What You should Know about Rent-Backs

Posted by Tamara Berryman on Wednesday, January 28th, 2015 at 1:16pm.

You find a home you love, right near Sarasota Bay and you can't wait to move-in, though closing is still weeks away. You're packing your things, planning out the logistics, making furniture arrangements in your head, and even looking forward to a few key customized features. What's not in your plans for the near future is having to delay you move-in day, but you've just learned that the sellers are requesting just that of you.

For whatever reason, be it a delay in their own purchase of another home, a job relocation that got pushed back, or something else, the sellers are asking to stay in the home you're buying after the closing date. It strikes you as odd and leaves you with a bit of anxiety because you'll be a short-term landlord. However, you want to be accommodating and are able to change-up your schedule to be able to make the situation work.

What's most unfortunately isn't the inconvenience, but other factors which might come into play. Two of those being the rules your mortgage lender sets, and, the length of time the agreement runs, which can change your tax status in regard to your newly-purchased home with the IRS. Neither of those are things you want to deal with, and that's completely understandable.

Before You Sign and Rent-Back Agreement

If the sellers are asking to rent-back the property, an agreement where you close on the home, are given legal possession, but do not occupy, you will become, as mentioned a landlord. Though the period of time the sellers rent from you will probably be less than 60 to 90 days, you should know about any potential problems which might crop-up as a result of the agreement.

... you should be sure to do a rigorous inspection of the house before the rental period begins, taking note of any dings you find. That way, you'll have a record of the house's condition in case there's any damage to the property when the old owners vacate. --The Wall Street Journal

First, you should approach this situation as a business transaction, and try and keep emotion out of the equation. Even though it's an emotional circumstance and the timing couldn't be worse, you have to treat this as a business dealing. Next, you ought to speak with your buyer's agent about alternatives. Perhaps the sellers can work out another arrangement and allow you to move-in the day previously planned.

Things to Know about Rent-Backs

Because you won't be "in control" of your newly-bought property, you'll want to be in-the-know and well prepared in the event something goes wrong. That means putting in place some measures which are specifically designed to protect your interests. Though these transactions typically go smoothly, you can't leave it to risk. Here are some steps to take when renting-back:

  • Walk through and document the current state of the home. As the above quote explains, you ought to document the current state of the home before the rental period begins. This way, if something is damaged, you'll have a record of it. Don't worry about minor problems, but do focus on things like appliances, windows, doors, and other expensive repairs.
  • Set a reasonable rent amount the sellers will pay. You should be quite careful when setting your rent-back agreement price. It should cover your mortgage, insurance, and taxes, but not be a way to try and squeeze a profit out of the seller. If you do set it high, you'll only cause resentment and that won't constitute a good situation.
  • Inform your insurer and require renter's insurance. In order to qualify and be approved for a mortgage, you must have homeowner's insurance, so, inform your insurer of the agreement. This doesn't necessarily mean it will cover damages by sellers who are renting-back from you. Require the sellers to take out renter's insurance so you won't be on the hook.
  • Request a damage deposit in advance of closing. You should speak with your buyer's agent about how much is appropriate for your particular circumstances. This ought to be palatable to the sellers and still be enough to cover you in the event something does go wrong. Ask for it in advance of closing to be held by a third-party.
  • Establish a vacate date and late departure penalty. The rent-back agreement should stipulate a date the sellers will move out of the property. In addition to the vacate date, there should be a penalty clause that costs the seller a percentage of the deposit amount or just a set daily penalty for every day the seller stays past the vacate date.
Finally, the rent-back agreement should be in compliance with local landlord-tenant laws. Your buyer's agent will probably have these documents available because although it might seem strange to you, in reality, rent-backs are pretty common occurrences.

Tamara Berryman
Google

Leave a Comment

Have a Question?

Contact Us

Follow Us