Rent Backs

Dear Phyllis,
After looking at homes for months, my fiancé and I finally made an offer. The sellers had several and they countered all requesting a 45 day period after the close where they could remain in the home as tenants. Although, we are renting month to month, we were fearful that this could blow up in our face so we increased our offered price but declined the tenancy. The home sold for $10,000 less than our increased offer. What’s your view on allowing the previous owner to remain in the home and what are the risks?   George

Dear George,
Sadly you have learned a very valuable lesson: Terms can be more important than price. When you are competing with other buyers, you need to be very mindful of the seller’s terms. The scenario you are referring to is called a “rent back”. They have become common in our market.
In a typical real estate transaction you will be granted possession either the day you close or a few days after. The seller could refuse to move or trash the home at any point after escrow closes. Personally, I am not much of a risk taker, but when evaluating a rent back, I look carefully at how the homeowner is currently maintaining their home. If the home is a dump, then they likely won’t be a good tenant, but if the home is immaculate, there is no reason to believe that they won’t keep it so.
There are different strategies as to what to charge the seller for rent. Some buyers offer the seller the same PITI (principal, interest, taxes and insurance) they are currently paying as their rent. Other home buyers will want their own PITI covered. When considering the amount charged to the seller/tenant, take into account how many offers you are competing with.
Of course if you do allow the seller to rent back, your real estate agent will need to prepare a rental agreement. Check with your lender, some won’t agree to terms of more than 30 days (or they consider your loan non-owner occupied at an increased interest rate). Also be certain to inform your insurance carrier that your home will be tenant occupied for the first 30 days (or however long).