Selling a home with lease back option?

Question

Hello all,

I wanted to ask a couple questions for those of you with more experience than I have.  I’ve bought a few houses, but have never sold one.  My wife and I are looking to move in the near future (3-6 months). We have almost paid off our primary home and are wondering what the likelihood of trying to negotiate a sale with lease back would be.  Is this something that makes the process arduous?  Do you have any tips to try to market to an investor or buyer who would be open to doing something like this?  Our home is in an “A” neighborhood in Phoenix, AZ fwiw.  We are looking for a larger new home.  We’ve saved 20% down for the home we want, and have recently converted it to cash but would like to use the cash AND the equity in our current home as the down payment. It would also make it easier on us and our child to move once so to speak.  I know I could buy, move, list, sell, pay down and refinance but I’d just rather do it in a little less stressful less involved manner. So that’s it, I just wondered if anyone could give me some advice on the topic.  Thanks in advance!  Mason

Corby Goade · Answer

I do these deals for investor clients all of the time. I have five of them in process right now. Most markets are on fire right now, Phoenix is no exception, and sellers hold most of the cards. That means you will likely be able to dictate many of the terms of the lease. Here's what I'd suggest- find yourself an investor friendly realtor (I can connect you with someone if you like) and tell them you are looking for a buy and hold investor who is willing to buy your house and rent it back to you for X months. Any realtor actively working with investors should have a handful of buy and hold investors looking for a deal just like you are describing. You'll likely only have to pay one commission rather than two, which saves you a chunk of money and you can afford to discount the property a bit to sweeten the deal. In order to make it work, you'll probably have to either discount the property a bit or pay a premium rent, but you'll get the flexibility on the back end of the deal that works for you.

I just closed on one exactly like you are describing for an investor client of mine, my client was the buyer. Basically, the seller sold to him at approx a 5% discount and signed a one year lease for approx 20% over market rents. My client gets a stable renter, equity up front and zero vacancy. The seller gets cash now to shop for his new house stress free and not deal with moving, it's a win/win.

Best of luck!

I just closed on one exactly like you are describing for an investor client of mine, my client was the buyer. Basically, the seller sold to him at approx a 5% discount and signed a one year lease for approx 20% over market rents. My client gets a stable renter, equity up front and zero vacancy. The seller gets cash now to shop for his new house stress free and not deal with moving, it's a win/win.

Best of luck!

Account Closed · Answer

@Mason R. I think Ryan covered it. You’re looking for a buyer who will do a leaseback. One thing to add is that the lease back term may be dictated by the terms of your lender. Most lenders require that the buyer purchasing the home as an owner occupant actually move into the property within 60 days, which further limits your buying pool.

Obviously anything that limits your buying pool is typically detrimental to competition and in turn, your offer action.

Allie Pfannenstiel · Answer

@Mason R. in this market, you can pretty much make whatever terms you want! Its an art to coordinate but Ive done it multiple times. I have a seller right now who lives in south scottsdale and is moving to north scottsdale. We listed his house in November and requested a closing timeline in mid January so he could find and put under contract the new one. So requested a longer closing. Easily found a buyer willing.

Ive also had sellers sell to get the equity, rent back for 30 days with a 10k escrow hold back, and then go find a rental.

Michael Robbins · Answer

@Mason R. I have helped several people sell their homes in Las Vegas and do a leaseback.  I am not exactly sure how it works in AZ.  One tidbit i would suggest to make sure you execute a post possession agreement and not a lease.

Ryan Swan · Answer

It's likely not an investor that would be interested in this, but rather a home buyer who is willing to give you the extra time needed to live in the home after close of escrow. It does happen pretty often - short term (say under two weeks) it's usually called a post possession or post occupancy agreement. For longer says (1 month or more), it's called a sale with leaseback and you would obviously be expected to pay a market rent to the new owner and pay all utilities/upkeep while living in the home. There's a limit to how long most potential buyers would be willing to do the leaseback, so the shorter the better. If you ask for too long of a lease, then it will greatly limit your potential buyer pool.

Bruce Lynn · Answer

Happens a lot in my market.  I'm not a big fan of it as an agent.  I like the clean break, but we see it more and more.  On your side you 100% know the buyer has closed and get your cash.   Less risk for you.  You get 30-60 days to move...in some cases you might get to stay for free, in some cases the rent is taken out from your proceeds at closing if there is rent to be paid.   Some leases have deposits so that could be at risk for you if the buyer does not give it back to you after you move out.   You get to go shopping and find a new place and have your cash to use towards the purchase of the new house.

Buyers who are nervous about the market get to lock up a new home before they give notice if they are renting now so that can be a win for them.  Some can buy now and perhaps even close before they give notice at their lease.  This gives them some comfort vs going naked in the purchase, that is giving notice and knowing they don't have a place to live on X date, but not having a new place locked up.

Of course you have to find a buyer who wants to do this.  Not all buyers like this.  There are risks for the buyer.  Condition and holdover are a couple.  You might also look into POD storage and AirBNB to give you options.   Or in today;s market you could go negotiate hard with a hotel or several hotels to give you 30-60-90 days residency at significantly reduced rates...since they're super low occupancy.

Have your agent market with some remarks that you want 30-60 days lease back, but are flexible.  That way you can attract both kinds of buyers...those who are ready to close and move soon with no risk to them...and those who have flexibility and might can offer you that to make the deal work for everyone.

Ingryd Hernandez · Answer

@Mason R. Lease options are always a great exit strategy since you are really the bank in that scenario. You'll want to make sure that the contract clearly gives the lease option buyers full responsibilities of the property, usually sellers will 'warrant' for 30 days. This makes sure they understand they have to manage any major repairs. Additionally, you'll want to time bound the option, minimum 3 years because folks who need this option usually need enough time to get their credit scores up.

With demand being so heavy in Arizona right now, is your motivation just having the down payment from the lease option ? Do you believe you'll only qualify for a new loan if your current home is either under contract or in a lease?

In my experience, you are looking for a very specific buyer but not unreasonable. However, you'll have full responsibility of vetting someone like a tenant versus when you sell when that's really the lender's  job to do that. You'll want someone who can help you that is experienced. Happy to help. I've been an agent in AZ since 2013. Both my husband and I are agents.

Selling a home with lease back option?

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