Builders often sell display homes with a sale-and-leaseback option as part of the deal. What does this deal mean for buyers and is it worth buying a display home with leaseback?
What is a display home leaseback?
Leaseback display homes are no different from display homes - it’s the circumstances under which you buy them that creates the difference.
At its core, leaseback – also known as a sale-and-leaseback agreement – is a transaction where the seller of a property immediately becomes the tenant by leasing the property back from the new owner.
How does buying a display home with leaseback work?
In the context of display homes, builders often sell the property and lease it back, allowing them to continue using it as a show home. This means that if you buy a display home with leaseback, you have an instant tenant and a steady stream of rental income.
Can I live in my leaseback display home?
Buying a leaseback display home does not have to be an investment property. You can buy a display home with the intent to live in it eventually, but you will not be able to live in it during the leaseback period.
How long does the leaseback last?
How long the leaseback lasts will depend on the builder who sells you the display home. Leaseback display homes for sale are usually leased back for a set period of between 24 and 36 months, although the builder may have the option to extend this period, often in three or six month increments.
It’s worth remembering that the leaseback period can often be longer, particularly depending on how long the surrounding development takes to sell.
Display home leaseback advantages
There are several advantages to purchasing a display home for sale on leaseback, including a steady rental income and a trustworthy and low touch tenant.
Above market rental returns
Display homes offer higher than market value rental income. A display home is a vital part of a builder’s marketing material, so they are prepared to pay more than a standard tenant would to secure their access to it.
No property management fees
As the display home comes complete with a tenant as part of the leaseback transaction, you won’t have to pay any management fees to an estate agent. The direct relationship that you, as the new owner of the display home, will have with the builder/tenant will save you significant administration costs.
No vacancies
Since the builder is the tenant under a fixed-term contract, the investor has a guaranteed income stream with no periods of vacancy. The contract will clearly lay out when the leaseback period ends, allowing you to plan ahead, which is particularly helpful if you are interested in moving into the display home yourself.
Ongoing maintenance is provided
It’s in the builder’s interests to maintain the house to a high standard to show it off and attract potential buyers for the rest of his development. This means they will keep your home or investment in pristine condition with impeccable landscaping and ongoing maintenance as required.
High calibre of tenant
Leaseback display homes also guarantee you the highest calibre of tenant. Not only will the builder want to keep the home impeccable but nobody actually lives there. While some areas might experience heavy areas of footfall, nobody will be using the appliances, water systems or bathrooms, so wear and tear should be minimal.
What do you need to think about?
Despite all the benefits of buying a display home, there are some considerations to bear in mind before you start house-hunting for display homes for sale in Perth with leaseback options.
Check the quality of the builder
You need to know that you’re buying a display home from a quality builder. This will help with resale when the time comes.
Higher requirements for your loan
There may be financial implications for the mortgage or home loan you take out if you wish to purchase a display home.
Some lenders see leaseback arrangements are more risky than standard home purchases because of the higher than average rental income. You may need a larger deposit to make the purchase.
What are the financial implications of a leaseback property?
Buying a display home with a leaseback agreement may impact the property's price, often leading to a premium due to guaranteed rent and maintenance. It will also affect how much you pay for stamp duty.
On the flip side, some builders will over-capitalise on a display home build, sacrificing the additional cost to ensure the product on display presents the best it possibly can. This means if you find the right home, in the right location, you may be pleasantly surprised with the price tag.
Additionally, the rental income and potential tax deductions can significantly influence the property's financial performance.
Loans for display homes with leaseback could also be more complex, so it's crucial to seek professional advice and talk to your mortgage broker.
What are the legal considerations for a leaseback property?
It's paramount to have a well-drafted lease agreement that explicitly outlines the terms and responsibilities of both parties.
Potential legal issues can arise if the lease agreement is not comprehensive. It’s recommended to work with an experienced legal team to get the fairest deal.
Display home leaseback vs. traditional property investment
A leaseback and traditional property investment each offer distinct benefits and risks. The optimal choice depends on your personal goals and aims.
Display home leaseback agreements provide a unique opportunity for real estate investors, but it’s not without risk.
While a leaseback provides guaranteed rent and high standards of maintenance, traditional property investment allows more flexibility and control over the property.
It's crucial to weigh these factors against your investment goals and risk appetite and seek professional advice while you consider such an investment.