Renting back
What does seller-rent-back mean?
It means that after closing escrow, and title has officially changed to the buyer as the new owner, the seller wants to stay in the property. He pays the buyer rent and becomes a renter of the property he just sold.
Why would a seller want to do this?
It is not uncommon for a seller to rent back the property. Usually, it is because their new purchase is not ready for them to move into. Sometimes, the seller sold the house in order to take out the equity, but they wanted to continue living there. The buyer purposely bought the house as a rental property, and is more than happy to have the seller stay on as tenants.
Does the buyer have to rent back to the seller?
If there is no rent back provision in the original purchase agreement, the buyer does not have to agree to rent back to the seller. However, in most of the situations I have seen with a rent-back, the seller only needs to stay a week to a month, and then they will be ready to move. If this is the case, the buyer usually agrees to the rent-back.
How much rent should the seller pay?
This is to be negotiated. Since it is an accommodation to the seller, why should the buyer lose money on it? Therefore, the rent is usually based on the buyer’s costs - his mortgage payment plus prorated taxes, insurance, and any other other assessments and homeowner’s association fees, or the seller pays market rent, whichever is higher.
What are some implications of a rent-back?
The seller becomes a renter in every sense the day escrow closes. The buyer is the landlord. He is responsible for anything that goes wrong with the property. This also means if the seller damages anything, he is responsible.
If the agreement to rent-back is done before escrow closes, the escrow company can be instructed to deduct from the seller’s proceeds and credit the buyer for the full amount of the rent due. The buyer should also collect a security deposit through escrow. This amount is also negotiated. I usually suggest the amount to be 30 days of rent, just like a normal rental situation.
The buyer does a walk-through before escrow closes, the same he would in a normal purchase. After the seller vacates the house at the end of the rental period, the buyer does a walk-through again, this time as a landlord, to assess any damage caused by the tenants. If there is any damage, it should be taken out of the security deposit. The difficulty with this is, it is hard to determine if minor damages are an existing condition normal with any home purchase, or they were caused by the seller during the rental period. For example, if there is a big stain on the carpet, a renter would be charged for carpet cleaning. However, if the stain was there before, the seller is not obligated to have the carpets cleaned for closing escrow. It is not productive to argue over these items, and the buyer usually just takes possession of the house, and clean it up as if they just closed escrow.
However, it would be wise to do walk-throughs very carefully and take plenty of pictures as a protection for both sides.
I usually do not advice a rent-back unless I am very confident of the seller’s integrity, and if their situation is very desperate. I would rather delay escrow closing to allow the seller to work it out wth some other means.