Model Home Purchase/Leaseback

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Thrift Shop
Posts: 59
Joined: Mon Mar 24, 2014 9:32 am

Model Home Purchase/Leaseback

Post by Thrift Shop » Sat Aug 12, 2017 12:39 pm

Hi Bogleheads

DW and I are considering purchasing a model home with a leaseback arrangement. Details are as follows:

- Lease will be 6 months with an option for 2 more at the builders discretion.
- Neighborhood is for the most part complete. This home will be one of the last ones sold.
- Even though a model home, upgrades are not anything over the top. Probably about 50k in upgrades on a 420k house.
- Other model homes on street have sold for 550k to 630k. The home we are thinking of is smaller than the other models.
- No driveway at the moment (just landscaping in front of garage). Builder will install later after selling out neighborhood.

Has anyone been through this process? If so, what can you share with me as far as pitfalls? For example, was the house wrecked because of all the foot traffic coming through? Appliances in working order? What items did you find negotiable? Or any other things we would need to be aware of?

Thanks for your input.

Thrift Shop
Posts: 59
Joined: Mon Mar 24, 2014 9:32 am

Re: Model Home Purchase/Leaseback

Post by Thrift Shop » Sat Aug 12, 2017 12:56 pm

One other thing. The home will become our primary (and only) residence.

adamthesmythe
Posts: 1633
Joined: Mon Sep 22, 2014 4:47 pm

Re: Model Home Purchase/Leaseback

Post by adamthesmythe » Sat Aug 12, 2017 3:15 pm

So you want to buy a house, but don't particularly care when you get it?

I would expect a model to be in generally excellent condition apart from carpets. But I'm not sure what the attraction is- great price??

JGoneRiding
Posts: 988
Joined: Tue Jul 15, 2014 3:26 pm

Re: Model Home Purchase/Leaseback

Post by JGoneRiding » Sat Aug 12, 2017 3:57 pm

I would expect a great price! That is a really long rent back and why I have advocated for them several times 8 mos rent back might create loan issues unless you are using the builders perfered Lender and they have agreed to this.

Generally speaking lenders require occupancy in 60 days for a primary residence loan.

stan1
Posts: 5018
Joined: Mon Oct 08, 2007 4:35 pm

Re: Model Home Purchase/Leaseback

Post by stan1 » Sat Aug 12, 2017 5:38 pm

My experience is that models generally sell for a price favorable to the builder. Usually its someone who falls in love with the interior decorating done by the builder, really wants a turn key home, and it becomes an emotional purchase. Your situation may be different so keep track of what the house is really worth to you. If you don't care for some of the upgraded decorative features and plan to replace them you'll be paying twice. Builder will repair anything that's broken and clean the carpet but no way to reverse the wear on the carpet.

Thrift Shop
Posts: 59
Joined: Mon Mar 24, 2014 9:32 am

Re: Model Home Purchase/Leaseback

Post by Thrift Shop » Sat Aug 12, 2017 5:48 pm

adamthesmythe wrote:
Sat Aug 12, 2017 3:15 pm
So you want to buy a house, but don't particularly care when you get it?

I would expect a model to be in generally excellent condition apart from carpets. But I'm not sure what the attraction is- great price??
I do care when I get it. Homes in this particular area are in high demand and builders have a long time to build. One even told me 11 months. Therefore this home would be available sooner.

But the question I am asking is who is familiar with this process?

Thrift Shop
Posts: 59
Joined: Mon Mar 24, 2014 9:32 am

Re: Model Home Purchase/Leaseback

Post by Thrift Shop » Sat Aug 12, 2017 5:50 pm

stan1 wrote:
Sat Aug 12, 2017 5:38 pm
My experience is that models generally sell for a price favorable to the builder. Usually its someone who falls in love with the interior decorating done by the builder, really wants a turn key home, and it becomes an emotional purchase. Your situation may be different so keep track of what the house is really worth to you. If you don't care for some of the upgraded decorative features and plan to replace them you'll be paying twice. Builder will repair anything that's broken and clean the carpet but no way to reverse the wear on the carpet.
Great advice. Thank you. Yes, I am trying not to make this an emotional decision.

