A sale-leaseback allows a buyer to rent the property back to the sellers, letting them stay in the home for a predetermined amount of time after the closing. This situation is fairly common if the sellers haven’t bought a new home before their house sells, and need a place to live.
Accommodating the sellers with a leaseback can be a major bargaining chip for buyers looking to stand out from the pack in a competitive housing market. Before a leaseback begins, however, there are some important things to hammer out.
“The buyer and seller [must] agree ahead of time to the rental fee if any,” says Joy Fraser, a Realtor® with Colorado Luxury Houses in Denver. But the rental fee is just a part of the equation, she says.
You also need to agree ahead of time on “who will pay the utilities and insurance, the amount of any security deposit, who will maintain the property, the buyers’ access to the property, and the date when the seller will move out of the home,” Fraser says.
Now that you know what’s required to enter into a leaseback deal, it’s time to discuss the math to determine how much to charge for rent.
How to calculate the rent for a sale-leaseback
Typically, buyers determine the monthly rent by calculating the monthly cost to own the home. This usually includes the mortgage principal and interest, homeowners insurance, and property taxes, says Michele Lerner, author of “Homebuying: Tough Times, First Time, Any Time.”
Other fees such homeowners association dues can also be factored in when calculating your leaseback rent. You’ll then prorate the amount based on how long the seller will be renting your new home.
Lerner offers this simple example: “If your total monthly mortgage payment is $2,000 and your homeowner’s dues come to $100 per month, your daily rate is $70. If the sellers are staying in your home for two weeks, then you would charge them $980.”
Some sellers might balk at paying a rent that’s based on your costs, Lerner says, especially if they’ve lived there a long time and have a low or no mortgage payment. If that’s the case, buyers also have the option of using the current market rent to calculate the leaseback, which may work out in the seller’s favor.
Another option is not to charge the seller at all.
“If there are multiple offers for the home, a buyer can offer to let a seller stay in the home for free for a short amount of time,” Fraser explains. “It is just one additional negotiating point between the buyer and seller.”
One calculation you can’t skip
If you’re debating a long-term rental as a means of generating rental income, and your sellers just want to relieve themselves of the burden of owning a home, you need to talk to your lender before striking a deal. Why? A leaseback period typically cannot extend beyond 60 days.
“Your lender will have to approve you for a mortgage as an investor rather than an owner-occupant,” Lerner says. “Investor loans typically require a higher down payment and excellent credit.”