Nearly 20 Percent of Sellers Move Out After Leaseback Period

Selling a home and simultaneously purchasing another property can be agitating. Ideally, the seller of the property will also have found another residence by the time the buyer is moving in, but this may not always happen because of delays in contract settlement.[1] In these cases, a seller may request to enter into a leaseback with the buyer. NAR’s monthly REALTORS® Confidence Index Survey finds about 20 percent of sellers vacated the property after the end of the leaseback period.

A seller leaseback, also called a sale leaseback or rent back, is a transaction in which the seller sells the property and then leases back the property from the new owner.[2] Both seller and buyer may benefit from this transaction if the leaseback clearly delineates the rights and responsibilities of the buyer and seller. Obviously, sellers benefit because they have more time to move out after selling their property and they get the proceeds from the sale which they can then use at closing of their new property purchase. But buyers who do not need to move in right away also benefit because by closing now, they can lock in their mortgage rate, which is beneficial especially when mortgage rates are on the uptrend. Buyers also start getting some returns from the rental payments from the leaseback, assuming the rent covers all costs (principal, interest, mortgage insurance, home insurance, real estate taxes).

Because buyers may also need to move in right away and because the risks of the leaseback are borne by the buyer (e.g.  the property will not be in the same condition at the end of the leaseback as at the time of closing), buyers who are most likely to agree to a leaseback are those don’t have to move in immediately or who may have purchased the property for investment or vacation use. According to the REALTORS® Confidence Index Survey, about 13 percent of homebuyers are non-primary residence buyers.

The leaseback transaction will generally consider the following aspects so that the buyer’s interests are protected during the leaseback period:[3]

1)     Drawing up the legal agreement that clearly stipulates the date the seller will vacate the property and the rights and responsibilities of the buyer and seller. Common stipulations pertain to property maintenance (usually seller’s responsibility), the right of the buyer to enter the property and make repairs, subletting (usually, seller may not sublet), uses of the property (not for illegal purposes, etc.), property insurance (seller insures his own property), payment of utilities (seller pays until move out), and payment of late charges in the event of late payment. The form of the agreement can be a purchase agreement addendum or a rental agreement, depending on the duration of the leaseback. For example, in California, leasebacks of less than 30 days only require a purchase agreement addendum while leasebacks of more than 30 days require a residential lease. To note, a purchase addendum will likely be the preferred form because a rental agreement creates rights for landlords and tenants that may complicate the process for the buyer in case the seller (tenant) fails to fulfill his responsibilities. For example, in California, a tenant can only be evicted if the landlord files a lawsuit.[4]

2)     Requiring the seller to pay a security deposit to be held in escrow until the buyer approves refunding back the deposit to the seller at the end of the escrow period.

3)     Stipulating a lease amount that covers the buyer’s total expenses, such as mortgage payment, taxes, insurance, utilities (or the utilities remain in the seller’s name until he moves out).

4)     Stipulating late charges in the event of late payment by the seller.

5)     Conducting a walk-through before closing and a final walk-through at the end of the leaseback period to verify the property condition before and after the leaseback period.

What this Means to REALTORS®: A leaseback may be necessary when the seller needs more time to move out. In a leaseback, the buyer bears the risk that the property will not be in the same condition at the end of the leaseback as it was at the time of closing/settlement. REALTORS® need to work closely with their buyer clients in crafting an agreement that minimizes this risk and protects their ownership rights.

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