What Do You Need to Know About Rent Back Agreements?

Ever hear of rent back agreements? So what are they, and what are the advantages and disadvantages associated with this kind of real estate transaction?

Rent Back Agreements Defined

Wikpedia defines rent back agreements as “a form of property transaction involving the
expeditious sale of an owner occupier’s residence to a landlord or property
company and renting it back from the new owner.” They are also known as
post-settlement occupancy agreements.

This kind of transaction allows a home seller to buy
himself extra time to stay in the home after closing.

And why would a home seller need extra time beyond
the closing date to stay in the home?

Rent Back Agreements Explained

Here
are a couple of home sale stories to help explain what rent back agreements are.

The Story of the
Brownstone

My
wife and I paid a builder to build a getaway home outside of New York City
limits. And now our builder is nearing completion.

We
put our brownstone up for sale as soon as the builder broke ground, assuming
that it could be on the market for a little while. But guess what? Our custom
home isn’t quite finished, and we already have a buyer for our brownstone.

The
buyer has come to an agreement on a reasonable closing date with us since our
new home is almost built. But again, guess what? As our closing date
approaches, the builder has informed us of a major delay. This snag is going to
keep us out of our new home for another 30 days past the closing date.

So
what can we do? We know the buyer wants to move into their brownstone on
closing day. Wouldn’t you? Of course you would!

The Story of the Offer
Too Good to Refuse

My
friend was selling her condo. And it wasn’t long before she received a very
attractive cash offer that was just too good to refuse. The cash offer,
however, came with a very short time until closing. She expected and planned on
having more time to find a new place to live. But she knew she couldn’t turn
down the buyer’s cash offer.

So
there she was, cash in hand and no home to move into at closing time. What
could she do?

Benefits of Rent
Back Agreements

In both of the stories, the sellers ended up with no place to go on closing day. And in both cases, their real estate agents proposed rent back agreements.

In the case of the condo seller, her buyer was an investor who was planning to rent the condo out anyway. And he readily accepted. For 40 days past the closing date, she paid a daily rate that was equivalent to her mortgage payment plus the condo fee.

Benefits for the Seller

• Allowed to stay in the home until a specified
  date past closing
• Able to put things together to close the deal
  (if used properly with the appropriate language inserted in the addendum to the
  contract)

Benefits for the Buyer

• Extra income can offset mortgage payments and
  some closing costs, such as broker commissions, appraisal fees, and attorney
  fees
• Agreeing to a rent back gets your offer
  accepted in multiple offer situations in most cases

Benefits for Both the Buyer and the
Seller

• Minimizes stress for everybody involved by wrapping the rent into the closing and delivering it as a single payment
• Used judiciously, it’s a win-win for all parties

Before Agreeing
to Rent Back Agreements

Before
agreeing to rent-back agreements, think carefully about the terms. Spell out
the details for the record to avoid misunderstandings.

• Understand why the
  seller wants a rent-back agreement
• Charge a fair price
• Don’t sign a lease
  that lasts longer than 60 days
• Charge a holdover fee
  if the seller stays longer than agreed
• Collect a security
  deposit
• Require renters
  insurance

Most people do their best to plan ahead. But life happens. When a seller gets an offer with a proposed settlement date, they might ask, “Now, how am I going to coordinate getting out of this house and into another without having movers lined up in the driveway?”

Take note: Rent back agreements should be treated the same as you would treat any other business relationship. Buyers, never let the sellers retain possession of the home without drawing up a formal occupancy agreement, never. Because with terms and conditions of the seller’s stay in the buyer’s new home, both parties are protected.

Have you ever needed rent back agreements? Did a real estate agent you were working with suggest using a rent back agreement? There’s a lot that goes into a good rent back agreement. And in order for it to do its best work for both parties, it must be used properly. I recommend consulting with a real estate lawyer for more information.

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SOURCE: Brooklyn Real Estate Blog – Read entire story here.