Rent-Backs are not as simple as many believe. There are risks as there are in any transaction.
1. This is elementary, but often overlooked because rent back/post-settlement occupancy by the former owners is generally for a short period of time. PUT EVERYTHING IN WRITING AS THOUGH. Treat it like you would in signing a lease for a rental.
2. What kind of loan is the purchaser using (if not paying with cash?)?
HAS THE PURCHASER BEEN APPROVED FOR A LOAN WITH OWNER OCCUPANT INTEREST?? If the rent back/Post Settlement Occupancy is for more than 60 days, the buyer may lose their standing as an owner-occupant and the concomitant interest rate. Mortgage interest rates are higher for investors...where buyer isn't owner occupant.
Many Post Settlement Occupancy Agreements are available for a 60 day occupancy only. For occupancy to last for more than 60 days, a standard Residential Lease Agreement may be required involving Landlord and Tenant law. If you do a "long term rent back", buyer risks charges of mortgage fraud. Lender may think buyer really doesn't have intention of moving into home and only wanted the better interest rate.
3. Home buyer should make sure to receive a security deposit from the former owner in case damage is done during the rent back. 4. One challenge is if the former owners don't move out when the rental period ends. The home buyer may have to go through the eviction process and incur legal expenses in order to force the former owner to move out.
4. Damages. What if the seller/tenant neglects and/or damages the property? There will be significant costs and/or loss of value on the part of the purchaser/landlord. The seller and the buyer should do a walk through and take notes regarding property condition prior to signing the rental agreement to avoid any disputes when then the former owner moves out. This is important for both parties in case seller claims the damage was pre-existing condition before settlement or buyer claims damage was done during seller's rental period. An adequate security deposit is the only way to mitigate the new owner's costs and/or loss.
5. Utilities. Who is going to pay the final utility bills? Without an adequate security deposit, the new owner will have no funds to cover the final utility charges if the seller/tenant fails to pay for their usage. Without a zero balance when the utility service is transferred from the former to the new occupant, many utility companies will not provide service to the new occupant. Water is usually a lien on the property. However, electric/gas is usually in the name of the occupant and final bills have to be satisfied or the new occupant may not have electricity/gas.
6. Another thing buyers have to consider when renting back their home to the seller is where to store their items in case they had to move out of their former residence. Even if buyers don't have to move out of their former residence prior to the end of the rental agreement with the sellers, the buyers still have to coordinate moving their items into their new home with when the sellers' out, unless sellers and buyers lease agreement allows buyers to move their items into the house during rental period.
7. A couple of reasons for sellers and buyers to engage in a rent back/post settlement occupancy agreement
a. Sellers are buying a new home and they want to make sure settlement on their new home goes as scheduled. If settlement is delayed, then sellers have to delay their move.
b. If sellers are buying a new built home and it isn't going to be ready prior to settlement on their former home.
c. Sellers are still working/in the middle of a project that doesn't end prior to settlement and they need to finish the job/assignment.
d. Buyers may be coming from out of town, and even if they are in town, they may not want to physically move during certain times of the year because of work, the weather, and the school year to name other reasons.
e. The buyers haven't sold their current home yet and a post-settlement occupancy period helps buyers generate income to help pay mortgage on their new home while they are still paying the mortgage on their unsold homes.
If you or anyone you know would like to further discuss this topic, other topics or talk about the real estate market and how I help people realize their home dreams, give me a call or send me a message. I always have time for your referrals.
Adam
Cell: 301-943-4370
adambashein@mris.com
www.basheinhomes.info
Adam Bashein
Licensed in MD & DC
Weichert Realtors
7821 Tuckerman Lane
Potomac, MD 20854
301-718-4100 ext. 132
