Graphic image with house in the background and words in front: Seller rent back after close of escrow - what do you need to know 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 closing. What does this mean?

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. Normally, a security deposit is paid and held in escrow or by the new owner. (These are sometimes called rentbacks or rent-back agreements.)

Most of the time, it’s for 60 days or less, because longer than that and the buyer’s lender will consider the property as “non owner occupied” and the interest rate will be higher.

Upon close of escrow, the buyers get a gets a set of keys, but can only enter the property for certain reasons.

Brief video on  rent back highlights

 

Rent back agreements

If you are going to do a rent back in Santa Clara County, you may run into one of three forms that sets this agreement in writing. These can impact each party’s rights and responsibilities.

CAR Forms

With the California Association of Realtor forms (CAR forms), there are two distinct addenda depending on the length of stay for the rent-back after closing.

  1. For stays up to 29 days, the form used is SIP for Seller In Possession, which is barely 2 pages long with no other addenda attached. With this one, sellers are called sellers and buyers are called buyers – not tenants and landlords, an important distinction due to the many tenant rights that exist in California. The agreement is called a license and not a lease or rental.
  2. For sellers remaining  30 days or more, the form is RLAS,  Residential Lease After Sale. This is quite long – 8 pages plus ancillary documents, about 15 pages in all. With the RLAS, we no longer refer to the principals as sellers and buyers, but tenants and landlords. That reflects the shift in rights and obligations present in this addendum.

PRDS Forms

Forms Vary for Seller Rent Backs!A second set of forms is sometimes used for real estate transactions, the Peninsula Regional Data Service (PRDS forms). In the past, these were popular just in some areas from about Los Gatos through Saratoga and Cupertino and then up the Peninsula and San Mateo County. They are not as widely used now, at least not in Santa Clara County, as most agents have switched to CAR forms.

PRDS has just one rent back form, the Seller Occupancy After Sale Addendum. It is 1 page long, refers to buyers as buyers and sellers as sellers.

 

What are the key issues for the rent back?

Whichever form you use and whichever side of the rent back 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 do not permit more than 60 days or they consider the property “non-owner occupied”, and some may cut it off sooner – 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 over-heated like it is today, we tend to see nominal security deposits and free, no-cost rent backs if they are fairly short. Usually the tenant or seller takes care of utilities, garden, pool maintenance, etc.

In San Jose, 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. In most of the county (perhaps all), the sewer bill is paid via the property tax bill.

What are some of the differences in the forms?

There are MANY differences between these forms. I’ll touch on a couple just to underscore some of them.

With the CAR paperwork (but not the PRDS), the new owner also has the right to show the home to prospective buyers or tenants. 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.

For 30 day and longer rent backs, it can get even more complicated. Sellers may need another addendum to keep pets on the property, or may have to pay for repairs if the plumbing breaks. Can you have company stay with you? Maybe not.

In every case, sellers are recommended to obtain insurance for their personal property, i.e. renter’s insurance, during their tenancy or lease back.

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.

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.

It’s a good idea to have a look at the forms before choosing how to proceed.

Many buyers prefer to keep their rent backs short so that the SIP form may be used rather than the RLAS form. While a typical escrow here is 30 days, we’ve sometimes done slightly longer escrows in order to use the buyer preferred SIP form.

If the real estate agents working with the buyer and seller discuss what each side wants, it may be possible to put the paperwork together in a way that is acceptable to both and  not have to do a lot of back and forth later with counter offers.

In summary:

With our 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 sought by home sellers is an option for a “rent back”.

  • 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.
  • 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. 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. A good real estate attorney is worth his or her weight in gold. If you are confused about these forms and your options, do speak with a real estate attorney so that you are fully informed.

 

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If you enjoyed this article about seller rent-backs, we have many more tips for sellers and buyers throughout this blog.

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