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We get asked this question a lot – “Can I sell my house and still live in it?”
The short answer is yes. Some buyers will allow you to sell your house and still live in it as a tenant who pays the rent after closing. We’re one of them. This scenario is referred to as a leaseback in the real estate world.
However, it typically comes at a price.
Disclaimer – The information on this page is intended for general informational purposes only and not to provide legal advice.
So how does the need for a leaseback affect your ability to sell your home?
Sometimes a seller needs a short leaseback to get their proceeds from the sale in hand to move. They may be looking for a one-year leaseback to avoid having to change their living situation until a child graduates from high school. Or they may merely hate change and be looking for a multi-year or lifetime lease if they’re senior owners. The situation surrounding and the terms of the leaseback will often determine how the desire or need for one affects the sales price of the home.
The length of time you need a leaseback for
An owner-occupant is almost always going to be willing to pay more for a home than an investor. And by a fairly significant margin. An owner-occupant is someone who plans to live in a house after purchasing it. While it’s not common for an owner-occupant to purchase a house where the owner needs a leaseback, the leasebacks in these cases are typically short in nature – from a few days to a few weeks.
If you’re looking for a leaseback to get your equity in hand before you need to move, you should still be able to get full market value for your home on the open market. Providing you use the right real estate agent. We recommend using these real estate agents if you’re in the greater Houston or Katy, Texas area. They have experience in negotiating leasebacks when selling a house. They are also adept at working to find you a new place to rent with a lease in hand before the sale closes if needed.
If you’re looking for a long-term leaseback, your buyer pool (the number of people who may be interested in purchasing your home) shrinks. Investors – even landlords who plan to use the home as a rental – are typically looking to buy a home at a discount from its market value. The smaller the buyer pool, the more leverage the buyer has in price negotiations.
The longer the leaseback, the smaller the buyer pool and the higher the discount a buyer may look to obtain as a result. That discount can be 20% or more, depending on the terms of the leaseback. The condition of the house, its location, how fast you need to sell, your viability as a tenant, and their long-term plans for the home will also be a factor.
The current condition of the home
If you didn’t maintain the home well when owning it, there is no reason for the landlord to believe you will maintain it well as a tenant. Not having maintained the home well doesn’t kill your ability to get a leaseback. But the investor may factor the likelihood of receiving the house after the leaseback ends in lesser condition than it is as the time of the sale into the price they’re willing to pay for the home.
Your viability as a tenant
Another factor investors will look at when deciding whether or not to grant a long-term leaseback is your viability as a tenant. Landlords are making a significant investment when they purchase a home as a rental property.
If you are behind on your mortgage payments when selling or have a bad credit score, the landlord has reason to doubt your ability to make rental payments after the sale. However, money talks; in these cases, the landlord can typically be swayed by more substantial security deposits or prepayment of rent for part or all of the lease term. These deposits or prepayments can be deducted from your proceeds from the sale at closing.
The home’s location
If your home is in an area that appreciates well, the property taxes can be expected to rise year over year, which will increase the landlord’s expenses in owning the home. The potential for rising property taxes may make a landlord hesitant to enter into a leaseback term that lasts longer than a year. Or they may pre-package rental rate increases into the lease that raise the rental rate for each year of the lease term to account for expected property tax increases.
While selling your home and continuing to live there as a tenant afterward is a viable option, there are some important things to know before signing any agreements.
Your new rental rate will likely be higher than your mortgage payment was
Landlords have to charge a rental rate that will cover their mortgage note. They also need to have some overage to fund reserves to make any needed repairs to the property that may come up after the purchase it. If your home was worth $100,000 when you bought it, your PITI (principal, interest, taxes, and insurance) payment might have been less than $1,000 per month.
If the home is now worth $200,000 and the investor is buying it at a 20% discount with 25% down, their PITI payments will be in the neighborhood of $1,100 per month. Then they’ll likely add a couple of hundred dollars per month to the total to cover their repair reserves, making the rental payment for the house $1,300 per month. But, being a tenant means you also don’t have any financial obligations to maintain the home. So, depending on what your yearly upkeep expenses were, a higher rental rate may even itself out in the end.
While it is possible to negotiate a lower than market rate rent rate, it will often come via a more significant reduction in the sales price. To keep your monthly payments at $1000, the landlord would need to purchase the house at a 50% discount on the market value.
Always get the terms of the leaseback in writing
Always ensure you get the terms of the leaseback in writing before signing anything. Reputable investors will include the leaseback terms as a condition of the sale. It would be best if you did not take any investors at their word. Even if they have the best of intentions, things can change.
If you’re selling the house at a discount in exchange for a leaseback, you want to be sure that you have the terms of that leaseback – as agreed upon – in writing to protect yourself from a legal standpoint.
If the investor is using the standard Texas Real Estate Commission 1-4 contract, you should see a note in Section 11: Special provisions. This section should acknowledge the sale is conditional on the leaseback – which should also be attached as an addendum to the contract in writing.
Leasebacks are not uncommon when selling a home. Still, the longer the term of the leaseback, and the lower the rent in comparison to market rental rates, the higher it has the potential to cost.