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Five Reasons Why Letting A Home Seller Stay On As A Tenant May Be A Good Move

The question is, does the buyer want to be a landlord or simply a home owner?

By Jeff Vasishta March 13, 2017

It’s an appealing concept—selling your home, getting a chunk of cash at closing and then staying there, albeit for a monthly fee. Leaseback agreements, as they are known, are rising in popularity. They can be in the form of an addendum at closing which states that the seller has a certain amount of time to vacate the premises. Usually, it’s under sixty days but often, especially with luxury homes, that period can stretch on for months or even years.

So why sell a home if you want to stay there? Here are five reasons leaseback agreements can be a win-win for all concerned.

It takes the rush out of moving.

No one likes the expense and effort of moving house. If you could do it piece-meal, gradually taking items and setting them up in your new place, the whole process doesn’t need to be so stressful. This is especially true with luxury houses, where packing up can stretch on for months.

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Allows a seller time to find a new place to live.

It’s all well and good putting your house on the market. Usually, once a buyer goes in to contract, it takes under three months for them to close. Sometimes it can occur in a little as two weeks, depending on how secure a buyer’s finances are and how flexible they are with contingencies. Three months generally isn’t much time to find a new property to move into. Allowing a seller to stay put while they line up their next home may be right move in getting a seller to accept an offer and possibly a lower priced one.

Helps older people get their affairs in order.

A noticeable recent example of this was the sale of Hugh Hefner’s Playboy Mansion. Hef has packed a lot of living into his 90 years, most of it in the iconic mansion he (and many others) have called home. Daren Metropoulos, the 33-year-old co-owner of Hostess Brands, including the snack cake Twinkies, bought the Playboy Mansion in Los Angeles for $100 million, with Hefner being a part of the deal. A spokesperson for Mr. Metropoulos told the Wall Street Journal the deal was contingent on letting Mr. Hefner, 90, remain as a lifetime tenant, at a rate of $1 million a year. Mr. Metropoulos, who lives next door, has said he would ultimately combine the two estates.

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Great for out of town investors who need a safe place to park their cash 

Who better to look after a home than someone who has living there for a number of years? They know the property’s quirks and if they have been long-term residents, will be more enrolled in house’s upkeep than a new tenant. When developer Mohamed Hadid sold his home, Le Belvedere, a roughly 40,000-square-foot stone-clad château in Los Angeles, for $50 million, he initially asked the Asian buyers if he could have six months to move.

“Six months became a year, a year became two,” Mr. Hadid, who has now been renting back the mansion for about six years, told the WSJ. Although he has never met the buyers, he approached their representative with a plan: He would cover maintenance costs and pay rent, which he wouldn’t disclose, to reside there until the buyers decided to move in. It was appealing to Mr. Hadid, because he got to put off the arduous moving process, and appealing to the buyers, because they had no immediate plans to move in and carrying costs on a mansion of this size can run into the millions. Taxes alone last year were $647,221, records show. The buyers never moved in.

A great short-term investment strategy.

From a purely investment standpoint, leaseback sales can work well for older people. The influx of cash may allow them to hire a home health attendant, while having the security of staying put. They will also have the cash to make regular lease payments. For an investor in an appreciating market, it allows the the security of knowing there’s a stable tenant in place and the rent will be paid. The sales price could even be reduced to reflect one or two years’ rent payments.

That said, not all tenants are created equal.

“There’s always the chance that damages could occur while the seller is living there. That’s why it’s a good idea to have a holdback deposit of anywhere between $5,000 to $10,000,” Emily Beaven, a Realtor® with Coldwell Banker in San Francisco told realtor.com. “The buyer, like a landlord, is now responsible for making any repairs should, say, your water heater break,” Beaven says. “Plus you may have to make those repairs immediately.”

The question is, does the buyer want to be a landlord or simply a home owner?

 

 

Jeff Vasishta

ABOUT THE AUTHOR Jeff Vasishta

ABOUT THE AUTHOR Jeff Vasishta

Jeff is a writer, husband and father but not necessarily in that order. As a music journalist he counts Prince, Beyonce and Quincy Jones amongst those he’s interviewed. He's also owned and flipped homes in Brooklyn, NJ, CT and PA.

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