The Sale Leaseback Option

A leaseback option more commonly occurs in commercial real estate transactions than in residential real estate negotiations, however, a buyer of residential rental property will occasionally come across a situation of this nature.

In a leaseback arrangement, a seller may have the need to market the property for sale for some ready cash to clear debts or to free up capital for investment purposes or other reasons, but knowing of the need to rent after selling his/her property, may feel more comfortable staying in familiar surroundings, and would prefer to remain on the premises as a tenant.

If the rental arrangement seems reasonable to the former property owner, the new owner is satisfied that the rents received from the former owner will satisfy the landlord’s expected profit potential for the property, and the length of lease is agreeable to both then a deal can be made.

Both parties can benefit from this arrangement, since the former owner will not have to deal with the expense and hassle of moving, and the new owner will save the time and expense of interviewing and screening prospective tenants.

Expense meaning the time it takes to find a tenant during which no revenues are being collected, instead of having a reliable source of income from a tenant that is more likely to treat the former property with respect.

The benefits to both buyer and seller could be in the form of an agreement that would allow the buyer to purchase the property at a very attractive below market price, and benefit the former owner by agreeing to a long-term leasing arrangement at a premium rate.

Additionally, since the buyer would derive depreciation tax benefits from the rental property, it is important for the buyer to conference with a real estate savvy CPA in order to assure that the timing and structure of the sale are designed to derive maximum taxable credits.

There can be legal complications detrimental to buyer and seller if it is determined that the seller has disposed of the property to hide assets, so the buyer should approach this arrangement with caution and should rely on the counsel of a skilled real estate attorney before making a commitment.

Some leaseback options may include terms which would allow the former owner to buy back the property after a previously agreed-upon time has elapsed.

Attorneys usually advise against the buy back arrangement, since there can be the possibility the  former owner may  construe the original transaction as a loan, and may take court action, which can become a serious headache for the buyer, and may result in unwanted consequences.

In some cases a lease back option could be beneficial to owners of distressed properties, who want to stay where they are but have the need to get out from under oppressive mortgage payments and avoid foreclosure.