<p>Here’s a question of a slightly different flavor. If one of the terms of a house sale is a seller rent back, and the rent charged is zero, is there income to the buyer imputed for this? I’m considering making this part of my next offer for a house where the seller needs another 2-4 weeks to move out after close of escrow. I’m weighing extending the close (from 30 to 45 or 60 days) vs offering “free” rent for 15-30 days after close. Equivalent houses are renting for around $3000/month. One of my other offers written up 2 months ago included a rent back at $3000/month. I didn’t get the house, but that wasn’t the main reason.</p>
<p>As some background, I did this when I bought my first house in California 15 years ago when the market was very hot and I was one of multiple offers on a house. The seller got 1 month free rent after COE, and even though I wasn’t offering the highest price, I got the house due to these terms. I have no memory of how I handled the taxes on this.</p>
<p>dstark–yes, both houses I mentioned were vacant and we toured both. These were on-line auctions, which were farmed out to a 3rd party by Fannie Mae and by HUD. They actually had a realtor attached, which was an agency 2 hours away in a metro area which handled lots of these. Our bids were made on line without any association with the realtor though.</p>
<p>The house I bought was originally listed by the bank at 2/3 of the mortgage amount. They dropped it another 20%, without takers, and then title went back to Fannie Mae. </p>
<p>The whole process was very fast and closing was quick. It was a cash deal. We bid ~27% of the mortgage amount. Maybe we should have gone lower. don’t know. </p>
<p>I was familiar with the house (I had owned it 1986-1997), it had substantial improvements since then-windows, siding, roof, drywall, and I knew the last owners and contacted them regarding the furnace, well, plumbing, etc. In this circumstance, they were out 1.5 years before it came to the bid point.</p>
<p>It’s a risk with the components after the bank/govt has sealed the mechanicals. The house needed some tlc though–some parts were rough. I haven’t seen a foreclosure yet that wasn’t trashed to some degree. My experience is people that aren’t paying their mortgage don’t have funds for repair and maintenance. It’s also hard on a house when it isn’t heated for over a year.</p>
<p>vballmom – what happens if the seller doesn’t move out? Then you start eviction proceedings?</p>
<p>I don’t know if the IRS imputes your waiver of rent as income, but if you intend to close with a mortgage, and if you intend to occupy the property as your primary residence, most mortgages have a standard clause stating that you will occupy in 60 days. So if the seller moves out within 60 days of closing, you’re fine, but just be prepared if they don’t.</p>
<p>btw, I know several banks over here go around their forclosed properties and offer $5000 each to “help” their moving cost, providing they follow the rules the bank hand out to them. I have a friend works for bank and act as the person who hands out the money (and the inspector).</p>
<p>“I haven’t seen a foreclosure yet that wasn’t trashed to some degree. My experience is people that aren’t paying their mortgage don’t have funds for repair and maintenance. It’s also hard on a house when it isn’t heated for over a year.”</p>
<p>“Yes I did factor the danger that the house is going to be stripped when they vacate.”</p>
<p>A part of me would like to buy a foreclosure…but right now… It is a very small part. :)</p>
<p>Because I don’t know how to do the work that is required to fix a place up…that lack of ability adds to the risk of a deal…</p>
<p>I do know people who are buying foreclosures and they are having success…either flipping the places back out after a little work or renting them out for positive cash flow. And the cost of building is so much higher than buying at an auction.</p>
<p>On the downside…some of these homes are in sketchy areas.</p>
<p>Interesting sryrstress…that you lived in the house you bought.</p>
I would advise that under no circumstances should you ever rent back to the previous owner. This moves you into landlord/tenant territory, which is governed by its own laws and courts which are generally much more tenant-friendly than landlord-friendly. For example, what if the previous owner refuses to move out for some reason? It can take months to legally evict them, longer if they know how to milk the system. What if they claim they were injured? You as the landlord are liable. </p>
<p>It’s a can of worms.</p>
<p>If they are going to be out in 2 weeks, delay the closing until after they are out. If you <em>have</em> to let them stay, hold back part of the proceeds until they are out in a timely manner, or use some other method that does not create a tenancy.</p>
<p>As far as the tax consequences, as long as it is an arm’s-length transaction you can make a case that zero in rent is legitimate and no imputed income will result. Why would you want to become a landlord collecting zero rent though? There is no upside.</p>
<p>Better to just let them stay there without creating a tenancy, at least then you would have a much easier time getting them out. You could just take physical possession and put their stuff out.</p>
<p>I don’t know about you, but I have seen many foreclosed house in good condition and I’ve bought one that is in moving conditions already. OTOH, I have seen houses that were trashed as well. But most of the people are still very reasonable.</p>
<p>I know it is can of worms. But ppl still do it every day. It depends who they are and where they are.</p>
