If you are buying or selling a home in Silicon Valley today, you may be considering including the option to have a “seller rent back” after close of escrow. What does this mean? This is often referred to as “seller in possession after close of escrow” (often shortened to SIP) or “seller occupancy after sale”, or for more than 29 days, the “residential lease after sale” (RLAS) and it’s not uncommon in the San Jose or San Francisco Bay Area now.
Most of all, a rent back means that after the sellers have been paid and the new owner is on record, the seller stays on as a tenant and the buyer takes on the role of a landlord. The buyer as the new owner will carry home owner’s insurance (mandatory if there is a mortgage – the lender will insist) and gets a set of keys.
The terns for this tenancy relationship are drawn out in a separate addendum to the purchase contract. Depending on how long the term will be (less or more than 30 days) and which purchase agreement form is used (PRDS or CAR) the paperwork varies a bit. Whichever form you use and whichever side of the rentback you are on, here are some key points to keep an eye on:
- Amount of security deposit, if any
- Amount of rent being charged, if any
- Length of the rent back or lease (most buyers have loans, and most lenders start attaching fees to rentbacks longer than 29 days and do not permit more than 60 days or they consider the property “non-owner occupied” – if you aren’t careful, you could walk into an expensive mistake here!)
- Who will pay for things like gardening, utilities, pool maintenance, and HOA fees, if any
- Who will hold the deposit (the buyer or the escrow company?)
- Under what circumstances the new owner can enter the property
When the market is super over-heated like it is today, we tend to see nominal security deposits and free, no-cost rent backs. Usually the tenant (seller) takes care of utilities, garden, pool maintenance.
In much of Silicon Valley, the garbage bill automatically goes to the new owner upon recordation of the deed, so if the seller is to cover that cost, it will need to be handled separately.
Landlord and tenants both have rights. You might be surprised by some of them in the agreement – besides the fact that the new owner gets the keys.
With the CAR paperwork (but not the PRDS), the new owner also has the right to show the home to prospective buyers or tenants, too. In either, the owner only needs to give 24 hours notice before entering the property. So even though you, the seller, get to stay there (and perhaps pay for the opportunity), you may not have all that much peace and quiet if that addendum is on the CAR form.
With the PRDS form, buyers must hold off on any construction work and repairs until the end of the addendums term as part of the seller’s right to quiet enjoyment of the property, but the CAR form allows for “necessary” or separately agreed upon work to be done during the lease term. That language is a little vague. Would that include chemical treatment for termites?
For 30 day and longer rent backs, it can get even more complicated (the RLAS form with addenda is 15 pages long). Sellers may need another addendum to keep pets on the property, or may have to pay for repairs if the plumbing breaks.
In every case, sellers are recommended to obtain insurance for their personal property, i.e. renter’s insurance, during their lease back.
Lastly, do not be timid about calling on the help of a lawyer or CPA with your real estate dealings. Many times, a small investment in professional guidance can more than pay for itself many times over. Realtors, even the best of us, are not allowed to give tax or legal advise. CPAs or other tax professionals and real estate attorneys have insights that can be majorly helpful. Real estate is expensive business, so please do not cut corners when you need more help and guidance from outside sources.
What are the names of the rent back forms in use in and near Silicon Valley?
PRDS Seller Occupancy After Sale Addendum – 2 page addendum
CAR Seller License to Remain in Possession Addendum – for less than 30 days only (29 or fewer days), very short 1 page addendum (actually 2 pages, but the back is just for signatures)
CAR Residential Lease After Sale: Seller in Possession After Close of Escrow – for 30 or more days, 15 pages in all as of 2022.
Today it is a red hot seller’s market. Home owners who are about to sell, you will likely have the upper hand in negotiations, especially if you are upfront about your preferred terms. You and your agent can request offers (and/or addendums) on either the CAR or PRDS forms. The option that “seller not to be disturbed during rent back period” or something similar could always be another term or condition. Most importantly, be proactive about your requests for both the regular form and the rent back form to improve the odds of getting the terms you want and are not surprised when offers arrive.
- Read the rent back agreement carefully! Whether you are a buyer or a seller, understand what you are agreeing to by signing. You and your Realtor can negotiate the terms.
- You may want to consider using a different form that puts you in a better position. Don’t just sign blindly – get educated, but try to do it up front, before you are at the last minute decision making point. I mentioned the issue of when the new owner might enter because, to me, that is major. But you might find equally concerning issues in the paperwork, too, so please read it carefully.
- Speak with a qualified professional. Your Realtor can guide you through many things, but a good agent will refer you to the appropriate experts for tax and legal advice. Real estate is expensive enough as it is, don’t cut corners when you need help!
If you enjoyed this article, we have many more tips for sellers and buyers throughout this blog. If you have found these articles helpful and are ready to make a move in the Silicon Valley housing market we would love to hear from you to set up a free, no-pressure consultation to see if we might be good match for your home buying and/or selling needs.