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Sale-leaseback scenarios can sometimes be the only option to avoid bankruptcy or foreclosure for homeowners in financial distress. These deals allow the homeowner to get out from under the mortgage on their home, while giving them the opportunity to stay where they are, renting from the purchaser.

As with many of the "remedies" for homeowners in danger of losing their property to the lender, some unscrupulous businesses and individuals have entered the sale-leaseback arena, so homeowners should do their homework before entering into any such agreement.

The positives to selling and then renting a property are many, and weigh much heavier than any negatives, such as loss of the real estate investment or having to live under the tenets of a landlord. The fact is, by the time a homeowner would be considering a sale-leaseback, they have exhausted most of their resources and are desperately trying to salvage what remains.

By being able to stay in their present residence as renters, the former homeowners avoid costly moving expenses and the hassle of relocating. That's only if they could find another place to live. With late or missed mortgage payments, credit ratings plummet. People facing foreclosure rarely have a credit score or payment history that would qualify them to buy another residence, or even to rent at many apartment complexes.

Furthermore, late mortgage payments are bad enough on a credit report, and affect home-buying power for a minimum of two years per Fannie Mae and Freddie Mac underwriting guidelines. But that's nothing compared to the damage that occurs to a credit score when a borrower defaults on a mortgage and the lender forecloses. And when a person files for bankruptcy, whether they file for Chapter 7 and erase debts, or Chapter 13 and redeem via a payment plan, the negative credit history from that remains on a credit report for seven to 10 years.

When a real estate investor chooses to enter into a sale-leaseback agreement, they are doing so because it appears to be a wise business decision to them, not usually just out of the kindness of their heart. Most of the time they are able to negotiate a price for the property that is well below appraisal because the homeowner needs a quick sale (or a short sale is permitted by the bank, which does not pay off the mortgage in full, but covers enough to be a favorable option over the impending foreclosure and possible auction at greater losses). They also have a ready renter, and set a monthly payment at a modest profit in a declining real estate market. Of course, the purchaser may require some financial credentials from the former homeowners to determine their ability to pay.

Regardless, a sell and rent back deal is not harmful to a homeowner facing foreclosure unless, like in any transaction, they deal with a disreputable purchaser. By executing due diligence in finding a suitable person or company to enter into such an agreement, the homeowner may avoid the prospects of foreclosure and/or bankruptcy. As a result, they cut their losses and minimize future financial damage.

Learn more about this author, E.L. Miller.
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