Leaseback Agreements
The date when a seller sells his or her property often does not perfectly align with when he or she is able to vacate the property. In this situation, a leaseback agreement is a perfect solution – the seller sells the property but remains in possession. As a result, understanding leaseback agreements can be extremely important for buyers interested in properties with sellers who are unable to vacate a property simultaneously with the close of escrow.
What Is A Leaseback Agreement?
A leaseback agreement is an arrangement whereby th
e owner of a property sells it to a buyer, but remains in possession for a specified period of time while paying rent to the buyer, effectively making the seller a tenant and making the buyer the landlord. In the residential context, leaseback agreements are typically short-term arrangements that are designed to provide the seller with some additional time to move out of the property without delaying the close of escrow. In the commercial context, a leaseback agreement can be a long-term arrangement that is used by the seller to raise capital by liquidating an asset (i.e. the property) without giving up the ability to use that asset. Leaseback agreements are also used in the aviation industry and with industrial equipment, as further explained here.
How A Leaseback Agreement Can Benefit Both Buyers And Sellers
Leasebacks are often important to sellers for practical reasons, and so they are also important to buyers from a negotiation standpoint. The reasons a seller will require a leaseback can vary, e.g. the seller needs additional time to identify and purchase a new property, the seller is closing concurrently on another property but needs some additional time to make repairs after the close of escrow, or the seller would simply like a week or so after the close of escrow to relocate. As a result, to the extent possible, buyers should be aware of a seller’s needs, and a buyer may be able to increase his or her chances of securing a property by being flexible on a potential leaseback arrangement.
How to Handle a Leaseback Agreement
Leaseback agreements should always be documented as early as possible. This ensures security on both sides – the seller knows he or she will be able to remain in the property after the close of escrow, and the buyer knows when he or she can move in.
The idea behind leaseback agreements in the residential real estate context is typically to accommodate the seller – not to make a profit on the buyer’s side or to remain in the property at a discount on the seller’s side. In order to ensure neither side reaps a financial benefit, buyers will typically charge sellers the cost of their daily PITI (principle, interest, taxes, and insurance), which essentially ensures that the buyer does not lose money (the seller will also be responsible for utilities because the buyer will not take over responsibility for utilities until the end of the leaseback). So long as the leaseback is documented before the close of escrow, the funds owed by the seller to the buyer in connection with the leaseback will be deducted from the buyer’s cost of purchasing the home through the escrow process.
Aside from money, another important consideration in a leaseback agreement is liability and maintenance of the property. The property should be inspected both prior to the close of escrow as well as prior to the end of the leaseback period to ensure that no damage was caused and no alterations were made to the property. Moreover, the leaseback agreement should specifically provide that the buyer/landlord is not responsible for damage to the seller/tenant’s property during the term of the leaseback.
Our representatives at Esquire Real Estate Brokerage, Inc. are experienced in dealing with leaseback agreements in connection with the sale/purchase of property. If you would like to further discuss how Esquire Real Estate Brokerage, Inc. can help you in the Los Angeles real estate market, feel free to give us a call at 213-973-9439 or send us an email at info@esquirereb.com.
