In Part 1, we discussed the concept of purchasing and leasing back a model home and the benefits to the builder / developer. In Part 2, we dig into why many investors love the concept. Next week, we will discuss do’s and dont’s and points to remember when negotiating an agreement.
In essence, investors can buy a fully-equipped, well-maintained home builder’s model at a discounted price. Then, for two to four years (sometimes longer or shorter) the builder leases the home back from you to use as a sales office. Many builders will pay 10+ percent of the purchase price as annual lease rents. In short, the models are brand new and the lease payments are locked in at the get-go. When the lease is over, the investor with a properly negotiated lease agreement will have a well-maintained house to sell or lease again.
Here are some of the reasons some investors love the program. When reading through these, be thinking about ways to address these benefits in a sales and leaseback negotiation and agreement.
Earn Income Day One: The lease agreement will be set up so you will receive the first month’s rent at closing. From there, your rent checks come in the mail or via bank transfer. With other rental investments, you might be dealing with long time frames between purchasing a rental and actually leasing it out.
Below Market Purchase: Keep in mind that builders that do sale and lease backs want to free up their balance sheet. That said, it’s possible to negotiate a strong discount from the market price for the home. It gets even better when you have a good relationship with the builder and / or take down additional models.
It’s Loaded: Most builders add virtually all of their available options to their model homes because they want visitors to get emotionally involved with homes they sell. Most builders also have professionals make design choices that appeal to the buyer is that particular market segment. The right options combined with a great price can make it much easier to resell.
Potential Appreciation: Of course we haven’t seen much of this recently, but builders have a tendency to raise prices when they open new sections, offer new features, or when their suppliers and developers raise prices.
Appealing to Banks: Some banks like these investments because there is a lease in place and the homes are purchased at below market value. Local community banks may be a good place to start if the builder / developer you are working with has an excellent reputation in your market.
Relationships: If you are able to build a strong relationship with the builder and work out a win/win agreement, the odds are good that additional model opportunities with that builder and others will present themselves.
Long Term Lease Potential: There is a potential for a long term lease if you get in at the community start-up and there are a lot of homes left to sell. One of my clients purchased and leased back a model 2 years ago and the builder had 150 available sites. The investor has bought down the principle of his loan 14%+ in each of the last two years and the builder anticipates staying in the home for another 2 years.
Pre-determined Lease Amounts: It’s all in writing prior to purchase. Ever purchase a rental, didn’t do your homework on market rent, and then got much less than expected? In this case, it’s all hammered out up front when negotiating the price.
Window Treatments / Merchandising: Savvy investors will be sure to make sure the window treatments, wall hangings, rugs, and potentially some furnishing stay with the homes when the lease is up.
Low Maintenance Expense: Yep, no calls in the middle of the night and no property management fees. The pros make sure the maintenance is completely covered by the builder and that the walls are touched up and that the carpet is cleaned or replaced prior to move out. The pros also make sure the house is armed at all times for additional peace of mind.
Transferable Warranty: When the builder moves out and you put the home up for sale, the warranty should be transferable to the next buyer.
Resale: Here’s one of the best advantages of buying a builder’s model. When the times comes that your lease is up, you will have dozens, if not hundreds of people who have come through your model home. Work it into your contract that the builder will assist you in selling the house. After all, buying the builder’s model is a point of pride / ego among many, and you may have your choice of buyers.
Every investor has their own risk tolerance and return goals – keep these in mind when exploring this option of selling and leasing back a builder / developer model.
In Part 3, we will discuss do’s and dont’s when negotiating an agreement and many of the risks involved of this transaction in a very difficult housing market.
Photo: Lauren Keith