Question: We would like to stay in our home for a few weeks after we settle, can you explain the rent-back concept?
Answer: A Seller’s Post-Settlement Occupancy, more commonly referred to as a rent-back, allows a homeowner to sell their home, collect the proceeds, and continue living in the home for a pre-determined period after closing.
Some common scenarios for a rent-back are:
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You need the sale proceeds for the purchase of your next home
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You want to ensure the sale closes before you move out
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You want to wait-out the end of the school year or last day at a job
How Rent-Backs Are Structured
The Northern Virginia Association of Realtors contract (as well as other regional contracts) provides a standard form for a Seller’s Post-Settlement Occupancy Agreement so you don’t need to worry about hiring an attorney. It functions as a short-term lease including:
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How much the seller will pay the buyer for the rent-back
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How long the rent-back lasts
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A security deposit
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A penalty for staying past the rent-back period
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Who is responsible for utilities and maintenance (sellers)
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Who is responsible for major issues from flood, fire, acts of God (buyers)
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Requirement for buyer and seller to maintain property insurance coverage
Pre-Settlement and Post-Occupancy Walk Throughs
Buyers will conduct a pre-closing walk-through before they purchase the home where they have all the rights provided to them in a normal sale. At the end of the rent-back, the new owners will conduct another walk-through once the previous owners move out, which is like that of a walk-through at the end of a normal rental period. If the previous owners cause damage during the move-out, leave junk behind, or fail other property delivery requirements, the new owners can make a claim against the security deposit, which is generally held by the Title Company who handled the sale.
Time Limitations
If the home is being purchased as a primary residence and the buyers are taking out a mortgage, most loans require that the buyer intend to move into the property within 60 days of the closing and thus any rent-back is limited to 60 days (I usually recommend 59, just to avoid an issue with underwriting).
If a home is being purchased with cash or as a secondary home/investment property with a loan, the 60-day limit doesn’t apply. However, the contract form you’ll use explicitly states that it’s meant to give the seller the temporary right to use the property after closing and not subject to the Virginia Residential Landlord Tenant Act, so avoid using this form in place of a legitimate lease if the Buyer/Seller intend on a long-term rent-back.
Not Without Risk
For the new owners, a rent-back carries with it some of the same risks as being a landlord. Disputes over security deposit, damage in excess of the security deposit, or trouble with the previous owners moving out on time are all realities that buyers need to consider.
As with many decisions in a real estate transaction, a buyer’s willingness to agree to a rent-back is a matter of risk and benefit. The risk of issues arising like those mentioned above versus the benefit of offering the seller a rent-back can be the difference between the seller accepting your offer or taking somebody else’s.
Free Rent-Backs?
In a normal market, the fee for a rent-back is usually calculated using the buyer’s carrying costs (mortgage + taxes + insurance), but in competitive markets, many buyers offer sellers a free rent-back to increase the competitiveness of their offer. A free rent-back isn’t worth much if the seller is asking for an extra week, but it adds up if the buyer has a mortgage and the seller is asking to stay for a few weeks or more past closing and can be a highly valued term in the offer.
If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at [email protected].
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