September 13, 2016

Baby Boomers: Should You Sell and Lease Back Your Home?

There are 9.6 million baby boomers living in Canada, and they could be sitting on a real estate gold mine.

Homes that they purchased decades ago may now be worth hundreds of thousands – if not millions – of dollars. But that doesn’t mean they’re in a rush to move out of the family home, and now they don’t have to. One emerging trend is seniors selling their homes to investors and then living in them under a lease agreement with the new owner. However, there are many pros and cons to consider.

What are Sell and Lease Back Agreements?

These agreements are known as sell and lease back agreements and are standard in commercial real estate. In commercial real estate, a company may sell a property but remain on as tenants with a very long lease. In residential real estate, this type of arrangement is still relatively new, but has risen in popularity in recent years. In fact, several real estate brokerages are now specializing in this unique type of transaction.

A sell and lease back agreement can be an attractive option for you for several reasons, but the biggest benefit is the opportunity to unlock the equity you’ve spent years building up in your home through paying down your mortgage and property appreciation. By selling your home and remaining on as a tenant, you can access that equity without having to leave your home. This capital could be used for travel, as a pre-inheritance for family members, or to augment cash flow.

The Investor Appeal

For investors, a sell and lease back agreement is an attractive proposal because the lease terms are usually between five and 10 years, which means they will have a built-in, affluent tenant for their Toronto real estate for an extended period of time. You can even negotiable a “life lease” allowing you to stay in your home until you choose to leave.

If you are considering a sell and lease back agreement, keep in mind that you will have to market your home a little differently to target investors. Staging will be less important, and the price will be paramount. You will need to price the home as an investment that is going to yield positive cash flow for your potential buyer.

Get Expert Advice

This is where you should get the opinion of a licensed real estate agent, says Barry Gordon, a certified Senior Real Estate Specialist, “even if approached by an investor, they should get some professional advice around pricing and value either through a professional appraisal or a real estate broker.” 

Understand How Your Home Will Change

You should also be prepared to spend time creating a detailed lease document that covers all possible scenarios. “Lease terms are key,” says Gordon, “understanding what you’re giving up. If a seller is anxious to pull out the equity but wants to get into a retirement community with a long wait time, they need the ability to leave whenever they choose and no sooner.”

As there are many variables in a long term lease, protect yourself by having a real estate lawyer look over the agreement before you sign.

A New Renter Reality

You should also make sure you know your rights when it comes rental rate increases. According to the Ontario Residential Tenancy’s act, the landlord cannot raise your rent more than 2.5% per year. You should make sure that you can afford possible rent increases, especially if you are living on a fixed income.

While sell and lease back agreements are more complicated than a conventional sale, they are well worth considering for any homeowner looking to unlock the equity they’ve spent years building in their home, without having to downsize or move into an apartment. As more baby boomers begin to retire and consider their options for long term living, we expect sell and lease back agreements to become even more commonplace.

Would you consider selling and leasing back your home? Let us know in the comments!