It’s not a new concept, but it has recently been reinvented. The sale-leaseback agreement used to be limited to commercial property or was done informally between friends and family.
Now the idea is being applied to residential real estate. That could mean a new way for mortgage companies to make money.
A residential sale-leaseback is an agreement in
which a homeowner sells their home to an investor
or leaseback company. The lease agreement, similar
to a standard rental-property agreement, allows
the homeowner to remain in the home as a tenant,
paying monthly rent. Homeowners are then able to
access their equity without the hassle of moving.
Mortgage originators should explore this concept,
because it allows them a chance to offer help for clients in need of a financial overhaul. When those clients
straighten out their finances, that’s a new customer
base. Residential sale-leaseback companies also typically offer referral fees.
Preventing foreclosures is an expensive endeavor for
lending companies. Lenders often work with borrowers
to find alternatives. Lenders may offer a client improved
terms or other options for continuing to pay back their
mortgage, despite late payments, which will often
increase the financial burden placed on lending
Despite costly efforts at remediation, financial
problems oftentimes persist. Ultimately, a foreclosure
The average foreclosure cost $50,000, according to
a 2007 report from the U.S. Congress’ Joint Economic
Committee. While more recent stats are not as concrete, inflation and rising prices within the current
housing market mean a steady increase in costs over
the past decade.
The lender is likely to lose money while the home
is being prepared to be sold and will need to pay for
maintenance costs and legal and administrative fees.
Additionally, foreclosures are often sold under market
value, further hurting a lending company’s bottom line.
Consider this: A homeowner comes to a mortgage
company to try to get a new mortgage with more
favorable terms or even a cash-out refinance. Due
to poor credit, a history of delinquencies or lack of a
stable income stream, the company is forced to turn
down the client who is too great a risk.
Mortgage companies do not profit off of client
turndowns. In fact, denied applications are costly, as
the company has already invested some time into the
client, in addition to allocating resources to vetting
Lenders who are working with the turned-down
clients might consider referring them to residential
sale-leaseback programs. Sale-leaseback programs can
help lenders avoid foreclosure costs while providing
remediation costs in the event of a likely foreclosure.
What’s more, the sale-leaseback solution could help
the borrower and lender early on. If the lender refers
the borrower to the sale-leaseback program after one
or two missed mortgage payments, more time and
money would be saved on both sides.
On the client side, sale-leasebacks help borrowers
remedy insurmountable mortgage debts without leaving their homes, a sticking point for many borrowers.
This option allows lenders to preserve their funds while
helping their customers, rather than hurting them.
Though a practice that will often occur toward the
end of a long lending process, lenders also can ben-
efit from referring their turndowns to sale-leaseback
options. Currently, strict lending requirements prevent
individuals with bad credit or nonrecorded income
from qualifying for traditional financing
Accessing home equity through a residential
sale-leaseback allows the client to gain some financial
stability. In addition to having access to their equity to
pay off other outstanding debts, clients also can boost
their credit scores by paying off or paying down loan
balances and paying rent on time to a reporting land-
lord. Consequently, these sale-leaseback programs
can help clients sort out financial difficulties.
Residential sale-leasebacks give lending companies
two ways to capitalize in the form of new mortgages.
When a customer who was in danger of defaulting on
their mortgage chooses a residential sale-leaseback
program, lenders save money. When a customer who
has been turned down for a loan and turns to residential sale-leaseback to help get their finances on track,
they may also eventually qualify for a mortgage. With
their finances in order, these clients will become ideal
candidates for new mortgage loans.
Some residential sale-leaseback companies offer
customers the option to repurchase their home, which
means that, once on firmer financial footing, the former homeowners are now potential new mortgage
customers. Residential sale-leaseback companies who
offer a repurchase option can then funnel leads back
to mortgage companies.
The sharing of leads between residential sale-leaseback
companies and mortgage companies has the potential
to create a cyclical revenue stream for both sides. Mortgage companies refer customers in trouble to residential sale-leaseback companies and the sale-leaseback
companies refer customers who wish to repurchase
their homes to the mortgage companies.
Typical of many industries, oftentimes, with these referrals come referral fees. So, mortgage originators stand
to profit directly and immediately from the clients and
turndowns that enter into sale-leaseback agreements, in
addition to the long-term financial benefits.
When factoring in the cost of delinquent accounts,
in addition to the cost of foreclosures, lenders stand
to benefit even more than sale-leaseback companies.
Not only is there a potential for new and increased
revenue streams from buyback leads, there also is the
opportunity to save money on costly remediation and
Jarred Kessler is the founder and CEO of EasyKnock,
a property-technology company looking to revolutionize the
housing industry by offering unique equity-release programs.
He previously worked at Cantor Fitzgerald & Co. as the global
head of equities. With experience at Credit Suisse, Morgan
Stanley and Goldman Sachs, Kessler has a wealth of knowledge
about the financial sector, the housing market, and economic
trends. Reach him at email@example.com.
New Spin on an Old Concept
Offers Originators Opportunity
Sale-leasebacks used to be mainly for commercial properties,
but they’re now being tried in residential deals
By Jarred Kessler
An agreement that involves one party selling an
asset, such as a home or other property, and then
immediately leasing that asset back from the purchaser.
The details of the rental agreement, including lease
payment and lease duration, are typically structured
immediately after the asset sale is completed.