Another housing tech company is jumping into the sale-leaseback business, offering to unlock a struggling homeowner’s equity by buying their house and renting it back to them.
The growing trend comes when many Americans face job insecurity during the pandemic, while home equity levels reach all-time highs. But homeowners should tread carefully and explore all options first if they’re hurting financially, experts said.
“I have seen this before, it’s a glorified and extend-lease option with the sizzle of getting cash now,” said Scott Sheldon, a mortgage officer at New American Funding. “I think most consumers would be better off keeping total control of their home and working with a good lender if they are in tough times or even going directly to their servicer for relief before allowing an investor to come into the mix.”
‘This gives you options’
Knock last week unveiled its spin on the sale-leaseback transaction by offering a repurchase option for the former homeowner after the company buys and leases their home back to them. The home, in turn, becomes part of a real estate portfolio for outside investors.
“If you lost your job during the pandemic, you may think I can’t get a new home and I don’t know where to go,” said Sean Black, CEO at knock.com. “This gives you options.”
Knock’s move follows EasyKnock’s announcement in September to offer sale-leasebacks, but without the repurchase option. The company, too, cited the need for more solutions for homeowners, especially as the pandemic wreaked havoc on the economy.
“Historically, financing options have been limited and lending standards have not worked in favor of the consumer,” said Jarred Kessler, CEO of EasyKnock in a press release. “We want homeowners to feel their financial circumstances do not have to define them.”
RentBack, which has been providing residential sale-leasebacks since 2018, noted an uptick in interest from homeowners this year.
“The reasons are [they’re] losing their homes and need to rent,” Carson Fears, founder and CEO of RentBack, told Yahoo Money. “Consumers are becoming more aware of this opportunity.”
‘You have trouble qualifying for a mortgage’
More than 2.8 million mortgages were in forbearance at the end of November, according to recent numbers from the Mortgage Bankers Association, a trade organization, accounting for 5.54% of the total mortgage population.
Homeowners with mortgages backed by Freddie and Fannie Mac have only until the end of the year to declare forbearance under the CARES Act, while the moratorium on foreclosures and evictions on mortgages backed by Fannie and Freddie ends at the end of January.
The government’s delay in providing further financial relief as part of a new coronavirus aid package also remains a driver in the sale-leaseback popularity, Black said.
“One of most used reasons is that homeowners have a whole bunch of credit card debt and they need the cash or they need to get their forbearance off their record,” Black said. “You have trouble qualifying for a mortgage without a low loan-to-value ratio.”
If they work with Knock, homeowners would be given details on the market price of their home in case they’d like to purchase it back in the future. They could rent for up to two years, based on neighboring market values, before deciding to buy back their home. The price would be based on a proprietary algorithm that calculates the future value of a home.
‘A fix to get cash now’
But like any other home equity option, homeowners should proceed with caution and make an informed decision, experts said, especially since it’s such a new type of transaction.
“Get an attorney involved. Get a CPA involved,” said Peter Palion, founder of Master Plan Advisory Inc. in East Norwich, N.Y. “Have someone look over that contract very, very carefully and don’t sign on the dotted line until you understand 101% what you are getting yourself into.”
There are many other options beside a sale-leaseback that could help a struggling homeowner get through a rough patch, Sheldon said.
“This is a fix to get cash now, but what happens if in the future, the former-homeowner-now-renter loses their job and cannot repurchase their home?” Sheldon said. “If they stayed as a homeowner and did a loan modification or forbearance, that could buy them the time they need to get back on their feet versus having an investor who now owns their home.”