Leaseback agreements bring distressed homeowners and cashflow-seeking investors together. They allow the homeowner to stay in the house while the investor gets to collect rent from him without having to fix up the house. Structured properly, these agreements represent a win-win option for both parties. However, they can also be complicated and can carry meaningful drawbacks.
Buy and Lease
Leaseback agreements are employed when the owner of a property wants to sell it to an investor and get her money out of it -- while remaining in it. They can be used in distressed residential transactions when the owner owes more than the property's worth. The investor buys it on a short sale and leases it back to the owner for a variable period of approximately three to seven years at a rent that is below the owner's original mortgage payment. Some leaseback agreements even let the tenant buy the property back at the end of the lease.
An owner who's willing to become a tenant in his own house can get out of his loan and stay in the house with a leaseback. Since the rent payments are usually significantly less expensive, he can also end up with more disposable income at the end of the month. Finally, leaseback agreements with buy-back clauses can even allow him to become a homeowner again once he gets back on his financial feet. He might even be able to buy the house back at a lower price than he originally paid for it.
Homeowners can make decisions about the disposition of the property -- a homeowner who becomes a tenant must adjust his attitude as well as his financial expectations. Leaseback agreements come with inherent risk: Upon their expiration, if the previous owner-tenant can't buy the house from the investor, he'll end up evicted, like any other tenant. Finally, leasebacks carry a significant risk. If the investor fails to fulfill his obligations as an owner and the property gets foreclosed on by a lender or seized for non-payment of property taxes, the tenant could get evicted and could also lose any equity he had built-up under a buy-back clause.
Leaseback agreements take a great deal of the risk out of buying an investment house. Investors don't have to renovate the house, since the owner is already comfortably ensconced in it. They neither have to find a tenant, nor wait for them to move it, since a leaseback structure includes a tenant. Leasebacks typically give investors long-term stable income and may even offer them an exit strategy should the tenant choose to buy back the property.
The long-term stable nature of leaseback agreements can limit an investor's return. With a leaseback, investors can't fix up the house, flip it to another buyer or take their money out. One of the leaseback's biggest benefits -- the ability to buy and rent without renovating -- is also a drawback, since the house frequently won't be rent-ready for another tenant. This can increase the investor's losses if the tenant has to be evicted for non-payment of rent.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.