Why Leasebacks are a Better Financial Decision

Homebuilders often hold onto their model homes for 3-5 years and sell them at the end of a community. They believe this is a better financial decision because they could sell the property for a higher price. However, we believe it's the wrong financial decision.

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Here's why:
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Margins

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Gross margins for homebuilders are 20% or more, and they can build a home every 6 months once a community is underway. By recycling the capital from selling the model home, builders can potentially build six homes in 3 years from the one model home sale. In other words, every time builders build a new home with the proceeds from the model home sale-leaseback, they are making an additional profit with that recycled capital. 

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Risk

One of the primary advantages of selling model homes through leaseback is that it allows builders to de-risk their portfolios. Currently, most builders have around 3-7% of their inventory tied up in model homes that aren't generating any income. By selling these properties, builders can reduce their risk exposure and redirect that capital toward more profitable ventures. This is a crucial advantage, especially in an industry where market conditions can be unpredictable. The market doesn’t always go up. 
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Appreciation

Home appreciation isn't a given. A production homebuilder is meant to produce, not to speculate on land and home values. While holding onto a model home may seem like a good idea if the market appreciates, there is no guarantee that this will happen. There’s also a ton of wear and tear on the model homes while being used as a sales and marketing office. By selling the model home through leaseback, builders can avoid this uncertainty and lock in a profitable transaction.
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In conclusion, holding onto model homes for 3-5 years may seem like a good financial decision, but it comes with opportunity costs. By selling model homes through leaseback, builders can increase profitability, reduce their risk exposure, and avoid the uncertainty of home appreciation. 

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On a per-unit basis, recycling the additional capital to build 6 more homes within 3 years is ultimately the best risk-adjusted return. For these reasons, we believe selling model homes through leaseback is a better financial decision than holding onto them.

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