Imagine this: Your builder is nearing completion on your custom home and you've just found a buyer for your current home. But as the closing date looms, your contractor hits a major delay that will keep you out of your new home for another month.
What can you do?
You call your agent and she suggests a rent-back (also known as a post-settlement occupancy agreement) to buy yourself some extra time.
A rent-back allows sellers to stay in their home until a specified date past closing. After settlement, the sellers pay rent to the buyer who now owns the home. The sellers are now renters, with a security deposit at stake should anything get damaged.
"I have learned to use rent-backs in a way that I've found very helpful to people," said Sharon Jarrott, associate broker and partner with Washington-based Central Properties.
"People do what they can to plan ahead, but when you get an offer with a proposed settlement date, people find themselves asking, 'How do I coordinate getting out of here and moving my money from one property to another without having moving men lined up in the driveway?' " she said. "It can become a logistical nightmare."
Andrea McDaniel was selling her condo in Annandale, Va., when she received a very attractive cash offer with a very short time until closing. Though she had expected to have more time to find a new home, the offer was too good refuse.
"When you have a cash offer in hand you never want to turn that down," she said. Her agent proposed a rent-back. The buyer, an investor who was planning to rent the condo out anyway, readily accepted.
"The rent-back agreement let me stay in my home and gave me peace of mind to find a place," McDaniel said. "It eased my concerns so that I didn't have to make a rush decision."
While it may make the seller uncomfortable to suddenly be in the position of renter, sometimes it's a necessary step to achieve a goal, such as moving into a dream home as opposed to the one available at the closing date.
"Rent-backs, if used properly with the appropriate language inserted in the addendum to the contract, help people put things together" to close deals, Jarrott said.
The rent-back contract — or "Seller's Post-Settlement Occupancy Agreement" — on www.virginiamls.com is a one-page form that lists such information as the rent amount, security deposit, move date and responsibility of the seller to maintain the home. As for insurance, it leaves that up to the seller and buyer, saying only that they "are advised to consult with an insurance agent regarding coverage."
McDaniel was advised to obtain renters insurance. "I canceled my homeowners policy the day we went to settlement," she said. The price of the homeowners insurance vs. her renters insurance was "fairly comparable," she added.
As for the rent amount, buyers typically either charge the local market rate or the actual amount they will be paying to live in the property, including mortgage principal, interest, taxes and insurance.
After selling her condo in December, McDaniel rented it back from the buyer for about 40 days at a daily rate that she said was roughly equivalent to her mortgage payment plus condo fee. She paid the full rent at the closing but was able to get some of it back by moving out before the 40 days was over.
"We included a clause that as long as I gave about a week's notice [the buyer] would repay the difference," she said.
Buyers and sellers who can be flexible with their dates have an advantage over inflexible parties.
"When it looked like it was four more days after settlement [before the seller could move out] my client said that was fine," said Denise Greene, an agent with D.C.-based DCRE Residential. "She wasn't really in a hurry. If there's a huge extension of time, you'd have to consider a rent-back."
Whether it's a formal rent-back agreement or a four-day grace period, "make it really clear" in writing, Jarrott said.
"If everyone agrees to a few days extra, simply put it in email," Jarrott said. "I feel better when there's a piece of paper. If anything should happen to me or anyone, there needs to be an email." It can be a two-sentence email — a record that everybody has agreed to certain terms, such as no security deposit required and keys to be turned over on a certain day.
As a broker, Jarrott said that this paper trail is crucial. "The broker has obligations to comply with the law even when everyone is agreeable," she said. And things occasionally happen; for example, a seller or buyer could have a sudden medical crisis or even die. Without the proper paperwork, that could leave the transaction in limbo.
At the end of a rent-back period when the seller moves out, the buyer can withhold part of the security deposit if damage occurs after closing. Think: pets, kids, moving furniture. The seller has to maintain the home in the state it was in at settlement.
The buyer, in turn, must be reasonable. The security deposit is not for repairing items that were never at issue in the sales process — such as replacing light fixtures that are out of style but still working.
In terms of timing, rent-backs should be seen as a short-term solution. If the parties engage in a rent-back longer than a certain number of days, the lender may consider it an investment property and adjust the terms of the loan. Lenders charge higher interest rates for loans for investment properties than principal residences.
Lenders are on the lookout for loan fraud in the form of investors purchasing a home at a principal home rate and then never actually living there. The buyer should discuss the terms carefully with a lender before entering into the agreement.
Another consideration is the timing of the rent payment. Wrapping the rent into the closing and delivering it as a single payment can minimize stress for all parties.
While a rent-back requires attention to contractual details, Jarrott said that under the right conditions she would advise buyers and sellers to consider it.
"Used judiciously, it can be a win-win for all parties if people keep it in mind with that perspective and spell out the details for the record to avoid misunderstandings," she said.