If you’ve owned your home for a while, with the mortgage paid off (or almost there), you’ve probably built up a ton of equity. Most people who need to tap into some cash use their HELOC as an easy way to access funds. But there is another option that's gaining traction with mature homeowners: it gives you access to your equity but lets you stay put, with no interest to pay and a lot less work to do in terms of repairs and maintenance.
And what is this intriguing alternative? It’s called leaseback – selling your home to a buyer who is willing to let you stay on as a renter. It's a great way to get your money out of your house or condo, while still living in a place that you love until you're ready to move on – plus it's a good way to pay down debt, invest, feed your travel bug or help your kids buy a home.
How do you find a buyer who would be open to this arrangement?
It can be easier than you think: leaseback is actually a great deal for an investor. They get guaranteed tenants with a vested interest in taking care of the property. They don't have to do any renos to attract tenants, go through the hassle of finding responsible renters, or have to face a period with no income where the property sits empty. The renters are already in place and the property is ready to go. Plus, the property keeps appreciating, with your rent paying most (if not all) of their mortgage. With the right buyer, it’s win-win.
Finding that buyer is a matter of marketing – and being very clear about your expectations in your listing. The process works the same way as any other residential sale. The only difference is that the new owner isn't getting vacant possession of the property. (Basically, you're transferring the title but continuing to live there.) At closing, both parties enter into a previously-negotiated rental lease that stipulates monthly rent, length of lease and all other terms. The lease can be short-term while your new home is being built or renovated, or long-term (5 to 10 years is typical).
How is this different than a reverse mortgage?
It's very different. With a reverse mortgage, you can't get 100% of the value of your home - you get a percentage. You remain the owner, with all the responsibilities that entails. You don’t pay interest the way you would with a HELOC, but once your home is sold, that loan has to be paid back, along with the accrued interest (by you or by your estate). This kind of arrangement works in favour of the lender and puts the homeowner at a disadvantage. A home equity line of credit is easier to get in and out and works out to be a lot less expensive.
With a leaseback, on the other hand, you get 100% of the cash out of your home right now…at top market value. So if your home is worth $1.6 million, you get $1.6 million (less the costs of the real estate transaction). The interest on that amount can pretty much carry the rent, and there's no stressful move to contend with – you just keep living in the home you love, without the financial responsibility. The new owner will be on the hook for repairs and maintenance, too, so if the roof leaks or the furnace stops working, that’s not your problem anymore.
Work with an expert
Because this type of transaction can be complex and is still relatively uncommon, it's in your best interest to work with an experienced agent and a legal professional. They will help you figure out what renewals and terminations will look like, plan for rent increase guidelines, determine if pets are allowed and who pays for utilities and insurance. A realtor will help you with a formal occupancy agreement that spells out all those terms and conditions, protecting both you and the buyer.
A leaseback may not be the right solution for everyone, but for mature homeowners looking for greater liquidity and less responsibility, it can offer financial freedom and security. It has worked for a number of my clients, both sellers and investors. If you're intrigued by the idea, it might be worth exploring. I’d be happy to take you a little deeper into the details to help you decide – give me a call anytime!
About Adam Linden
Adam (a.k.a. "The Condo Coach") is a Seniors' Real Estate Specialist (SRES) who gets the call when mature adults and their families are looking to rightsize their homes, finances and lifestyles. He has built a reputation as a trusted real estate advisor to the 50+ crowd, working with a team of professionals to get the right people in place so he can help his clients plan smart. He has written articles and ebooks on real estate for this market segment and is always available for free consultations, speaking engagements and networking events - drop him a line.