User avatar
macaroon
Posts: 50
Joined: Wed Aug 08, 2012 12:06 pm

Re: Model Home Purchase/Leaseback

Post by macaroon » Sat Aug 12, 2017 8:12 pm

DW and I are considering purchasing a model home with a leaseback arrangement. Details are as follows:

- Lease will be 6 months with an option for 2 more at the builders discretion.
- Neighborhood is for the most part complete. This home will be one of the last ones sold.
- Even though a model home, upgrades are not anything over the top. Probably about 50k in upgrades on a 420k house.
- Other model homes on street have sold for 550k to 630k. The home we are thinking of is smaller than the other models.
- No driveway at the moment (just landscaping in front of garage). Builder will install later after selling out neighborhood.

Has anyone been through this process? If so, what can you share with me as far as pitfalls? For example, was the house wrecked because of all the foot traffic coming through? Appliances in working order? What items did you find negotiable? Or any other things we would need to be aware of?
My husband and I recently purchased a model with leaseback to the builder. Our lease was for a year with the option to extend up to an additional 4 months. The lease won't be up until spring of 2018. The builder wasn't very flexible on the sale price - we offered less than they wanted but they didn't come down as much as we hoped. We may ask for some of the furnishings at the end of the lease - we haven't decided yet. The purchase agreement specifies that the appliances will be in working order, defects such as loose tiles, nail pops, paint scrapes, etc., will be made like new. The garage currently being used as a sales office will be finished as a garage and a paver driveway will be installed, as well as new landscaping in the front yard. This will be our permanent home, too, but we aren't quite ready to move yet so the fact that the builder is paying us rent for a year was a real plus. There hasn't been much wear and tear on the model over the past year so we don't expect that to be a problem.

One thing you should be aware of is that insurance might be tough to find. We couldn't get a regular homeowners policy because we weren't living in the home. But we couldn't get a regular landlord policy, either, because the property wasn't occupied 24 hours a day. The builder agreed to assume all liability during the lease period but all the insurance carriers we talked to required us to carry liability as well. We had a good local insurance agent who was able to find us a policy that worked for everyone but it wasn't cheap!

ResearchMed
Posts: 5477
Joined: Fri Dec 26, 2008 11:25 pm

Re: Model Home Purchase/Leaseback

Post by ResearchMed » Sat Aug 12, 2017 8:30 pm

Make sure you understand exactly who is to pay utilities, taxes, landscaping/upkeep, the property insurance, and such.
Make SURE that YOU get notification that these things are paid on time by the builder/tenant.
If they are supposed to pay for the property insurance, for example, and there is a fire or flood, etc....

RM
This signature is a placebo. You are in the control group.

HoosierJim
Posts: 393
Joined: Wed Mar 24, 2010 7:11 pm

Re: Model Home Purchase/Leaseback

Post by HoosierJim » Sat Aug 12, 2017 8:48 pm

Double check that warranties (components/structural) are from your move-in date. Sometime individual component warranties (hvac,water heater, appliances) can be extended by simply sending in the registration (Carrier HVAC for example). Builder may have sway with vendors - get the warranties extended as you would for any other home from the builder.

For example, a few additional years on a complex HVAC system might be worth thousands out of pocket after warranty period.

Image

User avatar
Watty
Posts: 11777
Joined: Wed Oct 10, 2007 3:55 pm

Re: Model Home Purchase/Leaseback

Post by Watty » Sun Aug 13, 2017 4:38 pm

Be sure to have the house inspected just like you would any other existing home that you might buy. You are buying an existing home, not a new home. Treat it the same as if you were buying an existing home from someone else in the neighborhood that got transferred a few years after buying a new house.

Even if they are in good shape things like a roof that might be expected to last for 20 years will already be several years through their expected life span. Expect to paint the house sooner than you would a new home.

In addition to the appliance and HVAC warranties be sure to know how it being a model home affects any warranty by the builder.

Jesa
Posts: 12
Joined: Sat Jan 28, 2017 1:52 pm

Re: Model Home Purchase/Leaseback

Post by Jesa » Mon Aug 14, 2017 6:22 am

Any builder that puts up more than a few houses a year usually receives a discount from their vendors for these models. Typically, this is at least half off or in some cases, with regional and national builders, 100% off. This may or may not help your negotiating power.

HoosierJim
Posts: 393
Joined: Wed Mar 24, 2010 7:11 pm

Re: Model Home Purchase/Leaseback

Post by HoosierJim » Wed Aug 16, 2017 4:18 pm

Watty wrote:
Sun Aug 13, 2017 4:38 pm
Be sure to have the house inspected just like you would any other existing home that you might buy.
AND compare it to the like-comps in the neighborhood for recently sold homes. You probably will get more amenities in the model than most of the other sales but some of that stuff doesn't appraise when you go to sell it. For example, gold plated faucets won't change the appraised value of the house but might be costed into the model price. New communities might not have many sales of used houses but if there are a lot of sales (or rentals already) RUN!!!!!.

