How Do Real Estate Leasebacks Work?

real estate leasebacks

Real estate leasebacks can be a great arrangement for both buyers and sellers.  They also work well with both residential and commercial real estate transactions.

What Are Real Estate Leasebacks?

There are three main elements to a real estate leaseback that work with any real estate  niche:

  1. Seller finds a buyer who wants an income property
  2. Buyer buys the property, and the seller remains as a tenant
  3. Buyer gets consistent rental income, seller frees up equity for other uses

How To Structure Real Estate Leasebacks

Real estate leasebacks aren’t seller financing and they aren’t like a lease purchase.  That’s because the real estate has already changed hands.

The buyer needs to do its due diligence on the seller, who is going to become the tenant.  Just because the seller owns real estate doesn’t mean they will have the money to pay the rent after the sale closes.

That’s what’s known in the real estate business as being property rich and cash poor.

Before closing escrow both the buyer/landlord and seller/tenant should have a written lease agreement in place, credit reports and background checks done, with monies from the sale forwarded to the buyer to cover any deposits and upfront rents.

Potential Problems With Real Estate Leasebacks

Real estate leasebacks can be a win-win situation for both the buyer and the seller.  At least for the time when the seller is leasing back.

But what happens when the lease is up and the seller vacates?  Buyers can suddenly find themselves holding a property that is difficult to rent to a new tenant.

Problems can occur with real estate leasebacks when the property is unique or has special deed restrictions placed on the property by the seller.

For example, convenience store operators often do sale-leasebacks as part of their normal business strategy.

But they will also put restrictions on the deed to prohibit the property being used as another convenience store for several years after the lease expires.  The result is that the buyer will be unable to lease to another convenience store and may have difficulty finding another good tenant.