Many people assume that to tap your home equity, you have to go to a lender or realtor. Home equity loans and lines of credit are probably the most popular ways of turning equity into cash, but they’re not the only ways. A home sale-leaseback, also known as a rent-back agreement, gives you a different type of option.
Originally developed for commercial real estate, a sale-leaseback lets you sell your house and receive the equity in cash, along with an option to repurchase your home or move when you’re ready.
Uses of a Home Sale-Leaseback
A home sale-leaseback can give you the money you need to achieve your short-term and long-term goals. People use the money they receive from the sale-leaseback of a house to:
- Fund a new business. If you have a solid business plan and your new company takes off, you can recoup the investment and then some.
- Fund their children’s college education, cover emergency expenses or consolidate debt.
- Get the down payment on a new home or investment property.
With a home sale-leaseback, you receive your equity in cash, so you can do anything with it you want — there’s no need to worry about paying it back.
Problem-Solving With a Sale-Leaseback
People who seek out a home sale-leaseback have often tried other, more conventional ways of accessing their equity. One of those conventional pathways is a home equity loan or home equity line of credit (HELOC), but it’s not always easy to qualify.
First, to approve you for a home equity loan or HELOC, lenders will usually require you to have a debt-to-income ratio of 43% or lower. That means all your monthly debt payments — your existing mortgage, car loan, student loans, and so forth — have to add up to no more than 43% of your monthly income before taxes. That can be hard to do, especially if you have a sizable mortgage payment.
Second, you’ll need to have a good credit score, ideally 700 or above. You may be able to find a lender with a score requirement as low as 620, but anything in the 600s probably means you’ll pay higher interest rates. The higher your interest rates, the more you’ll end up paying back over the life of the loan.
A sale-leaseback isn’t a loan, so you usually won’t have to qualify with your income and credit history. What matters is your equity and the value of your home.
With a sale-leaseback, you sell your house and convert your equity to cash — you don’t borrow against it. There’s no repayment period and thus no risk of losing your home if you default. You continue to live in the house and continue paying your rent as agreed.
The result is that instead of stressing about finding a lender and then paying back the equity you borrowed, you convert your equity free and clear to cash. You can use that cash for any purpose, no strings attached, and then repurchase or sell your home on the open market when you’re ready.
How Do You Do a Home Sale-Leaseback?
The key to a smooth home sale-leaseback is to find a company that makes the process easy. EasyKnock’s Sell & Stay is designed to suit private homeowners, not investors or industry insiders, so it’s intuitive and easy to understand.
- Step 1: Submit information about your home and mortgage situation.
- Step 2: Talk with a specialist about your goals and the kind of sale-leaseback program that would work for you.
- Step 3: Receive an estimate of your cash payout, monthly rent, and EasyKnock Option (the guarantee of your right to repurchase the house or collect its remaining value).
- Step 4: Review and sign the purchase agreement.
- Step 5: EasyKnock and a third party conduct an appraisal, an inspection of the property, and a background check.
- Step 6: After EasyKnock completes the due diligence process, sign the sale-leaseback agreement and closing documents.
- Step 7: Receive your equity payment and begin paying rent.
- Step 8: When you’re ready, exercise your option to re-purchase your home or EasyKnock will sell it on the open market.
EasyKnock is with you through every step of this process, including the ultimate sale of your property if you choose to move.
FAQs: What Do I Need to Know Before I Sell and Leaseback My House?
How Much Will My Monthly Housing Expenses Change When I Switch From Paying a Mortgage to Renting?
As a renter, you won’t have to pay property taxes or homeowners’ insurance, so you can subtract those expenses from your monthly obligation. All you’ll be paying is fair market rent, according to the terms of your agreement. That amount may or may not be less than your current monthly mortgage payment. The difference depends on your mortgage and what the market rent is when you sign. EasyKnock also recommends that tenants switch to renter’s insurance.
Will I Be Able to Make Any Improvements or Renovations to My Home Under a Sale-Leaseback Agreement?
As a tenant, you can only make changes to your property if the sale-leaseback company allows it. There will be a review period before you sign the agreement. If you have any particular concerns about improvements, you can bring them up at that time.
How Long Can I Stay Renting and What Are the Buyback Terms?
When you apply with EasyKnock, you will get a customized agreement detailing the terms that let you repurchase your home. You can continue leasing for as long as necessary, provided you keep paying rent according to your agreement.
What Are the Tax Considerations I Should Know About?
The biggest tax consideration of a home sale-leaseback is usually whether or not your rent as a tenant is tax-deductible. It usually is, though some repurchase agreements invalidate this option. There may be additional considerations if you use the property for business purposes. Check with an accountant or attorney if you have any specific questions about your situation.
Is Sale-Leaseback Your Next Smart Financial Move?
If you need access to your home equity but don’t want to borrow or move, consider a sale-leaseback program. You can cash out the equity you’ve built up without having to qualify for a loan and without the risk of losing your home due to default.
It’s easier than you might think. Read more about how it works, including how you can get a free estimate from EasyKnock.
If you’re looking to get access to your home equity, a loan is the typical path homeowners take. However, if you don’t qualify or are looking for an alternative to a loan, talk to a financial consultant about EasyKnock’s sale-leaseback programs to see if they may be a good fit for your needs.