ResalesRent Backs Can Backfire on Buyers
Sometimes real estate transactions call for creative negotiations. Owner financing, seller subsidies, paying off a buyer’s debts, 100 percent financing are all creative ways of getting a buyer into a house who might not otherwise be able to buy without extraordinary moves.
Certain strategies are used only in particular markets. Seller subsidies are more popular in buyer markets than in seller markets, for instance. If an owner is having a tough time moving the property, offering to pay off a buyer’s bills or picking up the expense of paying points will draw a buyer over another property.
In a fast market, sometimes a home shopper will find a seller who wants to sell the house quickly and take their time moving out or purchasing their next property. The seller will usually do what is called a "rent back" from the buyer. The transaction will settle and the title exchanges hands. The sellers now become renters with the new ownership at a pre-negotiated rent. Then the buyer waits for the seller to move into their new house. Be careful with this strategy, as it can come back to bite you later.
A rent back can be negotiated several ways. The lease can be for a set time period or open ended. However, some mortgage programs won’t allow a rent back to last more than 60 days. If the mortgage program was meant only for an owner occupant (meaning the person getting a loan for a particular property must actually live in the property). The underwriters would consider a home where the rent back exceeds 60 days to actually be a rental or investment purchase instead – which may require higher interest rates or higher down payments.
If the lease is open ended, the seller now renter has plenty of time to find a new home of choice and move at leisure. Here’s where the problems can begin and why it’s always best to negotiate such a contract as if the worse will happen. The worse could include:
The sellers/renters leave the house with lots of damage that was not present when the buyer first bought the house.
The delayed move date gives the seller time to remove some pieces of the real property that should have been included in the property, such as chandeliers, special door hardware or shelves and mirrors. The buyer/owner won’t find these things missing till move-in day which is not immediately after settlement now.
The seller/renters could end up losing their house on the other end of the deal or not be able to find a house they want to buy and now they want their old house back. This is probably the most prevalent hiccup in a rent-back situation – and the most distasteful.
Some seller/renters can get down right nasty when they can’t get the house back and commence to damage the house before moving out. The only option for the buyer is to sue at that time, but the damage has already been done and the expense of fixing it will most usually be picked up by the buyer until the suit is settled.
If you do negotiate a rent back, be sure to cover your bases on insurance coverage. Any damage to the house is now your responsibility. If the hot water heater goes out – it’s the buyer/owner’s water heater, now – not the former owner. Be sure to cover all of these issues in the lease and add addenda if necessary for items not covered in the lease. As added protection, if the seller wants a rent back, then negotiate a home warranty to protect you from such breakdowns. Check the deductible on these warranties, as some will require as much as a couple hundred dollars per incident before kicking in.
A typical lease makes the landlord (in this case the buyer/owner) responsible for repairs and upkeep of the property. Because of the unique situation of the rent back, the buyer may want to negotiate that the seller is responsible for all damage until the buyer moves in. Don’t leave anything up to assumption or speculation. Cover all the bases for damage to the property.