Wholesaling Homes: The Pros & Cons of Leasebacks

Wholesaling Homes: The Pros & Cons of Leasebacks

Leasebacks have surged in popularity in the U.S. real estate market in the last 7 years, but while they offer many advantages, newer real estate investors often fail to adequately anticipate the risks.

For those wholesaling homes, one of the biggest challenges of recent years has been sellers who either don’t want to leave their homes or simply can’t leave fast enough, even if they want to.

The leaseback has emerged as an attractive solution for this for both sides. A leaseback agreement can enable investors to contract to buy homes fast on properties they wouldn’t otherwise be able to snag and allow them to get them cheaper before more costs, back interest, attorney’s fees and other penalties add up and add to acquisition costs, building in larger profit margins.

For homeowners, it means being able to strike a deal to sell quickly without having to move out right away. For distressed homeowners, the advantage is clear. It can help them to avoid the worst consequences of an actual foreclosure, limit the damage to their credit and even get the funds to go out and look for another place to live. Some, on the other hand, find it the only solution to be able to stay in their family homes or keep a roof over their heads.

For those wholesaling homes, there are many back end benefits to these rent back set ups too. In some cases, a few months’ rent can be included in the deal at closing. In others, these arrangements can offset any holding costs until the property is resold or can even turn in a profit while being re-marketed. In the current market, wholesalers will also often find homes like this can be sold faster as rentals with existing tenants. Plus, they can be made even more attractive to some end buyers as turnkey rentals if investors can provide property management or outsource it. This not only means speed, but can help boost value for flipping at a premium price. Lastly, it also means that properties are not left sitting as empty targets to be vandalized or occupied by squatters.

Leasebacks are not without their cons and pitfalls though. Savvy and experienced real estate investors know that all too frequently these sellers don’t want to ever leave and may have no intention of doing so, despite being in distressed situations and needing to move.

Think about it. If the banks, with their mighty legal departments and even free passes to slip through fraudulent foreclosures, couldn’t get them out and if the seller couldn’t make their mortgage payments before, or didn’t bother to, how are you or another buyer going to expect payment or get them to leave?

Even if you pass the problem on, it won’t be a deal to create repeat buyers. If your clients have these issues, even if they are not directly your fault, it is going to leave a bad taste and result in bad feeling towards your brand.

So approach leasebacks with care and have bullet proof legal agreements in place.

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