A leaseback, or a sale-leaseback, occurs when the seller of a home remains a renter in the property after the close of the sale. This gives sellers more time to move or provides immediate income to a real estate investor. Parties should formalize leaseback terms in an official agreement, including rent, duration, and maintenance responsibilities.
When drafting a leaseback agreement, consider hiring a real estate attorney to ensure your interests are protected. If you don’t want to hire a traditional lawyer, check out Rocket Lawyer. Its team of attorneys can help you with document review and preparation of a lease agreement. Click here to learn more.
How a Leaseback Works
A leaseback enables a seller to rent their former property after ownership transfers to the new buyer. In this scenario, the buyer and seller agree to a leaseback during home sale negotiations, incorporating details in the purchase agreement or adding to a separate contract. After the closing, the seller remains on the property and pays rent to the buyer-landlord for a specified period of time.
During home purchase negotiations, the buyer and the seller will discuss options for a leaseback. In general, leasebacks should cover things like the length of the leaseback, the rental amount, and details about who will cover utilities, maintenance, and insurance costs. However, there may be additional details discussed specific to the property or tenant.
Once the terms of the leaseback have been verbally agreed upon, a written contract is drawn up. Short leasebacks can typically be described in the purchase contract or a Seller in Possession (SIP) form; longer leasebacks generally warrant a more comprehensive lease document.
When properly executed, leasebacks can help sellers who need more time to move out of their home or who want to stay in a property long-term. They are also beneficial for real estate investors who want an immediate tenant for newly purchased property, or simply need additional cash—secured from rent payment—at closing.
When to Consider a Leaseback
Short-term leasebacks are fairly common, especially when used to give sellers more time to move out of a home after the closing. However, a seller may also want to propose a leaseback to sell their home during a seller’s market while retaining the ability to live in the house after the sale. Additionally, a buyer who is in need of cash or who is buying the property as an investment may wish for the seller to become a tenant as part of a long-term sale-leaseback.
The Seller Needs More Time to Move Out
Depending on the circumstances, a quick closing can be advantageous to both a buyer and seller. However, some homeowners may need more time to move out after a closing than is provided for in the purchase contract. In those cases, the parties can agree to a leaseback that provides more time for the seller to move out. In cases where the leaseback period is only a few days, the buyer may not even request rent payment.
The Buyer Wants a Turnkey Investment Property
In some cases, a buyer may be a real estate investor who already plans on leasing the property after closing. This makes a leaseback an attractive option for the buyer because it ensures the buyer starts making money on the property immediately rather than having to search for a tenant. Under these circumstances, the leaseback is likely to be long-term and a traditional lease agreement is most appropriate to document the new landlord-tenant relationship.
The New Homeowner Needs Cash
If you’re buying a home and would benefit from some monthly income, you may want to propose a leaseback to the sellers. Of course, this will not work unless the seller has a reason to stay in the home after the closing date. However, if you’re a buyer working with a flexible seller—or a seller dealing with a buyer who has expressed an interest in seller financing options—consider a leaseback.
It’s a Seller’s Market
Sometimes, a property owner may want to sell their home or commercial space when local real estate values are elevated. If the seller isn’t ready to move out but wants to take advantage of a strong seller’s market—meaning that inventory is low and property values are high—a leaseback is an excellent option.
The Seller Needs a Place to Stay Long-term
If you’re buying a home or commercial building as an investment property, the seller may wish to enter into a long-term leaseback agreement rather than moving immediately. Under these circumstances, the leaseback agreement will be more comprehensive than for a short leaseback period and will generally take the form of a standard lease agreement.
How to Secure a Leaseback in 6 Steps
Most real estate contracts will include a provision for how long the seller may remain in the property after closing or for how a short leaseback period should be conducted. However, if you want a longer leaseback period or want to define the terms of the sale-leaseback further, you can draft a separate agreement that details the rights and responsibilities of the parties. Such an agreement should define duration, rent, maintenance requirements, and other lease terms.
To get a leaseback, follow these six steps.
1. Put the Sale-leaseback Agreement in Writing
If a seller requests a leaseback that isn’t included in the purchase contract, complete a Seller in Possession (SIP) form or other state-specific addenda to the purchase agreement. Specific requirements vary by state, but a SIP form is typically used for leasebacks shorter than 30 days and includes important leaseback terms. For longer leasebacks, the buyer and seller can draft and execute a more comprehensive lease agreement that defines the terms of the leaseback.
Common sections of a SIP form or leaseback agreement include:
- The term of the rental period
- Amount of rent per day
- Amount of security deposit, if any
- How the security deposit will be handled
- Late charges for fees specific to the leaseback agreement
- Who pays for what utilities
- The right of the buyer to enter the property
- The seller’s duties to maintain the property
- Whether the seller tenant can assign their lease or sublet to a third party
- The seller’s obligations after the lease ends
- Insurance for seller’s personal items
If you’re using a real estate agent in your real estate transaction, they can provide the appropriate leaseback form or a leaseback agreement template. If you need a more property-specific leaseback agreement, try a service like Rocket Lawyer that provides legal templates and document review services for real estate.
