Could Residential Sale Leaseback Compete with Reverse Mortgages?

As the reverse mortgage industry prepares for lower lending limits, one company believes it has a novel alternative to the federally backed Home Equity Conversion Mortgage — adapted from the world of commercial real estate.

EasyKnock, an online real estate brokerage, offers residential sale-leasebacks, patterned after transactions that are common for facilities such as office buildings and senior housing properties. For a homeowner, this would mean selling the property but remaining in the home, paying the new owner rent instead of a mortgage and releasing of the equity at once.

Jarred Kessler, EasyKnock’s CEO, touted the strategy in a column for Forbes this week, writing that the monthly rent would work out to about the same as ongoing reverse mortgage costs: Rents average 5% of the home’s cost, EasyKnock notes on its website, with typical rent increases of 2% per year. 

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“Residential sale leaseback terms aren’t restricted by age, and they’re not subject to the same government regulation that is making reverse mortgage terms less favorable,” Kessler wrote. “It allows homeowners to liquidate the full value of their home without changing their lifestyle. There’s more room for negotiation in sale leaseback deals, too, meaning homeowners can work toward a deal that really works for them.”

EasyKnock charges a 4% commission for its “Sell and Stay” transactions, and lists a host of potential reasons why a homeowner might pursue that option — including cashing in on a hot market while still staying in the neighborhood, or extending a move timeline by allowing a family to stay put while searching for a new property in a different area.

In his Forbes piece, Kessler also positions the products as a direct competitor to the HECM product, pointing out that sale-leasebacks provide more cash to homeowners upfront. Still, he notes that reverse mortgages work for older Americans who need some cash — but not the whole value of their home — to provide for themselves in retirement while also retaining ownership of their homes and allowing them to pass down property to heirs.

But Kessler also alluded to the strains on the current HECM program that prompted the Federal Housing Administration to tighten lending limits and increase mortgage insurance premiums for certain borrowers.

“As the reverse mortgage program gets deeper in the hole, however, sale leaseback should definitely be a consideration for potential reverse mortgage purchasers,” Kessler concluded.

Private precedent

Private sale-leaseback transactions in the residential space aren’t necessarily unprecedented: As reverse mortgage pioneer Bing Chen pointed out in a recent Q&A with RMD, equity-release schemes between two parties have existed for many years — most prominently in France, where homeowners can sell their homes to individual buyers but remain in them until they die.

This arrangement, called a “viager,” differs from sale-leaseback in that the buyer pays the occupant until he or she dies, which can present its own risk: At age 90, Jeanne Calment entered into a viager arrangement with lawyer Andre-Francois Raffray. Calment went on to become the world’s longest-lived person, eventually dying at age 122 — and outliving Raffray, who died at 77 after having paid more than double the value of Calment’s apartment.

“In life, one sometimes makes bad deals,” Calment quipped about the arrangement, according to the New York Times.

Chen expressed general misgivings about conducting equity release transactions in bilateral “personal markets,” which led him to explore the concept of “impersonal markets,” or the combination of multiple public and private entities that underpins the current HECM program.

“I was never interested in what I called ‘personal markets’ for converting home equity,” Chen told RMD. “There were calls from attorneys and Realtors in the late ’60s and early ’70s asking me to be their consultant for this type of thing. I politely declined.”

Written by Alex Spanko

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  • Can it compete with HECMs? Certainly as can proprietary reverse mortgages but in most cases, competition will not be comparable and the HECM will in the long run win out.

    Is it advisable? In some cases, absolutely. BUT in most cases, it would not be advisable unless economic conditions changed radically.

  • Just as the HECM is one solution, this is another possible solution. Both have their good and bad points. For example, in a leaseback situation, unless the rent is guaranteed for life in the contract, then it will go up. This could cause the senior a significant hardship. Is the new owner ready to be a landlord, with all that that implies? In some states being a landlord is fairly easy, in others it can be a real problem.

    In the end, I would hope that anyone entering into one of these transactions would seek counseling (not necessarily HECM counseling, but either with an elder law attorney or a housing counselor). The pitfalls are very high.

    Frank J. Kautz, II
    Staff Attorney

    Community Service Network, Inc.
    52 Broadway
    Stoneham, MA 02180
    (781) 438-1977
    (781) 438-6037 fax
    FrankKautz@csninc.org

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