Sale / Leaseback of Model Homes

Getting most out of MODEL HOMES

Leaseback options pay a buyer not to move in

The leaseback model home: It's like a big game fish, something special, something that only appears occasionally, a deal harder to land than your run-of-the-mill purchase, but well worth it for some.

Here s how it works: A builder or developer sells a model home to a buyer and then pays the buyer 6 to 9 percent (generally) of the property value per year to stay out of the house.

Sometime later a year or two, perhaps more and occasionally less the buyer takes possession of the house, often inheriting the furnishings for free or at cost along with such extras as a warranty dated from the actual possession.

In a hot housing market (and Florida is the hottest in the nation, real estate pundits say), the buyer gets a home already escalating in value, but purchased at last year's price. The seller recaptures the capital tied up in the home by leasing it for a relatively brief time at a guaranteed profit to the buyer.

It s a win-win situation for both seller and buyer.

Model home sales and leasebacks have proven a thriving niche market for more than a decade here, but recently buyer interest has jumped.

The deals are driven by many factors, builders and brokers say: the large number of second-home buyers who don t have to move right away, for example, and the increasing numbers of builders eager to show off one new product while putting their money into the next.

Many builders today have a waiting list of investors who want to purchase model homes with a sale/leaseback arrangement.

When a developer builds a model, it s usually financed, and it ties up the builder s credit. They d like to use the credit and capital in their business and not have it tied up in models, so they offer a good deal to an investor who will buy the model with their credit or capital. Then the developer leases it back at some rate in time, usually based upon an agreed rate of return.

For the buyer, they get a guaranteed rate of return for a period, then they get the home with model furniture thrown in at cost.

In simple terms, let's say the buyer closes on the deal in 2006, for $300,000. Every month after that and for the term of the lease that buyer will receive a check for $2,000 ( 8% X $300,000 divided by 12 months).

So over the course of two years, the buyer will take in about $48,000 in lease payments. If the builder extends the deal to 5 years, the buyer will get about $120,000, or 40 percent of the property s purchase price, all for not moving in.

Often, lease payments can more than cover the monthly mortgage payments made during the duration of the lease. Also, the buyer can either benefit from the escalating value of the home and neighborhood (10-20% per year), or suffer a loss if the value drops -- a remote possibility at best in South Florida, according to prognosticators.

The tax advantages appear excellent. Usually, the mortgage interest along with the real estate taxes are deductible expenses, and you can depreciate the property ($8727 per year for a $300,000 model).

And the homes are often carefully put together. In a model builders always try to put what they feel they are going to be able to sell the most. So they spend hours making sure the floor plan is right, all the details are right that the whole house flows together.

Upgrades, they call them. A model is going to have more bells and whistles than the average home, and the buyer s going to get the furniture.

In high end homes sellers sometimes don t lease back the furniture, they merely sell it at cost (or even give it away). In a $300,000 house, for example, complete furnishings could go as high as $80,000-$100,000.

We are currently negotiating with several builders to be able to present sale/leasebacks of their models to our investor community.

Please contact me if this investment model interests you!!

Dottye Blake

London Realty Corp.

863-382-9857