by Salahuddin Khan

Created on: November 06, 2009   Last Updated: November 11, 2009

Like many simply stated questions, this one has a complex answer. In truth there are circumstances in which a sell-and-rent-back arrangement can be beneficial and there are those in which there will truly be harm to the homeowner. As long as the former is possible, my vote's with this side of the debate. In order to prevail in the debate, we need only demonstrate the circumstances in which homeowners are helped and that those are realistic and not fancifully hypothetical. So what are those circumstances?

First of all, we are dealing with three distinct types of stakeholders. The lender, the homeowner and the prospective buyer/ landlord and each must see the transaction as delivering a better result than any other feasible option. So let's examine the concept from all three perspectives and that way emerge with a transaction design that does indeed benefit all three, which, by definition would include the homeowner per the debate's framing.

For the homeowner, already struggling with making mortgage payments, the key considerations are cash flow, equity in the home and the nature of the rights that flow from home ownership which might be abridged in some way if deeding the house to a new owner. For the lender, the key concerns include mitigating loss to the greatest degree possible, avoiding some form of systemic impact on both the lender's brand image and the market value of nearby homes in the community, some of which might also be financed by the same lender. For the buyer, the addage that "All money in real estate is made in the buying" probably applies since the buyer is looking for a discount to below both the loan balance outstanding and the prevailing market price. In addition, the buyer is usually also looking for an income stream out of the home and benefits from not having to market the rental given the existing occupant is going to become the tenant under the new arrangement. The challenge then is to find a way to make all three stakeholders come out in a win-win-win deal.

If we begin with the homeowner, this kind of deal works best when other "equity retention" options have been exhausted. If the dent on income from say, a loss of one job in a two income family isn't too large, then a loan modification makes eminent sense. However, if for any reason such a modification is not possible and a foreclosure is all but inevitable, then the homeowner needs to consider the sale and rent back option and it will make sense to the extent that the rental payment

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