Experts say there are safer alternatives that are just as good
Sale-leaseback agreements are emerging as a way to give homeowners who've amassed a mountain of equity totap into that by offering a tempting proposition: get a large sum of cash while staying in your home.While this might sound like an ideal solution --especially for seniors or those facing financial difficulties --it's crucial to understand how these agreements work and weigh the potential risks before making a decision.
Sale-leasebacks involve selling your home to a company and then leasing it back from them, essentially becoming a renter in your own house. This arrangement can provide much-needed financial relief, but it's important to be aware of the potential drawbacks. The Federal Trade Commission (FTC) recently issued a consumer alert warning that homeowners may not fully understand the complexities of these agreements.
[They] sound like a simple and risk-free way to get cash upfront and stay in your home. But the truth is these agreements are far from risk-free, Nick May, FTC Assistant Director, said.
Matt Schwartz at VA Loan Network, told ConsumerAffairs The main issue with sale-leaseback agreements is that homeowners often dont realize theyre no longer in control of their property. They transition from homeowners to renters, which means theyre subject to additional fees that may not have been fully disclosed upfront.
NPR investigates the situation
Two recent NPR investigations shed light on the potential downsides of sale-leasebacks, particularly for those who may be facing financial difficulties. One investigation revealed that some homeowners experienced unexpected fees, rising rents, and ultimately a loss of equity. The other called into question whether or not these deals were actually loans. Both focused on leaseback provider EasyKnock.
EasyKnock maintains that their agreements are transparent, have helped many people, and have successfully defended their position in arbitration. "We're empowering people. We're giving them control. We're giving them choices. We're giving them time, EasyKnock co-founder and CEO Jarred Kessler, told NPR. And the home values historically have rarely gone down, so they should be able to get appreciation.
Lets look at those 'fees'
The fees in a sale-leaseback are more than just a buck or two. The FTCs May called them hefty and the rent exorbitant. For example, processing fees can run up to 6%. If you fall behind on your rent, you could wake up with a $100 late fee tacked on, too. And if someone is evicted as May says happens often theres even more legal fees.
All told, the fees can run well into the thousands. In one transaction NPR examined, the homeowner got a check for $27,688 upfront, but by the end of the deal, he also owed $29,492.
Where things get rough
It's important to recognize that leaseback customers have varied experiences. Some ConsumerAffairs reviewsmentioned experiences that were "anything but seamless," while others said the company they used was "honest from the get-go."
In a letter to EasyKnock, Michigan Attorney General Dana Nessel highlighted a common misunderstanding among homeowners entering these agreements wasincorrectly believingthey'dreceive the full market value of their home, minus any outstanding mortgage and liens.
However, they often find out later that the actual payout is significantly less. This discrepancy, Nessel argues, stems from a lack of transparency about fees, costs, rent, and repurchase price. These factors can significantly erode the homeowner's equity over time.
At this point, homeowners are faced with a difficult choice: accept the unfavorable terms or fight back.Unfortunately, challenging these agreements isn't easy. As real estate investor Erwin Miciano pointed out, "These deals often come with terms that can quickly turn sour often terms they cant renegotiate."
Mixed experiences call for careful consideration
Its important to note that leaseback customers dont all have the same experience. There are complaints about unexpected fees and deceptive communication, while some customers had positive experiences, praising the professionalism and saying they found the process to be quick and easy.
What do these reviews mean for you? Take your time, scrutinize, and consult an attorney.
Both May and Miciano say that at the very least, you should involve a trusted family member or friend to review the documents. If they find a red flag that would cost you tens of thousands, its worth asking.
May adds that if your agreement is different from what the buyer promised or is too complicated to understand, you should stop right there and not move an inch forward.
These contracts can be complex, and homeowners need to fully understand what theyre agreeing to before signing on the dotted line, Miciano emphasized.
Other ways to get the same benefit
While lease-backs might seem like an easy fix, experts recommend exploring these alternatives:
- Cash-out refinance: If youre a homeowner needing cash and have at least 20% equity in your property, a better option may be doing a cash-out refinance. Or, depending on the interest rates and associated expenses, a home equity loan could cost less over the long run, Laura Adams, MBA, personal finance author and real estate expert with iBuyer.com, told ConsumerAffairs.
- Home equity loan/HELOC: Borrow a lump sum (loan) or access funds as needed (HELOC) against your equity. Generally lower interest rates than personal loans. HELOCs offer flexibility but have variable interest rates. Heres more information on how one works.
- Reverse mortgage: For homeowners 62 or older, convert equity to cash with no monthly payments. Loan must be repaid upon sale, move, or death. However, reverse mortgages are not without pitfalls of their own, such as the loan must be repaid when the homeowner sells, moves, or passes away.
- Downsizing: A win-win as this frees up cash and reduces ongoing housing costs. If you cant afford to make costly home repairs required for a buyer to get financing, another option is selling it as-is for cash, Adams suggests.
Ultimately, the best choice depends on your individual circumstances and financial goals, so it's crucial to consult with a financial advisor to explore your options.
Photo Credit: Consumer Affairs News Department Images
Posted: 2024-10-11 14:00:33
