Nearly 90% of people want to stay in their homes as they age, but the challenges in doing so pile up as we age. For older folks on a fixed income, needing in-home care for an illness or a disability can stretch finances to a breaking point. A sale-leaseback agreement is one they can stay in their homes, offering cash in exchange for selling their house and a lease allowing them to stay, paying monthly rent as a tenant.
For example, Rebecca is an 83-year-old widow and retired dental hygienist who owns her home in Nashville. Her home is now worth $600,000, and she has about $120,000 left on her mortgage. Rebecca has been in her home for 17 years and loves living there. She has a budget of $2,000 a month, $1,500 from Social Security and a pension and another $500 from her 401K retirement account. Her monthly housing expenses are her mortgage, about $1,000/month, $200/month in property taxes, and $80/month for insurance. The remaining $720 goes to food, utilities, gas, and other living expenses. However, she has a hard time affording repairs for her home and is worried that when a major one comes up, she may not have the cash available to make the necessary repairs. With only $720 left per month, a $500 expense could mean having to choose between gas and food.
Recently, Rebecca was diagnosed with a terminal illness that requires near full-time care. Unfortunately, she does not have any children or close family she could live with and she does not want to move into a nursing home. She wants to avoid moving at all costs, but this care will cost Rebecca about $3,500/month, which is more than her entire monthly income of $2000/month.
A sale-leaseback agreement could help. Using a sale-leaseback, Rebecca can sell her home and get about $440,000 in cash after paying off the mortgage and other closing costs. With this cash and a leaseback agreement, she could continue living in her home for $3,000/month in rent, and a 3% annual increase. Although her rent would be more than her previous housing cost of $1,200 a month in combined mortgage and property taxes, Rebecca feels somewhat relieved knowing that she will not have to pay for any future repairs or maintenance on her home. Her new landlord would be responsible for all those costs. With the lump sum she received for the sale of her house, Rebecca would be able to pay her rent and for her caretaker for the next seven years.
How do sale-leaseback agreements work?
Sale-leaseback agreements, also known as rentback agreements, home leaseback agreements, or residential sale-leaseback agreements, provide access to cash while allowing you to stay in your home, by selling it and leasing it back from the company that bought it. You get the value of your home (minus the unpaid mortgage and fees) in cash upfront and the sale-leaseback provider becomes the new owner of the home. You continue to live in the home and pay rent monthly.
The Benefits of Sale-Leaseback Agreements
There are a number of advantages to a sale-leaseback agreement, depending on your circumstances. You’re no longer responsible for the cost of repairs, ongoing maintenance, property taxes or other homeownership costs. A sale-leaseback is likely to get you the most money up front from among all the stay-in-home options, including reverse mortgages, home equity loans, and home equity agreements. Unlike a reverse mortgage, there is no age requirement. It won’t add to your debt and your mortgage is paid back in full with the proceeds from the sale.
The sale-leaseback is also a quick way of selling your home without having to hold open houses or pay for staging and go through escrow periods
If you are determined to stay in your home and do not have another source of funds like a friend or other asset, a sale-leaseback agreement may be a great option to consider.
The Downside of Sale-Leaseback Agreements
Of course, the advantages of these agreements come at a price. You do start paying monthly rent, likely more than your original mortgage payment, and the amount is not fixed, but agreements usually indicate what the rent will be for the duration of lease. Once the original lease period is up, the home can be sold. Spouses should be listed on the lease as well, to make sure they can stay for the full length of the lease, even if one spouse dies or moves into an assisted living facility.
Additionally, because the home no longer belongs to you, you can no longer make renovations to the home without the permission of the new owner, the sale-leaseback provider, and you can’t leave the house to an heir. It’s also important to understand how selling your home and receiving a lump sum payment may affect your taxes, particularly if the property has significantly appreciated in value since you bought it. It’s important to work with a tax advisor or attorney through this process to make sure the math makes sense for you.
Is a sale-leaseback right for you?
In addition to understanding how a sale-leaseback agreement works, there are some questions you’ll need the answers to before knowing if such an arrangement is the right financial move for your unique circumstances.
What you need to consider:
- Understand other financing options, like home equity loans and reverse mortgages, before making a decision.
- What your home is worth in the current local market—how much are comparable houses in the area selling for?
- How much do you still owe on your original mortgage principal - do you have significant equity in the home?
- Your credit score
- The possible implications of receiving a lump sum of cash on your taxes, Social Security, and Medicaid eligibility.
Some of the above information will also help you estimate how much you’re likely to get for your home in a sale-leaseback agreement.
If you’ve decided a sale-leaseback is the right option, there are some things you should do before selling the house, if you can:
- Make any repairs that will be covered by your home insurance.
- Get an appraisal.
- Tidy up your credit score–make sure there’s no inaccurate or outdated information.
What to look for in a leaseback agreement
Of course, it’s essential to understand the lease agreement before you commit, including making sure the names of everyone who will need to continue living in the property, such as a spouse, is on it. Here are some things to look for.
- Rent: Make sure you understand how much the monthly rent will be. Will it change, and if so, what are the limits to any increase? How will the leaseback provider calculate the rent?
- Other bills: You’re no longer responsible for property taxes, but you may be responsible for other housing costs like utilities. Make sure you know which ones, so you can budget for them.
- Home maintenance: How will regular maintenance, like landscaping or snow shoveling, be handled? What happens if an appliance needs to be replaced?
- Renovations: You won’t be able to make major renovations, like redoing the kitchen, but will the agreement allow for minor changes to the property, like interior paint, mounting frames or shelves, or altering landscaping? What if you’ll need modifications, like a wheelchair ramp or grab bars in the bathroom? Does the agreement accommodate such changes?
If you’re on a fixed income, need in-home care and want to stay in your home, determining your best financial option will always depend on the kind of care you need, how long you’re likely to need that care, your mortgage, and the importance to you of aging in place. If you or a loved one needs additional funds to stay in their home, let us help you better understand your options. A Wellahead concierge can talk you through the financial products available to you so that you can make the decision that’s best for your unique circumstances. There’s no fee for the service, and there’s no obligation. We’re here to help. Contact us today to get your free estimates.