to the seller. The seller is proposing to sell but rent it back from me. Any pitfalls on the arrangement? I’d rather buy and own but the seller would like to keep the house for 6 months after selling. They need the money right now.
You would then be responsible for any repairs or damage that occurs while they live there. Also will their proposed rent cover the mortgage payment?
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Common in my area (Northeast, urban). Especially for older sellers who are relocating and need the sale of the original house to finance the new house, and don’t want a bridge loan or to risk being homeless!
The only pitfall I’ve heard of is if you don’t have an ironclad clause about damages/dings/etc. Your tenants are going to feel like it’s "their house’ (because it was) and potentially, treat it that way. So build in a nice cushion for repairs and repainting!
Most of my neighbors who have done this don’t regret it- unless they are planning a large remodel in which case they want to close on an empty house and immediately gut it… in which case it won’t work.
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Pretty common here. I haven’t done it, but my neighbors rented back for a couple of months while they bought in another state. I can see pitfalls mentioned above, but it’s not unusual, to me anyway.
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We rented back our old house after selling to a developer, who was going to knock it down. I remember we were responsible for insurance, utilities , and property taxes, but they didn’t ask for $$ rent.
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I would want a large deposit just in case there was any damage. And I would want a firm contract with a firm end date.
If you rent and need to evict someone…it’s not very easy.
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I’ve heard of such arrangements. Just make sure the rent is high enough to cover your mortgage expenses, insurance, property tax etc… plus some extra. You’d want there to be enough pain to the seller that they only do it if really necessary, ie not to get a bargain.
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I have also heard of this. Definitely have your real estate lawyer write a contract detailing everyone’s responsibilities (both financial and property maintenance) and get a security deposit.
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In rereading your post, this is giving me pause:
What’s that about?
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That’s why people do this- they need the equity out of the house so they can start looking for their next property, and don’t want to live in a corporate one bedroom apartment while they are doing so. So they sell the house, bank the proceeds, rent their old house while they look and avoid a bridge loan or anything else in the interim. They’ve banked the down payment for the next property and don’t have to juggle closing dates…
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I would look into how renter friendly at your locality. How hard would it be for you to evict them if they should decide not to move. In NYC it is very hard to evict a renter, even for non payment.
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The people I know who’ve done it rented back for weeks or two months tops. Six months seems like a long time.
Wanting/needing that money for the next purchase makes sense. Something in that sentence rang of desperation.
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I have friends renting their old house right now. They are building in Florida; they aren’t desperate but the notion of moving twice in one year seemed unnecessary if their buyer was willing to rent to them. Buyer wants to be in the house by the start of the school year so it works out on both sides. My friends are gradually downsizing their stuff, the buyers are making a nice profit via the rental which will help cover the costs of whatever improvements they want to make once they move in, it all seems very easy so far!
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We’ve rented both as a buyer and seller. Our circumstances were understandable in both situations and our financial situation was solid. First was starting new jobs in a new town with two kids who needed to get settled in school so we were lucky the sellers were wanting to move ASAP. I think we only rented that house for a month or so before closing.
Then as a seller, we were waiting for our youngest to graduate from hs. Buyer was a single man in no hurry. He was a great guy.
In the first case, the sellers agent was a tyrant and got mad at me for doing a thorough cleaning of the storage/laundry section of the basement and giving the floor a very nice coat of appropriate paint. It was pretty gross beforehand and the paint was a free improvement if our situation had fallen through. Which it was not going to. Weird.
Second case, I went with a lower cost mover (fyi, don’t do that!). It was our first big move that we had to pay for ourselves. One of the movers was a HUGE Russian guy that was like a bull in a china shop. He broke one of my pieces of SW pottery and put a large TV armoire on his back by himself and proceeded to go downstairs with it banging into corners and handrails all the way down. I finally had to scold him “This is NOT our house, you NEED to be more careful! But, thankfully no major damage was done (not so for my pot) and the new owner was very happy with the house.
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I have a neighbor who ideally would want to sell her house and rent back for TBD time period…. til her cats die. (They were 18 at the time, and now it’s down to one.) I explained to her that it’s unlikely she’ll find such a buyer. The one thing she has going for her is that the house is a ranch, which is in high demand around here.
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I would be afraid of what shape the place could be in after 6 months, wear and tear on appliances and HVAC etc.
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A sale and leaseback transaction is not uncommon for those home-sellers waiting for their new home to be built and receive a certificate of occupancy, or for those who need funds to close a deal on an already contracted property.
Riskier sale and leaseback situations involve sellers who need money due to indebtedness to clean up their credit in order to pass credit checks for renting or buying in the near future.
If a seller in a sale and leaseback situation, it would be wise to hire a local real estate attorney for advice and drafting a contract.
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Can you holdback money in escrow?
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My wife, a realtor, says don’t do it. Too many pitfalls, which have already been articulated here.
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My niece did this in a seller’s hot market to make her offer be the one chosen (there was a bidding war). She wrote a letter and included a photo of her and her spouse the kid(s) and said the seller could remain in the studio of the 4-plex rent-free for 6 months.
Niece’s bid wasn’t the highest but 6 months rent-free was attractive to seller. They were a bit concerned about whether he’d move out in timely manner but they told him how much they were looking forward to nanny moving into unit to care for the children so seller left as scheduled instead of needing stronger persuasion.
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