What is a seller rent-back?
A seller rent-back is a provision in a purchase contract that allows sellers to continue to live in their old home after the buyers have closed. The sellers rent the home from the buyers for a length of time that's mutually agreed upon.
The cost of renting back is negotiable. But it's usually equal to the buyer's principal, interest, taxes and insurance (PITI), prorated on a per-diem basis. Make sure that the property tax proration is based on the buyers' projected property taxes and not on the sellers' taxes, which could be considerably less.
Buyers who are short of cash needed to close should specify in the purchase agreement that the sellers pay rent in advance at closing. This way, rent money can be used to offset some of the buyers' closing costs.
Seller rent-backs are common in today's market. Most homeowners need to sell their current home in order to buy another one. A rent-back allows the sellers the opportunity to move directly to their next home without having to incur the cost or inconvenience of making an interim move to a rental while they find another house to buy.
Although a rent-back may seem to only favor the seller, most buyers would prefer a purchase with a seller rent-back to a
contract that's contingent upon the seller finding a new home. At least with a rent-back, the buyers know they have a home; they just won't be able to move in on the closing date.
Make sure there's a time limit to any rent-back arrangement you negotiate with the sellers. Don't leave it open-ended. Also make sure that your rent-after-sale agreement, which should always be a written agreement, includes a provision for the sellers to continue to pay for utilities and to maintain the property during their rental period.
FIRST-TIME TIP: First-time buyers who are renting can usually accommodate a seller rent-back, because they can continue to rent until the seller delivers possession to them. This can give a first-time buyer an advantage in negotiations, particularly if there is a competing offer from a buyer who has sold another home and needs to take possession by a certain date.
Be sure that the rent-back agreement specifies that the sellers will give you written notification of the date they will deliver possession of the house to you -- ideally 30 days before they vacate -- so that you can give notice to your landlord and thereby avoid paying additional rent.
THE CLOSING: A lender might object to a seller rent-back if your loan application indicated you would be owner-occupying the property. Many lenders won't permit a rent-back that runs longer than 30 days after closing.
Check with the lender at the time you submit your loan application to find out if a seller rent-back will be a problem. If it is, and the seller is adamant about needing longer than a 30-day rent-back as a condition of the sale, you'll need to find a lender who's more flexible about rent-backs.
Dian Hymer's column is syndicated through Inman News Features. Send questions and comments care of Inman News Features, 5335 College Ave., No. 25, Oakland, Calif., 94618.