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Rent Backs Can Benefit Or Bite Seller

Written by M. Anthony Carr on Thursday, 13 May 2004 7:00 pm

Various scenarios can force sellers into a rent-back situation. This is when the homeowner sells the property but does not move right away and strikes a rental agreement with the new owner to stay in the property for a designated period of time.

A rent-back can provide several benefits for both the buyer and the seller. There are various reasons for a rent-back which is usually requested by the seller:

  • Sellers want to finish out the school term for their children before moving out of the house.

  • A new job may not open in time for the seller to move to a new location until several weeks after the planned closing.

  • Construction on a new home may not be complete before settlement.

  • The seller may still need to find their home of choice in a resale property.

For the buyer, a rent-back can have several benefits as well. In general, if a seller is asking for a rent-back, this is a major concession. Fair market rent is not really viable in this scenario. As the new owner, try to get a little more than the going rent for your neighborhood. Short-term rentals are much more expensive than year-long rentals -- your lease should reflect that difference. The seller should expect to pay a couple hundred dollars extra per month for delaying the buyer moving in and for the benefit of avoiding temporary housing elsewhere. With an inflated rental fee, the buyer/new owner could make a pretty good profit for the length of time the seller/now renter is in the property.

Some loan programs will not let the buyer settle without taking possession of the property, so check with your loan officer first before agreeing to this type of arrangement. Since it's a rental agreement, don't forget to cover several issues you would cover in a regular rental: condition, rental amount (possibly per day), deposits, condition of property, etc.

Now this is the time when a rent-back agreement can turn on both the buyer and seller. It can get especially sticky if the sale was in an as-is condition basis -- the question may arise, "As-is when?" When the house was sold or when the old sellers are moving out? Get these ironed out and written in an agreement before moving forward with a post-sale, occupancy, rent-back agreement. There's nothing like damaged property from a "renter" to sour an otherwise pleasant transaction.

Even if you've signed a property disclaimer form (meaning that the seller doesn't give any warranty as to the condition of the property) if the buyer can prove that something in the house was in working order or not damaged when they bought the house, then the old owner may end up paying for repairs out of his or her own back pocket. The buyer should conduct a thorough -- fine-tooth comb -- walk-through with the seller and be particular about any damage you see. Note any spots on the carpet -- lift rugs and furniture, look at how many holes are in the walls from pictures, inspect windows for cracks and breaks, and request a professional cleaning on the way out.

Some buyers don't like the idea of someone living in "their" house after they've just bought it. In other terms, it's the same as if you bought a new car but then the dealer wanted to drive around in it for a couple of months before delivering it to you. Consider if that's the type of arrangement you want before signing the post-sale occupancy agreement.

If there is damage afterward, then the buyer and seller are going to have to work it out. You may want to have an arbitrator predesignated in the rental agreement so that you both already know what to do before this type of situation arises. After all, the original intent is to sell the property and exchange ownership -- not create a rental where common wear and tear are expected.

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