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Residential Leasebacks: A Tool Against Future Foreclosure Crises?

Editor's note: This article appears in the March 2021 issue of DS News, available here

In 2009, I began purchasing single-family (SF) and small multifamily foreclosures with the strategy of refurbishing and renting the assets until the market recovered. Our company was able to assemble an extensive portfolio of nearly 400 SFR and 400 small multifamily doors. To simplify and have greater control, we vertically integrated our company, providing direct exposure to the rehabbing, leasing, management, and maintenance of these houses. It was clear that many of these foreclosed homes were representations of families who had lost their homes and impossible not to be personally affected by the emotional aspect of these "opportunities." 

According to a report from the U.S. Congress' Joint Economic Committee, the average foreclosure cost is more than $77,000. Mortgage servicers often attempt to avoid foreclosure by offering the different homeowner alternatives, mostly loan modifications or "cash for keys." The issue with cash for keys is that it does not solve the homeowner's problem because the amount of money usually offered is not in line with the alternative that the homeowner has, which is to fight the foreclosure and stay in the home for much longer. According to some Florida foreclosure defense attorneys, it will take at least 24 months to properly foreclose a property, even longer with some COVID delays. 

Rather than impose the high costs of foreclosure on the banks, homeowners, municipalities, and society, a sale-leaseback of the property can be used to solve most issues presented in foreclosure. This simple solution can create a win-win situation between a homeowner and the owner of the note. A sale-leaseback allows the homeowner to sell the property to an investor and enables the investor to lease it back, keeping the homeowner as the tenant. The benefits for the "ex homeowner" are clear: keep the kids in the same school district and avoid expensive moving companies, storage payments, furnishing, decorating, or moving into a new place. Equally important, the investor will have a tenant that will treat the home as its own. 

An additional incentive that could entice the homeowner to do a sale-leaseback is if the note holder can provide the investors with prepaid rent or a discount on the property. This solution can also work where the homeowner has negative equity. In this case, the note holder can make a short sale on the property. 

Many economists are projecting a surge in foreclosures due to the crisis brought by COVIDMortgage holders and servicers should create a policy to alleviate the potential financial and social trauma that this will produce. Through its agencies Fannie Mae and Freddie Mac, the government is backing more than 70% of all homeowner mortgages. If the government were to create a policy that will encourage servicers and noteholders to offer leaseback as an alternative to foreclosure, this policy could reduce the overall costs of the mortgage system.  

This sort of policy could also encourage more people to become homeowners because the "failure" to maintain a mortgage becomes less painful. A robust sale-leaseback market would provide all homeownersnot just the ones in foreclosurewith an alternative to selling their house and renting somewhere else. I firmly believe that this would create a more "liquid" market that would benefit homeowners and investors alike. 

About Author: Daniel Kattan

Founder and CEO of Sell2Rent, Kattan has more than 15 years’ experience in real estate. In 2009, he founded PIA Group and created one of the first vertically integrated platforms to acquire SFR. He led his company to acquire more than 900 units across south Florida. Kattan has extensive knowledge of the different variables that affect the market and is currently working on a book about how technology will affect the different real estate asset classes.

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