“Leasebacks aren’t uncommon, but buyers should certainly take a few steps to protect themselves. First, ensure that all parties sign an agreement which details the rental amount, duration of lease, who is responsible for paying utilities, security deposit, and what happens should the seller becomes a holdover tenant. Additionally, every buyer should conduct a final walkthrough of the property prior to closing; this will allow the buyer to confirm that nothing happened to the condition of the property during the lease.”
— Trey Van Tuyl, Founder, OmegaHome
2. Calculate the Rental Amount
The rental amount in a leaseback is negotiable and typically based on the buyer’s daily principle (mortgage payments), interest, taxes, and insurance (PITI) costs. This ensures buyers don’t lose money as a result of the leaseback. Rent is generally greater than or equal to the buyer’s PITI costs. For example, if a buyer’s PITI costs are $850 per month, the rent should cover all of these expenses plus additional expenses like maintenance or homeowner association fees.
If the buyer and seller document the leaseback prior to the close of escrow, the total leaseback rental amount can be deducted from the purchase price of the home. Otherwise, the buyer and seller can detail payment terms in the leaseback agreement.
“Rent can be zero to a minimal amount, so the rental amount and the deposit depend upon a variety of factors. If a buyer is purchasing the property with a loan, then the buyer will likely want to be compensated for their actual daily expenses, which is called PITI. Many times, the buyer will explain to the seller what their daily costs are as this is usually a reasonable way to negotiate the daily, weekly, or monthly rate. Since the seller is renting it back, it is typical that the seller continues paying utilities and maintenance.”
— Michael Bell, Broker & Realtor, Sotheby’s International Realty
3. Assign Responsibility for Utility Costs
As in a standard rental or lease agreement, it’s necessary to establish who will pay for utility costs during a leaseback period. Typically, the seller-tenant is responsible for utility charges until they move out of the property, including but not limited to water and sewer, electricity, and propane. This section of the leaseback agreement can also address whether the buyer or seller must pay for a monitored security system during the leaseback period.
For example, the for sale by owner (FSBO) resource Hauseit offers this sample leaseback agreement:
“Until Seller vacates the Property, Seller shall be responsible for and pay all utility charges including but not limited to gas, electricity, telephone, water, propane and/or fuel and oil use, and cable and security system charges if any.”
4. Clarify Maintenance Responsibilities
A leaseback agreement should also address who will pay to maintain the property and who will bear liability for damage to the home during the leaseback period. To establish a baseline, inspect the home prior to the close of escrow and perform a second inspection at the end of the leaseback period to evaluate whether the seller-tenant caused any damage to the home. The leaseback agreement should also specify the amount of the security deposit to cover repairs.
As an example, Hauseit’s sample residential leaseback agreement states:
“Seller shall maintain the Property, including the smoke alarm and carbon monoxide detectors, in the same order and condition as of the Closing Date, Seller shall not make any alterations or changes to the appearance of the Property during the Term without the prior written consent of Buyer including without limitation, the redecorating or remodeling of any portion of the Property, or the removal of any included appliances and fixtures, except as otherwise provided herein. A security deposit can be retained by the owner if any damage is done to the property. Make certain to do an initial property walkthrough with photographic documentation at the initiation of the lease and a final walkthrough with photos at the conclusion. The courts will need to see evidence of the damage if the matter is contested.”
—Ron Humes, Vice President of Operations, Southeast Region, Post Modern Marketing
5. Confirm Insurance Coverage
While the seller will likely continue paying utilities and maintenance, the new homeowner will typically bear the expense of a homeowner’s insurance policy—as in any other residential real estate transaction. The new homeowner may also choose to purchase liability insurance to protect themselves from injuries sustained by the seller-tenant during the leaseback period. Likewise, the seller-tenant should get renter’s insurance to protect their personal belongings.
The New York City residential agreement sample from Hauseit states:
“Seller shall maintain and continue to have liability insurance policy for both property and personal injury (which may be in the form of a ‘tenant’s policy’), in full force and effect throughout the term of their post-closing possession, as tenants, or as so required by the insurance. Purchaser shall be indemnified and held harmless from any liabilities or claims made upon Seller during the period of Seller’s post-closing possession. Purchaser shall be required to purchase a cooperative ‘homeowner’s’ policy to take effect on the date of closing. Each party shall submit a copy of such policies to the other at closing upon request.”
6. Execute the Leaseback Agreement
A leaseback is not finalized until the terms of the agreement are agreed upon, and the document is signed by both parties. Generally, lease agreements do not need to be notarized, but this requirement varies by state. Once the agreement is fully executed, the buyer-landlord should keep the original document in a safe place and provide the seller-tenant a copy.
