How to handle seller’s request for Rent-Backs?
Ask Phyllis is a blog series of frequently asked real estate questions. Have a question about real estate? Email us here
Dear Phyllis,
After looking at homes for months, my fiancée and I finally made an offer. The sellers had several, and they countered all, requesting 45 days 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 seller rent backs and their risks? George
Dear George,
Sadly, you have learned a valuable lesson: terms often matter more than price. Therefore, when you compete with other buyers, you must pay close attention to the seller’s terms. This situation is called a “seller rent back,” and it has become common in today’s market.
In a typical transaction, you receive possession on the day you close or within a few days after closing. However, the seller may refuse to move or may damage the home after escrow closes. For that reason, I avoid unnecessary risk.
When I evaluate a rent back, I carefully review how the homeowner currently maintains the property. If the home looks neglected, I assume the seller may not make a reliable tenant. In contrast, if the home looks immaculate, I have no reason to expect a behavior change.
Next, I consider rent strategies. Some buyers charge the seller the same PITI (principal, interest, taxes, and insurance) they currently pay. Others require the seller to cover the buyer’s full PITI. Finally, I adjust the rent back terms based on competition. When I compete with multiple offers, I weigh how aggressive I need to be to win the deal.
Of course, if you do allow a seller 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).
Related Post: Pros and cons of early possession