User avatar
BigOil
Posts: 219
Joined: Wed May 23, 2012 2:45 pm

Re: Model Home Purchase/Leaseback

Post by BigOil » Thu Aug 17, 2017 8:09 am

Advice:

1) You should really like the house and decorating, and the still-present "extra costs" and/or accelerated spending of buying "new" (yard & hardscape finishing, paint changes etc.) A market-priced, tasteful but not perfect, under 20 yo house is typically a better deal--you do the updates to your schedule and budget. Sometimes these used homes have much better lots/locations as new builders ALWAYS try to put max sq ft on a lot = more margin to them...

Clearly in hotter markets/locations you have less room to mauver.

2) Read the contract, VERY carefully. NVR's (Heartland, NVHomes, Ryan) absolutely STINKS! (probably typical) but they did change the most egregious parts. For example a promised a target date to close was in, but boilerplate gave them a *2 year window to close* for almost any reason. We got that changed. Sales Rep is their fiduciary but will typically tell you only *ONLY when you ask* what parts they have seen allowed Management changes(they want a done deal as much as you might). We did not use an Attorney (you might) but be aware they will not change fundamental terms and conditions for a buyer.

3) Get addendum: builder clean the carpets, touch-up all paint, fix all finish damages, etc. just before close. Also include anything you want left behind (rugs, appliances, reefer, etc.).

3A) Ensure all the extra stuff by the subs for the model and not in typical home re specified AND completed. Subs typically don't get paid much for the model and do as little as possible (e.x. minimize lights/plants/cheaper plants/fewer zones/beds in yard ---not done fully to plan/spec) Ask for copies of the additional non-standard scope in the house as addendum.

4) Get a copy of the Decorator Plan with all the fixture SKUs and paint codes etc.

5) Be aware it might under appraise initially. Due to upgrades.

User avatar
8foot7
Posts: 588
Joined: Mon Jan 05, 2015 7:29 pm

Re: Model Home Purchase/Leaseback

Post by 8foot7 » Thu Aug 17, 2017 8:35 am

BigOil wrote:
Thu Aug 17, 2017 8:09 am
Also include anything you want left behind (...reefer, etc.).

Didn't know you could ask for this. Live and learn! :sharebeer

JGoneRiding
Posts: 988
Joined: Tue Jul 15, 2014 3:26 pm

Re: Model Home Purchase/Leaseback

Post by JGoneRiding » Thu Aug 17, 2017 9:28 am

8foot7 wrote:
Thu Aug 17, 2017 8:35 am
BigOil wrote:
Thu Aug 17, 2017 8:09 am
Also include anything you want left behind (...reefer, etc.).

Didn't know you could ask for this. Live and learn! :sharebeer
Really?? I specifically asked the builder to put in a refrig in my offer on brand new place--and specified type and brand (to match other appliances and so he couldn't do the absolute bare min)--granted this was in 2008 and before it plummeted but just.

HoosierJim
Posts: 393
Joined: Wed Mar 24, 2010 7:11 pm

Re: Model Home Purchase/Leaseback

Post by HoosierJim » Thu Aug 17, 2017 10:01 am

Once all the negotiating is done, demand a concession for the realtor commission (assuming you haven't got a agent already involved) If you pass on the deal there is a good chance a realtor will be bringing them the next buyer. Although they don't pay full commission, you should be able to get 1/2 of the full commission. You have to be in a position to walk away to get the best deal. Most people don't want to deal with the lease-back but the builder obviously wants to book the sale now since they could wait and sell it as in inventory home later. They can get more "motivated" as you approach month end, quarter end , or year end due to corporate politics and motivations you'll never know. It's best to drag your feet a little and get the sense they are hungry for the deal. Typically this is motivated by management decrees and the underlings do what their told.

Joseramonf
Posts: 1
Joined: Mon Oct 30, 2017 3:42 pm

Re: Model Home Purchase/Leaseback

Post by Joseramonf » Mon Oct 30, 2017 4:45 pm

Can anybody please share a broker or insurance contact who has experience on how to insure model-home lease back? Thanks,

User avatar
macaroon
Posts: 50
Joined: Wed Aug 08, 2012 12:06 pm

Re: Model Home Purchase/Leaseback

Post by macaroon » Mon Oct 30, 2017 5:22 pm

Joseramonf, I will send you a private message to let you know who we used.

Post Reply