A leaseback agreement has the potential to be the perfect way to escape financial jeopardy without moving houses or throwing your family into chaos.
But what exactly is a leaseback agreement, how does it work, and is it right for your needs? Let’s take a look.
A leaseback agreement is an arrangement where you sell your house to a willing buyer, and the buyer immediately leases the property back to you. You get to stay in your home just like a regular lease tenant, except you would receive a chunk of cash from selling the equity you’ve built up in the property.
In this way, a leaseback agreement enables you to escape the shadow of foreclosure and relieve yourself of the responsibilities that come with homeownership. You don’t have to move out and change your living arrangement.
While it’s not always the case, you might have the opportunity to purchase your house back later on. The lessor (the person or company that bought your property) would benefit from property appreciation and likely turn a profit if they agreed to sell.
A leaseback agreement works the same way as any other lease arrangement. The only difference is that the property buyer doesn’t have to look for a tenant or lessee immediately after purchasing it, making things much more convenient for them.
Most leaseback agreements are measured by decades. For example, you might sell your house to a prospective buyer for a 20-year timeframe. After that, you may be able to repurchase the property from that lessor and reclaim sole ownership.
Similarly, businesses may use leaseback agreements to sell retail real estate they own without interrupting their operations by moving to another location.
When comparing a leaseback to a foreclosure, there are many benefits that make the agreement a more attractive option.
A leaseback agreement allows you to sell the equity in a piece of real estate which means you’ll get a lump sum of cash based on your equity. You can use these funds for whatever you want, including paying debts or loans, starting or expanding a business, going on an elaborate vacation, or anything else that comes to mind.
Plus, a leaseback agreement allows you to avoid foreclosure without moving. With a leaseback agreement, both you and the buyer understand that you plan to stay in the home for some time. Of course, you can always move out if you want, as you’re not legally required to stay there.
Another massive benefit is that leaseback agreements help you avoid a negative hit on your credit score. Lenders report missed mortgage payments to the credit bureaus, and foreclosures can stay on your credit report for seven years. By selling your property via a leaseback agreement, you can avoid these black marks on your credit and stay in your home.
When you enter into a leaseback agreement, it leaves the door open for potentially purchasing the property in the future. It will largely depend on the financial plans of the buyer, as they have to be willing to sell it back to you. It’s something that you would want to discuss during the initial sale. But if they’re willing to sell it back to you in the future, a leaseback agreement could be a beneficial way to temporarily ease financial pressure until you’re able to own the home again.
As you can see, the benefits of leaseback agreements make them an excellent option for residential homeowners and businesses.
For example, a business may sell a retail storefront to a new lessor. By doing so, the company can continue operating out of the same space and make regular, affordable monthly payments to the lessor in lieu of traditional mortgage payments.
The biggest downside to a leaseback agreement is the loss of homeownership or real estate ownership.
The details of a leaseback agreement can include additional downsides, too — look carefully at the lease before you sign. The monthly payments you’ll be required to pay could be more than your current expenses. Always make sure that you read the fine print on anything before signing.
For example, a specific time frame might be listed in the agreement where you can’t purchase the property back. If you want to reclaim ownership of your property sooner rather than later, this needs to be spelled out specifically in the leaseback agreement paperwork that you sign.
Leaseback agreements can come with solid advantages, making them a handy alternative to going into foreclosure.
However, these agreements also have a few downsides, especially if you wish to purchase your home back from the lessor. There's no guarantee that they’ll agree to sell it, and you might be stuck leasing for decades or having to find a new living situation.
If a leaseback agreement isn’t right for your situation, consider entering a co-ownership with Balance. Here at Balance, we’ll replace your mortgage with an equity investment in your property. Instead of paying your mortgage each month, you’ll make monthly payments to us that include your occupancy fee and your share of the monthly expenses. In contrast to the leaseback agreement, with Balance, you will retain ownership of your property and remain on the title.
With Balance, you’ll have the chance to save money, rebuild your credit, and stabilize your finances. You’ll also receive a lump sum in cash for the equity we purchase from you, which you can use to make necessary home repairs, pay off debts, and catch up.
Plus, you can buy Balance out at any time and refinance into a traditional mortgage. Over the years, Balance has given many homeowners the opportunity to avoid foreclosure and get back on their feet.
While a leaseback agreement is one option to avoid foreclosure, co-owning with Balance might be a better choice in the long run.
When you enter a co-ownership with Balance, you can purchase that equity back at any time and won’t be at the mercy of the new lessor. In other words, partnering with Balance has all the benefits of a leaseback agreement with none of the downsides.
If you want to know more, contact us today.
Sources:
Leaseback (or Sale-Leaseback): Definition, Benefits, and Examples | Investopedia
Lease Definition and Complete Guide to Renting | Investopedia
Nearly 20 Percent of Sellers Move Out After Leaseback Period | National Association of Realtors
Foreclosure: Definition, Process, Downside, and Ways To Avoid | Investopedia
