​​Karen Summers Realtor
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The Colony Homes Specialist​

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 What Is A Leaseback?

According to Investopedia, a leading source of financial content on the web, a leaseback is “an arrangement where the seller of an asset leases back the same asset from the purchaser.  In a leaseback arrangement, the specifics of the arrangement are made immediately after the sale of the asset, with the amount of the payments and the time period specified.  Essentially, the seller of the asset becomes the lessee and the purchaser becomes the lessor in this arrangement.”

In simpler terms, it is the process of renting back, for a certain time period, a piece of property after selling it.  This effectively makes the seller a tenant and the buyer the landlord.

Why a Leaseback?

Here’s a scenario --- you have sold your home and are moving to a new one soon.  However,  what if your property closes on the 10th of the month while the new one you are moving into will not close until the 30th of month?  What do you do?

You could move into a short term rental or a hotel but that may mean having to move your personal effects twice - to a storage facility and then eventually to your new home.  And that would be too much of a hassle, not to mention an added expense.   Another solution that you might consider is a leaseback that allows you to remain in your home, even if you have  closed escrow and you have already been paid for it.

In a residential property situation, leasebacks are more likely to be short term.  As with the example given above, the leaseback allows the seller some additional time to move out of the property without causing delay in the close of escrow.
Who are those most likely to take advantage of a leaseback?  Aside from the above given scenario, leasebacks are generally for people who need to be more liquid and need access to the money they’ve invested into their home but at the same cannot move out of their home.  

More and more retirees are taking advantage of the leaseback option.  It gives them the ability to continue living in the home they owned while having more money for retirement.

And of course, it is good option for people who have suffered financial reverses due to job loss or other difficult circumstances.  It gives them a sense of continuity in a time of uncertainty.

In a commercial property, a leaseback arrangement can be long term.  An owner needing to raise capital may sell off his commercial property to become more liquid while retaining the ability to use the property for business.

The Pros and Cons

The Pros for the Seller.  
  • A leaseback assures the seller of money in the bank and the funds to make an eventual move while giving him the wiggle room to not rush to a relocation
  • The seller avoids the cost of moving his things into storage to move into a temporary home
  • It affords the seller time for a home clean up for the new occupant, as well as, time to renovate the home he is about to move into

Cons for the Seller
  • The seller, now being the renter, needs to remember that though the home was his, it is not his anymore.  Therefore, he can not alter the property, however small, without initially getting approval from the new owner.
  • Buyers may get impatient and demand possession sooner than what was agreed upon

Pros for the Buyer
  • The main advantage of a leaseback to the buyer is an increased chance that his offer will be accepted by the seller if he is open to the arrangement.
  • If for some reason, the buyer could not move in immediately, the risk of having the house vandalized or broken into while empty is eliminated in the event of a leaseback

Cons for the Buyer
  • There are instances when terms are not set properly and sellers take advantage of the loopholes to overstay.  
  • There is risk that seller can take something from the house (a chandelier, for example) or leave something that you really do not want or worse, leave the house dirty and in complete disarray

Real Estate Agreements
Handling A Leaseback Agreement

To avoid any potential problems down the line, leasebacks should be documented as early as possible.  This protects both parties.  The seller is assured that he will be able to remain in the property after the close of escrow.  On the flipside, the buyer knows when he can move in.

How is the rent determined?  Typically, the rent on a leaseback is determined by computing the buyer’s PITI - Principal, Interest, Taxes and Insurance on their new loan and dividing by 30 days.  

For condominium units, and planned communities, HOA’s are also included in the rent rate.  Of course, these are all negotiable.  A lot of leasebacks use the current market rate.

Things to take into consideration when drawing up a leaseback agreement:
  • It should be determined prior to the close of escrow
  • Buyers need to ensure that insurance is in effect and sellers should also check that this type of arrangement is covered by their own insurance
  • The roles are reversed in a leaseback situation.  Since the seller is now the renter, he needs to ensure that the property remains in good condition while he is an occupant. The buyer, on the other hand, becomes responsible for any maintenance or repairs that need to be done while seller/renter is in the house.
  • A home warranty is suggested for any unforeseen issues that might arise.

A leaseback can be a win-win situation for both the seller and the buyer.  A well crafted leaseback agreement will ensure that problems are avoided.

Ask About Leasebacks

As an experienced real estate professional, I can answer your questions about leasebacks. If you are selling your home and are not ready to immediately move after close of escrow, let me help you explore your options.

Call me at 951-333-8065 or click here to set up an appointment.

Tags:  Leaseback Pros and Cons, Leaseback Advantages, Leaseback, Home Buying, Home Selling, Commercial Real Estate, Residential Real Estate, Escrow, Real Estate Closing, Home Warranty

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