Seller Advantages & Disadvantages of Leasebacks
Depending on the circumstances of a leaseback, there are advantages and disadvantages for the seller-tenant. A sale-leaseback can simplify the moving process for the seller and otherwise provide flexibility during the sale of a home or commercial space. However, a seller may find that the lease terms are unfavorable, and the rental and insurance costs are high.
Seller Advantages of Leasebacks:
- Simple moving process: The moving process can be time-consuming, and a leaseback provides sellers the ability to stay in their home or commercial building after ownership transfers to the buyer.
- Ability to take advantage of a strong market: If a property owner intends to stay in their home or commercial space but wants to sell the space during a strong real estate market, a leaseback can provide a solution.
Seller Disadvantages of Leasebacks:
- Unfavorable lease terms: If a seller is the party who needs a leaseback, they may have to agree to unfavorable lease terms to make the deal work.
- High cost: It may be expensive for a seller to remain in their property after closing. Possible expenses include rent, utilities, insurance, and other carrying costs incurred by the seller-tenant each month.
“More often than not, the buyer is doing the seller a huge favor by permitting a leaseback. Therefore, it has become commonplace for the original seller to cover the cost of utilities and insurance. However, it is by no means required for the seller to cover these costs. The resulting terms are entirely dependent on arrangements set forth by the parties involved in the impending transaction.”
—Than Merrill, Founder, FortuneBuilders
Buyer Advantages & Disadvantages of Leasebacks
Likewise, leasebacks present advantages and disadvantages to the buyer. For example, a buyer-landlord cannot immediately occupy their new property and must deal with the risk of damage associated with having a tenant. However, a leaseback will generate cash for the buyer and may be a less complex process than leasing the property to a third-party using a full lease document.
Buyer Advantages of Leasebacks:
- Cash generation: Leasing a home back to the seller is an easy way to generate cash that can be redirected to a monthly mortgage payment. Alternatively, if the leaseback agreement is finalized before the closing, leaseback proceeds can be subtracted from the overall purchase price.
- Faster returns on investment properties: If a homebuyer intends to use the property as an investment property rather than an owner-occupied property, a leaseback may provide a higher, more predictable rate of return than a traditional rental because they already have a relationship with the seller and don’t have to search for a tenant.
- Lease customization: A leaseback agreement may be more flexible than a traditional lease agreement because it can be for a short or long period of time that fits the needs of the buyer and seller.
- Easy execution: Unlike traditional lease agreements, a sale-leaseback may only require completion of a SIP form. This means that the buyer and seller can list relevant lease terms by filling out a state-specific form instead of preparing a lengthy and more comprehensive lease agreement.
Buyer Disadvantages of Leasebacks:
- Potential for damage by seller-tenant: A property is not owner-occupied during a leaseback, which means the seller-tenant may damage the home or commercial property during the leaseback period. However, this risk can be mitigated by requiring a security deposit and assigning maintenance responsibilities to the tenant.
- Inability to immediately occupy property: If a leaseback agreement is in place, the buyer-landlord can’t occupy the property until the sale-leaseback is over. This may not be a problem in the case of an investment property.
- Potential legal or financial hassles: Leasing a property to the seller can become a hassle if the seller-tenant fails to pay rent on time or at all. In this situation, the buyer may have to repossess the property or evict the seller.
Frequently Asked Questions (FAQs)
Why would a seller do a leaseback?
The seller of a home or commercial building may wish to participate in a sale-leaseback because they need more time to move than is permitted under a standard purchase agreement. What’s more, a seller may want to take advantage of a strong real estate market but needs to stay in their home or office for the long-term. While some buyers may not be open to this arrangement, others may be grateful for the rental income.
How much rent should you charge for a sale-leaseback?
When calculating the appropriate rent to charge for a sale-leaseback, consider the cost of holding the property. This includes the buyer-landlord’s daily principle, interest, taxes, and insurance (PITI). Also, determine who will be responsible for utility costs, maintenance-related expenses, and the cost of repairing any damage sustained by the property during the leaseback period.
What should be included in a leaseback agreement?
The contents of a leaseback agreement depend on the length of the leaseback, the property, and the complexities of the transaction. In general, the agreement should address terms like the length of the leaseback, the monthly rent, and who is responsible for utilities and maintenance costs. Finally, the lease agreement should include the amount of the security deposit, insurance requirements, and dispute resolution terms.
Bottom Line―What Is a Leaseback?
A leaseback exists when a buyer of property leases that property back to the seller. The lease term can range from a few days to several months, though the specific length should be documented in a formal leaseback agreement. Additional terms in the agreement commonly include the amount of rent and the rights and duties of each party.
Drawing up a more complex leaseback agreement can be a challenge—especially if you’re not well versed in real estate law. If you’re buying or selling a home and need to draft a leaseback agreement, check out Rocket Lawyer. Its team of legal professionals can help you with a lease agreement template or document review so that you include all of the important lease provisions. Click here to learn more.