Sale Lease Back

Sale-Leaseback Plans

Even when older homeowners have difficulty paying for their housing costs, they are very reluctant to move. The sale-leaseback plan allows them to stay put but get money from the equity in their homes (Golant, 1992). A sale-leaseback plan works this way: A family member or friend, but conceivable an investor or a nonprofit organization, buys the home from the older persons. Although the older homeowner becomes a renter, the new owner guarantees the seniors the right of lifetime tenancy. The new owner in turn views the purchased home as an investment property that will yield a favorable return, especially in a rapidly appreciating housing market, Thus, the new owner treats property taxes and maintenance costs as tax-deductible cost items.

If the older seller chooses to hold a mortgage note on the house, he or she will receive part of the dwelling's equity in the form of an initial cash down payment from the new owner and the remainder as monthly payments (principal plus interest). Alternatively, if the buyer financed the house purchased through a commercial lender, the older person will immediately receive all of the home's equity from the new owner. In either instance, the older person can invest the up-front cash or purchase an annuity from an insurance company.

Cautions About Sale-Leaseback Plans

Sale-leaseback plans are laden with potential financial legal pitfalls for the unwary. Their appropriateness depends on whether they monthly mortgage payment (principal plus interest) adequately covers the older resident's costs of living, especially the monthly rent. If rent increases are excessive, there is the danger that the older resident will be paying out more for rent than is received in mortgage payments or the interest returend on the investment.

Seniors assume all the usual risks of renters, though more is at stake given their relucance to move. They must be assured of lifetime tenancy, that their rent increases will not be excessive, that their dwellings will be appropriately maintained, that the new owner will tolerate their taking in of a care giver or boarder, and that they will retain their right of residency during a short-term absence, such as during a hospital or nursing home stay.

If seniors hold a mortgage note, they must also scrutinize the financial implications of their receiving a new source of monthly income. New income may change their eligibility for Supplemental Security Income, Medicaid, or food stamps.

This method of releasing a home's equity is not especially popular with either private investors or financial institutions that consider the life-tenure lease provisions too restrictive because they cannot easily increase rents or sell the property. On the other hand, a sale-leaseback approach might be advantageous to family members who want a strategy by which they can increase the monthly cash income of their older mother or father. The Internal Revenue Service, however, must view the home sale as a legitimate, for-profit commercial venture. Thus, it mus tnot apear that the rent charged is too low or that the buyer is not assuming investment risks or costs such as taxes, insurance, and repairs.

The information above is reprinted from Working with Seniors: Health, Financial and Social Issues with permission from Society of Certified Senior Advisors® . Copyright © 2009. All rights reserved.