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It is safe to say that the key defining attribute of the 2022 spring real estate market is low inventory. According to the National Association of Realtors (NAR), inventory levels are at 1.7 months for March 2022 — down even lower from the month prior. And while low inventory is the key factor to creating the strong seller’s market that our current sellers love, it can be a double-edged sword for sellers too: Where do they move after cashing in?
A seller leaseback is a handy tool that provides sellers with time to shop around and the funds to buy their next property without using a home sale contingency — which in our current state of low inventory would most likely never be accepted.
How does a seller leaseback work?
A seller leaseback means that after closing, the seller of the property remains in the property for a designated period of time. During that time, the seller becomes the “tenant,” and the buyer becomes the “landlord.”
The time period varies greatly, anywhere from one day to six months. On my team alone, about 50 percent of our transactions thus far in 2022 have included a lease back.
Timing is important
An important term to hash out upfront is notice periods. Sometimes a seller commits to vacating the home by a specific date, but for others, flexibility is most important, so it is wise to consider a short notice period for the seller vacating since most markets are moving so quickly — approximately two weeks.
This way, sellers can act fast on an opportunity, and buyers can move into their new home following the notice period.
Conversely, the length of leasebacks is longer than usual right now, averaging around six months. This more extended period of time gives sellers time to find a home in the competitive marketplace.
The first caveat to note is that seller leasebacks will typically only work during a strong seller’s market.
For example, in Chicago, where we work, I anticipate that come fall 2022, this trend will most likely diminish because demand will decrease.
Also, if a buyer is financing their purchase, lenders typically like to see leasebacks under 60 days.
How is rent handled?
Rent is usually based on the buyer’s daily rate:
Monthly mortgage payment + insurance + taxes / All divided by 30
Why seller leasebacks are appealing
Sellers like using leasebacks because it provides the security of time and funds when looking for a new property and allows them to sell during peak market times when they can achieve a higher sales price.
Buyers are usually willing to work with a lease back because of low inventory and also a desire to lock in rates before they increase. The peace of mind of finding a home wins out.
States that use attorneys during the transaction period will create a “Post-close Possession Agreement” during attorney review that outlines all the particulars and provisions, such as who makes repairs if something breaks during the leaseback period.
For states that operate without attorneys, brokers typically use standard riders/addendums outlining the agreement.
Providing creative solutions to buyers and sellers, such as leasebacks, is a tangible way to provide value to clients and create opportunities. Sellers on the fence about selling are much more willing to try if they understand all available avenues.