4 Disadvantages of a Property Leaseback to Consider

A property leaseback allows a seller to relinquish ownership of a property to a buyer then lease the space back in order to continue using it. This process was most common with commercial real estate properties for many years in the United States. In France and the United Kingdom, individual home owners used this model to obtain vacation property. Today, some persons facing foreclosure may be tempted to pursue the option. They can sell their home and home loan to an investor, and then they pay the new investor a lease sum each month to continue living in the home. This is a highly risky option with many potential disadvantages.

#1 Lost Equity

When you sell your property to an investor, you are selling all the equity you have built up in the property. Most people facing foreclosure will find they do not have much current equity at this time. However, if they were to stay in the home and pay off their mortgage, they would begin to rebuild some equity. Unfortunately, the sale of the property will stop that option immediately. The owners become leasers, and all equity in the property is lost.

#2 Limitations on New Equity

Once the individual becomes a leaser, he or she will continue to make payments toward the property. With mortgage payments, these go toward actual equity in the home. With lease payments, though, these sums are directed straight to the new landlord with nothing given in return. Most people who pursue this option use proceeds from the sale of the property to make some payments in the short term or in the long term. The money that was once equity is now cash, and it is spent as cash, never to be returned to equity again in the future.

#3 Lost Control of Property

Leasing a property is not the same as owning the property on many levels. Once a borrower is in a leaseback situation, that party cannot alter the property in any way without first gaining approval from the new owner. This is particularly challenging for families who have owned a home for many years and enjoyed the ability to make it "their own." They will all of a sudden find the landlord could change rules regarding painting walls, changing light fixtures or even planting flowers.

#4 Uncertain Future Costs

Just because the new owner offers to lease back the property at a reasonable rate for 12 or 18 months does not mean the new owner will keep that contract stable in the future. In European countries, the leaseback contracts can extend up to 10 years in order to protect leasers from rising lease costs in the near future. In the United States, this time period is much smaller on average. A leaser may find he or she all of a sudden owes a few hundred dollars a month more just to remain in the same property through an additional year. Even small incremental changes each year can add up until a family can no longer remain in the property at all.

blog comments powered by Disqus