By Dian Hymer
In an ideal world, you would sell your current home and move directly from there to your next home. But, this can be easier said than done. Sellers often need to sell their current home before they can afford to buy another one. Or, a suitable home might not be immediately available. Sellers who are buying a new home may find that construction delays make a seamless move from one home to the next impossible.
One solution is to go to an interim rental. But a preferable solution for many sellers is to stay put and rent their home back from the buyers for a period of time after closing. This is called a rent back.
Buyers who are in a position to offer sellers a rent back may find that they have an edge in negotiating a home purchase. Recently buyers who were competing with five other couples for a listing won the competition in part because they offered the sellers a rent back of up to three months after closing.
Buyers who are renting on a month-to-month basis, along with repeat buyers who haven't yet sold their home, are often able to accommodate a seller who desires a rent back.
House Hunting Tip: Make sure if you do offer the sellers an option to rent back that there is a provision in the contract for the sellers to inform you of the date they'll vacate, ideally 30 days before they move out. This way, you'll be able to plan your move. Also, the sooner you give notice to your landlord or to the buyer of your home, the less rent you'll pay.
The cost of renting back is negotiable. However, it's common for sellers to pay an amount equal to the buyer's cost of owning the property - that is, the buyer's principal, interest, property taxes and insurance (PITI) prorated on a per diem basis. Some buyers who are in competition offer the sellers a free rent back for a certain period, thereby making their offer more attractive.
Often the amount of rent sellers pay to rent back is more than the amount they paid to own the property. This is particularly so if the property sells for significantly more than the sellers paid for it and if the buyers obtain a large-sized mortgage. The cost is worth it to many sellers because they avoid having to make a double-move, which is costly and inconvenient.
Sometimes sellers who rent back don't know by the closing date when they'll be vacating. One option in this case is for the sellers to pay rent directly to the buyers. Another option is to deposit enough rent money to cover the maximum period the seller will stay in a trust or escrow account. Any unused rent money can be returned to the sellers when they move out.
The buyers and sellers should sign an occupancy agreement that sets forth the terms of the rent back. This is not a standard lease agreement, but an occupancy agreement that is specific to a situation where the seller stays in possession of the home he's selling after closing.
The agreement should stipulate such things as who pays for utilities and repairs. Sellers who stay in possession after closing will need to carry insurance to protect their possessions, which won't be covered under the new buyer's homeowner's insurance policy.
The Closing: Some lenders object to rent backs that last for longer than 30 days following closing. Before agreeing to a rent back, check with your lender or mortgage broker to make sure that you won't be putting your mortgage in jeopardy.
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