Sale Leasebacks Make a Comeback

With millions of homeowners facing foreclosure due to adjustable-rate mortgage increases and slumping real estate values, sale leaseback strategies are in vogue. In this strategy, the homeowner sells her house and immediately leases it back as a tenant.

Faced with unwieldy mortgage rates, difficulty refinancing, and a housing market that continues to crumble, many homeowners are selling for the privilege of leasing their homes back again. This unique arrangement is gaining popularity in today's ravaged housing market because it helps people avoid foreclosure while keeping a roof over their heads.

Ideally, a homeowner could simply pay off her mortgage; but in this declining real estate environment, too many borrowers are "upside down" in their loans-they owe more on the mortgage than the home can fetch from a sale. Others can manage to pay off their mortgage, but they have second mortgages or home equity loans that also need to be satisfied. With fewer buyers, lower prices, and insurmountable costs, they revert to the sale leaseback.

Inner workings of sale leasebacks

Here are some fine points to consider regarding leasebacks:

• It may not be feasible. The financial incentive for the buyer, who will also become a landlord for the current homeowner, will only be realized if the rent charged is sufficient to cover the expense involved. A homeowner having trouble making a mortgage payment may not be able to afford rent that's high enough to cover the new buyer's own mortgage payment-especially in a rising mortgage rate climate like the one that's expected in the next few years.
• It will benefit those who can handle the new rent payments but, for one reason or another, can't manage their current debt. A prime example is a homeowner who's now paying a loan, but expects that the mortgage rate will reset soon to a much higher level. She can sell before the mortgage rate spikes. As long as the buyer gets a decent fixed-rate loan, the monthly overhead should be affordable. This plan can save the present homeowner from a financial catastrophe.
• There are always tax implications to consider. Before doing a sale leaseback, the homeowner should figure out how much tax she'll have to pay from the proceeds of the sale, and incorporate those numbers into her final decision.
• Even though sale leasebacks are often executed between family members, it's important to have solid legal contracts. Otherwise, a dispute may arise, or one party may fail to uphold her end of the agreement. Without legally binding agreements, this can become a relationship nightmare.

From the buyer's point of view, former homeowners often make great tenants because they have a pride of ownership in the property and may take better care of it. Acquiring a home at a discount, and generating rental income to pay the mortgage, is a wonderful way to profit from real estate while also helping a desperate homeowner with a welcome solution.