✏️ Editor’s Note: Realtor Associations, agents, and MLS’ have started implementing changes related to the NAR’s $418 million settlement. While home-sellers will likely save thousands in commission, compliance and litigation risks have significantly increased for sellers throughout the nation. Learn how NAR’s settlement affects home sellers.
Nearly 60% of house listings go under contract in two weeks. And 50% of these sell within 7 to 10 days during peak season. What if your home sells so quickly that you don’t have a new house to move into? A leaseback agreement is your solution.
It lets you stay in your home as a tenant until you finalize your new residence. However, a leaseback agreement may expose sellers to disadvantages like, heavy rent for an extended period, conflicts with the new owner, and property maintenance expenses.
Instead, you can try to sell your old and buy your new home simultaneously with Houzeo. Your home will be on the MLS in 24 hours. Moreover, you can browse through thousands of property listings to find your dream home.
What is in a Lease Contract and Document?
A lease document is a binding contract between the buyer(lessor) and the seller(lessee). It helps avoid disputes and stipulates the condition in which the property must be maintained.
Here are essential things to check in a leaseback contract:
- The date when the seller plans to move out.
- A provision for the additional time, if required by sellers.
- Prepaid rent, if needed by the buyer(lessor).
- Late fees, if the seller(lessee) misses any lease payment.
- Description of a part of the property, in case of a partial leaseback.
Why Do You Need a Leaseback Agreement?
Here are some situations where you may need a leaseback agreement:
- If you have sold a house and can’t find a new one soon. It may happen due to financial constraints, delayed transactions, or low housing inventory in the market.
- You need an immediate cash flow or home equity to invest in your business.
- If you receive contingent yet attractive offers from buyers and you have to refuse such good offers because you haven’t found a new place. With a leaseback, you can accept those offers and stay back for a while if you end up selling soon.
- You may want peace of mind and get the closing funds deposited to your bank before you move.
- If your new house is under construction.
- You want to let your children complete their academic year in the current school district.
- If you sold your home quickly for a great deal but couldn’t find time to explore homes to buy.
What is the Duration for a Leaseback Transaction?
The lease period varies per your requirements. The contract’s validity duration will be only for a week or two if you buy and sell homes simultaneously. The validity period may extend for a lifetime if you lease back the house to a lender or a bank.
What is the Difference Between Leaseback and Sale-Leaseback(SLB)?
A Sale and Leaseback (SLB) Agreement is different from a Leaseback Agreement in a real estate market.
| Criteria | Leaseback | Sale-Leaseback (SLB) |
|---|---|---|
| Potential Users | A home seller who couldn't plan the timeline of selling and buying a house. | The businesses or home owners who want alternative methods of raising capital without losing the asset ownership. |
| Assets involved | A residential house is involved | Other fixed assets like land, factory, or large machine equipment are involved in SLB. |
| Purpose | It's an arrangement of a temporary stay for sellers | It allows you to utilize the cash flow from an asset for other purposes while you still retain the asset ownership. |
| Market | It happens in a real estate market | It can occur beyond a real estate market |
What to Consider in a Leaseback Agreement?
Here we underscore the important things to consider in leaseback agreement. With these things in place, sellers don’t have to incur anything extra and buyers get a smooth move-in to the house.
Work Out the Terms and Finances:
- Stipulate the rights and duties of both seller (lessee) and buyer (lessor) in the legal document.
- Decide a reasonable lease rent amount and consider the market rent rates.
- Calculate the damage deposit, taxes, and utility expenses in detail.
- Decide who will pay for repair costs, if any.
- Take monthly mortgage payments payable by the buyer into consideration.
- Bear in mind that it’s usually the seller’s responsibility to pay for property maintenance.
- Check that seller should not be allowed to sublet.
- Include all the utility charges, late fees on lease payments, and insurance payments.
- Check for local legal complications in different states.
- Arrange for an escrow that holds the funds owed by the buyer and seller to each other.
Other Things to Plan for:
- Generally, a leaseback agreement lasts for 60 days. The buyers should consult with their lender if they wish to have a period more than this.
- Buyers have a right to enter the property during the leaseback tenure. So plan their visits before closing the sale and at the end of the leaseback. This way, they can verify the condition of the property and check for any damages.
- The mortgage company determines the move-in time for the buyer. Thus, a buyer should inform their lender about the lease agreement.
Negotiate and mention all these conditions in a legal document with the help of a real estate attorney. An attorney will review the agreement and reduce the chances of disputes.
Benefits of a Lease Back Agreement
Both sellers and buyers enjoy the potential benefits of a rent-back or a lease-back agreement.
Sellers:
- Get flexible transition time to move house.
- Get temporary stay till they buy a new house.
Buyers:
- Receive a fixed stream of monthly rent income.
Disadvantages of a Leaseback Contract
Here are some potential drawbacks to consider before going under a leaseback agreement:
Sellers:
- Have to pay higher monthly rent than the mortgage payment.
- Can’t make any changes to the property.
- May lose security deposit, if they incur any damage to the property.
Buyers:
- May end up having landlord responsibilities like collect the rents, security deposit, etc.
- Get delayed to move to the new property.
- May face possible disputes if tenants don’t move out after the contract ends.
- Can’t remove the seller(tenant) from the house for not paying rent if Eviction Moratorium occurs.
The Bottom Line
Beyond the advantages of flexibility, additional time, and sometimes a good cash flow, a leaseback agreement is riskier. It increases the transactional costs and disputes between the seller and buyer.
If you want to avoid the leaseback agreement, look for the MLS platforms to sell and find a home. Houzeo is one such platform that gets your house listed on MLS in 24 hours. You also get a huge database to explore and buy a new home.
You can list a home on Houzeo and save on the 3% listing agent commission. All of this is available for only a flat fee so that you can pocket more profits.
FAQs
How can a home seller benefit from a leaseback agreement?
As a home seller, it helps you avoid the tussle of moving twice. You can claim a tax deduction on the lease amount from your taxable income.
Is a rent-back or leaseback agreement risky?
As a seller, you may have to pay large rent amounts. If any damage happens to the property during your tenancy, you may lose your security deposit.
As a buyer, you will have to be in the unwanted shoes of a landlord. It’s time-consuming and delays your move-in.
What are the different types of lease?
The main types of lease arrangements are partial, long-term, joint, leaseback in real estate, and sale and leaseback on equipment and transportation.
A joint leaseback declares both seller and buyer equally responsible for the asset. They both can access the property and pay for repairs and title insurance.
Is the lease amount taxable for the buyer?
Yes, any income received as rent or lease by a buyer on a house property is taxable under IRS rules irrespective of the lease period.
If you get the house as a primary residence after a leaseback of more than one year, you can also take the benefit of depreciation.
How long does a rent-back agreement last?
It lasts as long or as short as both sides decide. If the leaseback agreement is part of an investment, it may last for a longer period.
If the agreement is for a temporary stay arrangement, it should be shorter than 60 days.
