It’s not a new concept, but it has recently been reinvented. The sale-leaseback agreement used to be limited to commercial property or was done informally between friends and family.
Now the idea is being applied to residential real estate. That could mean a new way for mortgage companies to make money.
A residential sale-leaseback is an agreement in which a homeowner sells their home to an investor or leaseback company. The lease agreement, similar to a standard rental-property agreement, allows the homeowner to remain in the home as a tenant, paying monthly rent. Homeowners are then able to access their equity without the hassle of moving.
Mortgage originators should explore this concept, because it allows them a chance to offer help for clients in need of a financial overhaul. When those clients straighten out their finances, that’s a new customer base. Residential sale-leaseback companies also typically offer referral fees.
Preventing foreclosures is an expensive endeavor for lending companies. Lenders often work with borrowers to find alternatives. Lenders may offer a client improved terms or other options for continuing to pay back their mortgage, despite late payments, which will often increase the financial burden placed on lending companies.
Despite costly efforts at remediation, financial problems oftentimes persist. Ultimately, a foreclosure is inevitable.
The average foreclosure cost $50,000, according to a 2007 report from the U.S. Congress’ Joint Economic Committee. While more recent stats are not as concrete, inflation and rising prices within the current housing market mean a steady increase in costs over the past decade.
The lender is likely to lose money while the home is being prepared to be sold and will need to pay for maintenance costs and legal and administrative fees. Additionally, foreclosures are often sold under market value, further hurting a lending company’s bottom line.
Consider this: A homeowner comes to a mortgage company to try to get a new mortgage with more favorable terms or even a cash-out refinance. Due to poor credit, a history of delinquencies or lack of a stable income stream, the company is forced to turn down the client who is too great a risk.
Mortgage companies do not profit off of client turndowns. In fact, denied applications are costly, as the company has already invested some time into the client, in addition to allocating resources to vetting prospective applicants.
Lenders who are working with the turned-down clients might consider referring them to residential sale-leaseback programs. Sale-leaseback programs can help lenders avoid foreclosure costs while providing remediation costs in the event of a likely foreclosure.
What’s more, the sale-leaseback solution could help the borrower and lender early on. If the lender refers the borrower to the sale-leaseback program after one or two missed mortgage payments, more time and money would be saved on both sides.
On the client side, sale-leasebacks help borrowers remedy insurmountable mortgage debts without leaving their homes, a sticking point for many borrowers. This option allows lenders to preserve their funds while helping their customers, rather than hurting them.
Though a practice that will often occur toward the end of a long lending process, lenders also can benefit from referring their turndowns to sale-leaseback options. Currently, strict lending requirements prevent individuals with bad credit or nonrecorded income from qualifying for traditional financing
Accessing home equity through a residential sale-leaseback allows the client to gain some financial stability. In addition to having access to their equity to pay off other outstanding debts, clients also can boost their credit scores by paying off or paying down loan balances and paying rent on time to a reporting landlord. Consequently, these sale-leaseback programs can help clients sort out financial difficulties.
Residential sale-leasebacks give lending companies two ways to capitalize in the form of new mortgages. When a customer who was in danger of defaulting on their mortgage chooses a residential sale-leaseback program, lenders save money. When a customer who has been turned down for a loan and turns to residential sale-leaseback to help get their finances on track, they may also eventually qualify for a mortgage. With their finances in order, these clients will become ideal candidates for new mortgage loans.
Some residential sale-leaseback companies offer customers the option to repurchase their home, which means that, once on firmer financial footing, the former homeowners are now potential new mortgage customers. Residential sale-leaseback companies who offer a repurchase option can then funnel leads back to mortgage companies.
The sharing of leads between residential sale-leaseback companies and mortgage companies has the potential to create a cyclical revenue stream for both sides. Mortgage companies refer customers in trouble to residential sale-leaseback companies and the sale-leaseback companies refer customers who wish to repurchase their homes to the mortgage companies.
Typical of many industries, oftentimes, with these referrals come referral fees. So, mortgage originators stand to profit directly and immediately from the clients and turndowns that enter into sale-leaseback agreements, in addition to the long-term financial benefits.
When factoring in the cost of delinquent accounts, in addition to the cost of foreclosures, lenders stand to benefit even more than sale-leaseback companies. Not only is there a potential for new and increased revenue streams from buyback leads, there also is the opportunity to save money on costly remediation and foreclosures.