<p>I know a house in Atherton, bought by my friends, was giving three months for the old lady to move out after closing. It was the condition that the lady will sell the house to them. Now, that was a 5 Million dollar house. If you know where Atherton is, you should know it is common place a house is worth 5 mil. or more.</p>
<p>vball has to make that offer of free rent because the market is so hot that without that you cannot buy a house(or at a disadvantage).</p>
I know people do it, I’m just saying there are better ways of accomplishing the same thing, that don’t subject you to landlord/tenant law.</p>
<p>It’s not the fact that you have to let someone stay for awhile after the closing, it’s structuring it in a way that minimizes your liability and reduces your exposure to trouble.</p>
<p>Now that I think about it, there is one tax loop-hole that you can take advantage of, if the rental period after you close is 14 days or less - income from a short-term rental of 14 days or less of your house is <em>tax-free</em> (at the federal level anyway). So you could structure the deal where the purchase price is lower, but paid back as rent. This is win-win for everyone - buyer gets a lower basis, and tax-free money in their pocket, seller shows less profit (in the unlikely event they have to pay taxes on the gains), transfer taxes are less, etc.</p>
<p>Thanks for the thoughts, and yes I realize that a rent back is risky regardless of the situation. I’m thinking a 60-day close might be acceptable to the seller so will start with that as an opening offer and not even mention the rent back possibility.</p>
<p>^^ I’m putting on my “sellers” hat here, but why would a longer close benefit the seller over another offer with a quick close? I’m assuming the seller is selling because he wants the money, possibly to buy another property, and closing sooner is usually better and more desirable than a longer close of escrow, for most sellers. My hubby is a broker here on the SF Peninsula, and a buyer who can close quickly usually trumps other offers requiring a long time to close, price being equal. A lot of things can go wrong with a long close. I dont think offering a long close puts you in a strong negotiating position, not right now or in the locations you are interested in.
My husband occasionally deals with rent backs, and all that is necessary is to have a portion of the proceeds of the sale of the property withheld in an escrow account until the house is finally vacated. Then the seller has a financial motivation to vacate.</p>
<p>So, we’ve been getting our house ready to put on the market for the last year or so. I only live in the house on weekends, so that certainly slows the process down.</p>
<p>Yesterday, I saw on-line the house that appears to be exactly what we want. This, in spite of my decreeing that we weren’t going to really look for a new house until the old one was under contract.</p>
<p>Assuming the new house turns out to be what it appears to be from the on-line listing, how do we buy the new house before we sell the old house?</p>
<p>mpm yes that would be the usual situation, but in this case the seller isn’t buying another house, she needs time to find a rental and move. When we talked to her about timing she said she’d need more than the usual 30 days to pack and deal with her stuff. She doesn’t have a lot, but some of it needs some thought as to how to dispose of it.</p>
<p>We’re presenting our offer Friday and are willing to negotiate a rent back with funds held in escrow if that’s preferable to a longer close. This is a FSBO, we’re the only offer at this point, and the seller has been fairly transparent so far.</p>
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<p>VeryHappy unless you have the cash to buy the new house, your first step should be to talk to a mortgage broker or loan officer to determine if you’ll be approved for a loan on the new house while still paying a mortgage on the old one. If you income is high enough, you can buy the 2nd house. A better plan might be to hurry up and put your current house on the market, priced to generate a quick sale, and meanwhile write up an offer on the new house contingent on the sale of your current one.</p>
<p>^^ VH - If I recall correctly you live in an area of CT where there’s always a market for homes … the only issue is selling price. I’d suggest getting a local realtor to provide you with a “at this price your house should sell in 90 days” estimate. If you can swing the financials at that price I say go ahead and buy the “exactly what we want” place. Life’s too short to be held hostage by a house that no longer suits your needs. JMHO. Good luck!</p>
<p>VH You can submit an offer to buy it contingent on the sale of your property.<br>
Or, if you have excellent [as in 750+] credit scores , a low balance on your current mortgage and have $$$ in the bank, you may be able to get a bridge loan from a lender, which you would pay off as soon as your home sells. First Republic is actively lending to customers with excellent credit.</p>
<p>Both things are good ideas. Yes, we do have excellent credit. I sent a question to my real estate agent to see what she knows about the new house. </p>
<p>From just looking at a house on-line, you just don’t know – it could smell mildew-ey, and nothing will change that.</p>
<p>“We’re presenting our offer Friday and are willing to negotiate a rent back with funds held in escrow if that’s preferable to a longer close. This is a FSBO, we’re the only offer at this point, and the seller has been fairly transparent so far.”</p>
<p>^^keeping my fingers crossed for you! good luck!</p>
<p>We never had any luck with bridge loans despite great credit. In the end we had my parents rent one house from us for the period that we owned both houses. We paid them back. Luckily there was only a month or two of overlap. Enough to do the renovations.</p>