In other words, you’d become a landlord before you get to move into your new home. What? Why would a seller want to do this? Do you have to agree?
Why a Seller Might Want to Rent-Back
A seller might want to rent-back after closing for various reasons and this type of request isn’t uncommon. Presumably, the seller is buying a new home of their own. Maybe it’s not available yet at the time your transaction closes. Or maybe they can’t find a moving van on the last day of the month, because the demand for moving vans is high at that time. Of course, you might find this situation unsettling as a new home buyer. After all, you’ve paid a lot of money for your new home, and you’re paying interest on a loan for a place that you can’t yet occupy. It’s understandable that you’re eager to move in and take possession right away—not to mention that you probably didn’t anticipate finding yourself in the position of being a landlord.
What’s in It for the Buyer?
You have some logical reasons for not wanting to do a rent-back but take a deep breath and consider that it might be to your advantage. Date of possession is often a pivotal factor when you make an offer on a property. Put yourself in the seller’s shoes. Buyer A and Buyer B both offer $325,000 for the property. Their offers are similar in other respects as well. The seller counters both offers, realizing that they must ask for a two-week rent-back. Buyer A agrees. Buyer B says no. Which offer do you think the seller will accept? Consenting to allow the previous owner to rent-back can get your offer accepted in multiple offer situations. The seller is more likely to accept your bid even when there aren’t any other offers.
How to Protect Everyone’s Rights
Treat this situation as you would any other business relationship. Buyers should never let sellers retain possession of a home without executing a formal occupancy agreement. These agreements spell out the terms and conditions of the seller’s stay in your new home and they protect buyers as well as sellers. Some states make “seller in possession” (SIP) forms available for these situations. The forms address seller rent-backs as well as other contract terms. This addendum can modify the purchase contract when the appropriate box is checked. The SIP handles short-term seller rent-backs that are less than 30 days. It usually includes these provisions:
The term of the rental periodAmount of rent per dayAmount of security deposit, if anyWhether the security deposit will be held in escrow or released to the buyer at closingLate charges, if any, pertaining to non-sufficient funds and/or payments that are received late outside of escrowWho pays for what utilitiesThe right of the buyer to enter the propertyThe seller’s duties to maintain the propertyLease assignment and subletting rightsThe seller’s obligations upon surrenderInsurance for seller’s personal itemsMiscellaneous conditions
A lease agreement should be executed if the seller wants to stay 30 days or longer.
Insurance Coverage for Seller Rent-Backs
Sometimes buyers will insist that sellers maintain their existing homeowner’s insurance policies during the rent-back period. Insurance companies aren’t typically happy to keep coverage in effect but many will continue the policy upon request. There are several problems with this, however. The seller no longer owns the home, so the seller’s insurance company might refuse to pay any potential claims. And the buyer typically already has insurance coverage because lenders insist that the buyer’s insurance policy be in force at closing. Some insurance companies have argued that if a claim were to occur and the seller submitted it to their own company, that insurer might look to the buyer’s insurance coverage for reimbursement even if the seller’s company pays it. In either case, the seller should carry coverage for their own personal belongings and automobiles.
Determining Rental Amounts
The amount of rent the seller pays is negotiable. Sometimes sellers actually ask to stay in the home for a few days rent-free. It’s still wise to execute an agreement that addresses liability issues and term if you agree to this. Most buyers finance their new homes so they’re incurring interest and paying taxes and insurance for a home they can’t yet occupy. It’s reasonable in most cases to charge the seller an amount equal to a daily proration of the buyer’s principal, interest, taxes, and insurance. It’s fairly simple to divide the PITI payment by 30 days and charge the seller that pro-rata amount per day when the buyer’s new mortgage payment includes impounds for taxes and insurance. If the buyer’s new payment is $3,000 PITI, that would work out to $100 per day. But a PITI payment for a seller rent-back isn’t required. Smart buyers would check existing rental rates in the area. They might find that a PITI payment calculation is less than average rental rates. For further protection—and to comply with local rent control laws or other state-specific laws governing landlords and tenants—buyers and sellers might want to consider signing a short-term standard residential lease agreement. Consult a real estate lawyer for more information.
