If mortgage repayment is becoming a burden, retirement funds are a concern, or you need a substantial amount of cash, leaseback (sale and leaseback) allows you to raise funds without giving up your home. In this article, we organize the mechanism, advantages, and risks of leaseback from the perspectives of investors and property owners.
What Is Leaseback? Explaining the Mechanism
Leaseback is a real estate transaction method in which you sell your home to a leaseback company and then lease the same property so you can continue living there. Its formal name is “sale and leaseback.” Its biggest feature is that you can continue residing in the home while receiving a lump-sum payment from the sale.
How the process works:
- The seller sells the property to a leaseback company and receives the sale proceeds in a lump sum
- Ownership of the property transfers to the company
- The seller signs a lease agreement with the company and continues living there while paying monthly rent
- If there is a repurchase clause, buying the property back in the future is also possible
Eligible properties include detached houses and condominium units, as well as real estate owned for purposes other than housing.
What Are the Benefits of Using Leaseback?
You can raise funds while continuing to live in your home
The greatest benefit is that you can secure a lump sum without moving out. In a standard sale, finding a new residence and moving are mandatory, but with leaseback there is no need for relocation costs. The fact of the sale is also less likely to become known to people around you.
You no longer have to pay fixed asset tax or city planning tax
By transferring ownership to the company, fixed asset tax and city planning tax become the responsibility of the new owner. The seller only pays monthly rent, which reduces ongoing holding costs.
It can be used to repay a mortgage
Using leaseback requires the mortgage lien to be discharged, which means the loan must be fully repaid. You can use the sale proceeds to repay the mortgage in full and apply any remaining funds to living expenses, medical costs, education expenses, and more.
What Are the Risks and Drawbacks of Leaseback?
The sale price tends to be lower than the market price
Because the company assumes the risk of rent delinquency and the obligation to handle a repurchase, the sale price is generally set lower than in a conventional sale. Even if you are able to obtain an adequate sale price, the rent may rise accordingly.
Rent is often set higher than nearby market rates
Because rent is determined based on multiple factors such as the property’s sale price and market conditions, it is often more expensive than comparable rental properties in the surrounding area. In particular, for properties with a large outstanding mortgage balance, the sale price often needs to be raised, which also tends to increase the rent. If you plan to live there long term, you should also consider the risk that the total rent paid may exceed the lump-sum amount received.
Related reading
- Real estate exit strategies in an era of inflation and soaring construction costs: should you sell or hold? A thorough explanation
- Avoid losing money when selling real estate: how to spot an agent’s positioning talk and the trap of dual agency
- What is real estate buy-renovate-resell? A comprehensive expert guide to the differences from brokerage and the advantages and disadvantages
Frequently Asked Questions (FAQ)
Q. What is leaseback?
A. Leaseback (sale and leaseback) is a transaction method in which you sell your home to a company and then sign a lease agreement to continue living in the same property. You can receive the sale proceeds in a lump sum and continue living there without moving.
Q. If I use leaseback, who pays the fixed asset tax?
A. After the sale, ownership transfers to the company, so fixed asset tax and city planning tax are borne by the new owner (the company). The seller’s ongoing burden is limited to rent.
Q. Is the sale price in leaseback the same as in a normal sale?
A. Generally, it is lower than in a normal sale. This is because the company reflects the risk of rent delinquency and repurchase-related costs in its pricing.
Q. Can I buy back the home I sold later?
A. Yes, if a repurchase clause is included. It is important to confirm the repurchase price and conditions when signing the contract.
Q. What kind of people is leaseback suitable for?
A. It is suitable for people who want to remain in the home they are used to, repay their mortgage in a lump sum, or secure funds for retirement living. However, if you plan to live there long term, be sure to compare the total cost against the total rent you will pay.
