Home Equity Management: Sale And Leaseback Are They As Good For Canadian Seniors As They Claim To Be?
Recently, Garry Marr of the Financial Post, wrote an article titled “How to exit the housing market without exiting your house”. The article introduced us to a concept that has been around in Canada since 2013, (and in other parts of the world, even longer) but due to the increasing number of seniors who, in today’s market, can easily classify themselves as house rich and cash poor, this concept of Sale and Leaseback as a means to manage home equity is making its way back into mainstream media.
What is Sale and Leaseback?
Sale and Leaseback is an alternative for people to get out of the housing market, capitalize on their home equity, pocket the wealth and lease back their own property. This concept is most attractive to the senior demographic, as many of them are retired, low on cash flow and have the emotional or physical need to stay in their own homes. The concept of Sale and Leaseback has been more prevalent on the commercial property front, where even some financial institutions have sold off their property holdings in the past with the intention of staying for the length of a signed lease.
Benefits of a Sale and Leaseback
A homeowner can effectively cash in on their home equity – sell their home, lease it back and stay in their home while paying rent and in theory can live worry free with more cash flow.
Underneath the Surface of a Sale and Leaseback
With a sale and leaseback, the homeowner sells their home to an investor, who rents their home back to them. The homeowners eliminate the risk by choosing not to partake in the real estate market’s fluctuations but also forgo the potential that their home realizes a sudden real estate market surge in price. Due to Canadian rental protection, for the most part, the homeowners can be secure renting their own home, but the landlord does control the cost of rent, which can vary over time. In addition to that, the cost of utilities and household maintenance will need to be determined between the tenant and the landlord and repairs are done as per the landlord’s schedule.
Sale and Leaseback Advantages and Disadvantages
- Sell your home for more cash flow
- Continue living in your home
- Household maintenance to be negotiated with landlord
- Canadian rental protection can ensure that you remain in your home
- Lose title and ownership of home
- Pay rent to continue living in your home
- Rent amount can vary and fluctuate over time
- Certain circumstances such as landlord or the landlords’ family needing to occupy the home can act as a reason for you to vacate your home
- Repairs and maintenance need to be arranged by the landlord on his/her schedule.
- Lose out on market appreciation of home.
An Alternative Solution: A Reverse Mortgage
A reverse mortgage allows the homeowners (55+) to remain in their home for as long as they want to, while getting a qualified amount of tax-free cash from the home. The homeowner is able to withdraw from their home equity and maintain ownership, which in today’s market, can be a great advantage since they may get real estate appreciation. However, if the real estate market collapses, the homeowners will never owe more than the fair market value of the home. Basically the best of both worlds! The best part of a reverse mortgage is that the homeowners will not need to make any monthly mortgage payments for as long as they live in their home. All in all, a reverse mortgage has many of the advantages of a Sale and Leaseback, minus having to live as a tenant in your own home and still maintain control.