With our severe seller’s market in Silicon Valley, many properties are selling with multiple offers, over bids and highly competitive terms. One of them which is frequently sough by sellers is an option for a “rent back”.
What is a rent back?
A rent back refers to the seller staying in possession of the home after it’s been sold to the new owner. Sometimes it is free, other times there is a cost, but often (either way), a security deposit is held in escrow.
Why do some sellers want to stay in the property after close of escrow?
If the sellers have sold their house, townhouse or condo, why do they want to continue living there? In most cases, the sellers request the ability to stay on a little longer for any number of reasons. Perhaps they need to find a replacement property, they are building a home which is not yet completed, they want a child to finish out a term at a neighborhood school, or some other deadline or goal has not yet been met. If they don’t have the ability to lease for that period of time, they will have to move twice – something no one enjoys.
What issues arise with a rent back?
Forms: Like other contractual issues, there are rent back forms available to spell out the understanding both within the CAR and PRDS sets of forms, and some real estate brokerages may have forms for this agreement also. The wording and terms are not identical from one to the next. Some are short (one page) and others quite long. Since they are called different things, it’s helpful to know the names. For PRDS, it’s called the Seller Occupancy After Sale Addendum (RSOAS). For CAR, Seller in Possession Addendum (SIP) or Residential Lease After SALE (RLAS) for periods of 30 days or more.
Keys: At close of escrow, if the seller is to stay in possession, the buyer becomes a landlord and in virtually all cases receives a set of keys to the property just like any other landlord would. In case of emergency, the seller has a right and likely an obligation to enter if the tenants aren’t there to stop a flood or address any other urgent situation. Part of the agreement spells out how, if and when the new owner may enter. Usually it never happens at all.
Insurance and other costs: It’s helpful for the seller to see if renter’s insurance is a good idea when renting back, since the contents of the property may not be covered well by the new owner’s policy. Also, who will pay the gardener, utilities, and so on? That should be part of the agreement too, especially if it is for more than a few days.
Length: If a home buyer purchases with financing, rather than all cash, the lender may restrict the length of the lease. Check with the bank, credit union or other lender. Some are more flexible than others but most will not allow more than 60 days, some only 30 and some perhaps not at all. If a home seller wants a very long possession after closing, it’s probable that the home will need to sell to a cash buyer for that to happen.
Cost: Ordinarily, in a balanced market, the sellers would pay either fair market value or the buyer’s daily rate of principal, interest, taxes and insurance (PITI). This is no ordinary market, though, so many home buyers are including a free rent back as part of their bid. If it is a short duration, many will waive the security deposit. The longer the stay, the more likely that the deposit will approach 2-4 weeks’ value.
As with other terms and contractual forms of a purchase contract, it’s important to read all of the paperwork carefully before agreeing to it. If something isn’t clear, you want to discuss it with your agent and strategize this angle of the agreement as you would any other. If you’re a buyer, you may need to focus on making the sellers happy in order to get the property at all. If you are a seller, you don’t want to play hard ball to the point where you lose the best buyer. It’s always a balancing act.