and have been around for decades. Although primarily utilized in commercial real estate and businesses as an alternative to conventional financing, sale-leasebacks have been getting a second look in the residential markets. A recent article in the Wall Street Journal reports that real estate agents are seeing and increase in sale-leasebacks where the homeowners sell their home and then rent it back from the new owner. The homeowner frees up cash to help weather the current economic crises, while continuing to live in their home by making lease payments.  The family member or investor looking for investment income has the benefit of a long term lease executed the same day the property is purchased.
 
The mechanics are fairly straight-forward. The home is sold in the same manner as a typical sale of any other residential real estate. At closing, concurrent with the sale of the home, a mutually agreeable (previously negotiated) Residential Lease is entered into by both parties. The Residential lease terms and conditions are often incorporated into the Purchase Agreement as a pre-condition to closing. Care should be taken, particularly when involving family members, to make sure the transaction will be viewed as being “arms length” where the sale price and lease terms are based on fair market comparisons.
 
Unlike commercial and business use, where the sale-leaseback deal structure is fairly standard and often utilizes boilerplate agreements, residential sale-leasebacks are often unique to each individual situation and will need to be structured accordingly. For example, if a home’s value (particularly in this current housing crises and sometimes irrational housing valuations) has fallen below the balance owned on the related mortgage, the homeowner may not have any “equity” to cash out. After paying off the mortgage with the proceeds from the sale of the home, the previous homeowner may find the monthly “lease payments” as much of a struggle as the previous mortgage payments were. Furthermore, they will likely have lost certain tax benefits formerly available as a “homeowner”.
 
Each sale-leaseback deal structure will be influenced by the projected cash flow and credit strength of the individual homeowner. In some cases, where proceeds from the sale of the home exceed mortgage payoff amounts, the deal might be structured with a higher selling price or lower lease payments in return for a guaranteed minimum “return on investment” (ROI) when taking into account future price appreciation. Caution is advised however, as to the underlying strength of such “guarantees” and in certain situations, funds may be set aside at closing in a separate escrow account as security for future anticipated price appreciation.
 
The bottom line is that a residential sale-leaseback may be worthwhile to consider for a cash strapped homeowner possibly in danger of defaulting on their loan. The attractiveness to the investor is being able to acquire property at a good price, not having to renovate the property in order to lease it, and not risk having the property sit empty for a period of time while waiting for someone to lease it. It may also be a good investment portfolio diversification during the current volatile stock market.
 
If you are a homeowner or potential investor that would like to discuss this in further detail, please call or email me. I have an extensive background in mergers and acquisitions and also as a CPA and CFO and would be happy to discuss your situation and assist you in structuring a possible residential sale-leaseback that meets both your needs as well as those of a potential investor.
 
Larry Hansen
Posted 10-2-08
 

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