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” or “seller occupancy after sale” and it’s very common in the San Jose or San Francisco Bay Area now.
Most of all, a rent back means that after the seller(s) no longer owns the property, he / she / they stay on as tenants. The new owner needs to have home owner’s insurance (which will be mandatory if there is a mortgage – the lender will insist). The new owner becomes a landlord and, as such, gets a set of keys at the close of escrow.
Second, it means that there will be a separate addendum for the tenancy. 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.
Naturally there are a number of terms in the lease or rental agreement. Among them are these:
- Amount of security deposit, if any
- Amount of rent being charged, if any
- Term of the rent back or lease (most buyers have loans, and most lenders do not permit more than 60 days or they consider the property “non owner occupied” and charge a higher rent”)
- 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, we tend to see nominal security deposits and free rent backs or no-cost rent for 30 or 60 days. Usually the tenant 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. So even though you, Mr. or Ms. 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.
What are the names of the rent back forms in use in and near Silicon Valley?
PRDS Seller Occupancy After Sale – very short, 1 page addendum
CAR Seller in Possession Addendum – for less than 30 days only, 1 page addendum
CAR Residential Lease After Sale Seller in Possession After Close of Escrow – intended for 30 or more days, 5 page addendum
Today it is a red hot seller’s market. Home owners who are about to sell, you and your agent can be proactive and request offers on either the CAR or PRDS forms. You have the upper hand, most of the time, and can request your terms upfront. “Seller not to be disturbed during rent back period” or something similar could always be another term & condition. BE PROACTVE about both the regular form and the rent back form so you are not surprised.
In sum: 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 to change 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.
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.