Selling a house is all about timing – if you sell too soon you could be missing a bullish trend in the real estate market, and if you sell too late you could be facing a bear with falling prices. Homeowners looking to sell their house often find themselves in a tricky situation where they have a buyer, but they’d be practically homeless if they sell because they are still looking for another lease for themselves.
What Is A Sale Leaseback Agreement?
In simple terms, a sale leaseback in real estate involves a homeowner selling their property and then leasing it back at a predetermined rate. That is to say, a seller can unlock the equity potential in their property, and also enable its use as the property ages.
What Are The Types Of Sale Leaseback Agreements?
There essentially exist two types of sale leaseback agreements:
Commercial Sale Leaseback
As the name suggests, this is when a sale leaseback agreement exists on a commercial property, such as an office or a warehouse. The lease rates and the set time may differ depending on the new owner’s perceived market value of the property, as well as their financing costs.
Residential Sale Leaseback
Again, as the name suggests, this is when a sale leaseback agreement exists on a residential property. A homeowner could be building a new home for themselves and planning to sell their existing one shortly. If they receive a deal they cannot say no to and yet do not have a place to shift to anytime soon, they may opt for a residential sale leaseback agreement.
How Does A Sale Leaseback Agreement Work?
A sale leaseback agreement works with a triple net lease, which is also known as an NNN lease. According to this type of lease, the seller of the home, now transitioning to a tenant, is responsible for all the real estate taxes, maintenance costs, insurance expenses, and other utilities. Under the NNN lease, the new owner essentially has zero responsibilities as a landlord, and collects market value or higher rent, and hence is a great opportunity for hands-off investors.
What Are The Benefits Of A Sale Leaseback Agreement?
Sale leaseback agreements are essentially a win-win situation for both the buyer and the seller, and given below benefits from both perspectives:
Benefits For The Seller/Tenant
For the seller transitioning into a tenant, they get access to a rental property until they figure out where they or their business may shift to, and do not have to rush moving out.
Sellers can also benefit from a bullish market by simply accepting the best deal they get without having to worry about any repercussions associated with waiting out until they find another place to sell.
Sellers may also rent something in advance before putting their property on the market, and the longer their property sits on the market, the more money they lose in terms of rental income they have to pay. This can be avoided by availing of a sale leaseback agreement.
Sellers also get to set their rental rates which free up capital to invest in other ventures such as new residential or commercial property. They can also use the cash flow to pay off debt while making decisions for a property they no longer own.
Benefits For The Buyer/Landlord
For the buyer transitioning into a landlord, they get to convert the investment into an asset and enjoy rental income minus any of the responsibilities associated with being a landlord. They can hence benefit from the NNN lease model.
Buyers can start earning from their property right off the bat, with their earnings starting right when they sign to buy the said property. Their investment makes them money in real-time, without the fatigue of having to look for a tenant or be burdened with landlord responsibilities.
Sellers can also deduct property depreciation expenses and interest payments on their income tax return, while they might be responsible for paying them altogether. They get access to investment tax credits depending on the state where they live and can protect themselves from volatile market swings.
A sale leaseback agreement is a great financial tool for both sellers and buyers alike. It is an ideal arrangement that benefits both parties in different ways and enables them to enter an agreement that is convenient and profitable for both parties. Make sure you study your particular case and weigh all the pros and cons before you make a final decision.