Sellers’ rents can be a powerful tool in a buyer’s toolbox
One of the complications of a bustling real estate market is that intense competition for homes makes it harder for home sellers to plan their next move. Those selling a primary residence need to consider other factors, like how long it will take them to find their next home and where they will go in the interim if their current home sells out quickly. As a result, an increasingly popular tactic to highlight a buyer’s offer is the use of seller leases.
Sellers’ rents have increased in proportion to the competitive housing market
Many homeowners would like to take advantage of this extremely competitive housing market and take advantage of bidding wars and inflated prices. But these same market conditions made sellers reluctant to leave their homes without the next location being scheduled. This attitude is justified given that it is now quite normal for homes to exceed the asking price by 15%, or even 20% depending on the region – and for buyers to suffer multiple refusals before an offer is accepted.
Vendor-leaseback arrangements (also known as seller-leaseback), in which the seller rents the house to the buyer for an agreed term, have become increasingly common in this market. In the past, agents typically turned their clients away from rents to avoid potential complications, but many agents are now adopting them as a temporary solution in a difficult housing climate.
The benefit to sellers is clear: it saves them the trouble of having to move twice and rent between homes, while helping them avoid placing home sale contingencies on their offers. And with such a competitive market, it’s something sellers can ask for – and receive.
The risk to buyers, while relatively small, is something they should consider – they will navigate a temporary tenant-owner relationship where sellers could potentially leave the house in disrepair. But in a multiple auction situation, offering a rent-back is a way for buyers to present a more attractive offer to sellers without having to increase their bid price.
Although vendor hire-purchase arrangements have grown in popularity across the country, it has become particularly prevalent in extremely competitive and transitional markets such as the greater DC metropolitan area (Virginia and Maryland). The main reason for this is that the area’s housing market is starting to cool down and sellers don’t want to miss out on the excitement of the past few months (according to data from Bright MLS, DC Metro Homes were on the market for 7 days in July, down from 6 in June – and the median selling price fell 3% in July compared to June).
Sellers are realizing that a tight market and profit go hand in hand. Once it becomes easier for sellers to buy their next home, they’re less likely to get 10 deals and the best price for their current home. By selling now and entering into a post-occupancy deal, they can maximize their profits while ensuring they have time to find their next home.
How the sale-leaseback agreement works
In most purchase contracts today, the seller’s return rent is usually included free of charge as part of the offer for the house (or, the buyer can charge the seller for a monthly fee). This is because buyers use the free occupancy months as a negotiating tool in a very crowded market – usually Besides exceed the asking price. On-lending agreements are typically 30-day and 60-day agreements, although they can be shorter or longer. The seller usually pays a security deposit of several thousand dollars.
The terms of the contract, in particular the post-occupancy agreement, are essential to have a smooth seller rent-back experience. If there are any issues, it will almost always revert to the language of the post-occupation agreement.
The suitability of a seller retrocession for a buyer depends on several factors, including location. For example, in DC, seller’s hire purchase agreements are generally frowned upon due to rental laws – if something were to happen, the departing seller could occupy the house for up to six months (which is the time). it takes to deport to DC).
A licensed real estate agent is ultimately the best resource here to structure the contract to protect the buyer, but also to guide them to the best option for their needs.
Potential complications of Rent-Back
In the past, agents have often cautioned clients against entering into or accepting rental agreements due to the risk of complications. The question of who is responsible for fixing a washing machine that breaks down before the new owners can move in, for example, can seem a little murky.
There are also a lot of details to be worked out about who pays for what. Renters insurance is strongly recommended, as is going to a lender or insurance company to make sure the seller is covered. More precisely for this situation. Typically, the seller will pay for utilities until they move.
Unsurprisingly, buyers are often wary of the condition the home will be left in. The final visit usually occurs after the seller has removed all of their property from the house, but in this situation, the final visit comes after the house has completely changed hands. Even in the best-case scenario, it’s likely that clogged pipes or burnt out bulbs have been missed. After closing, however, there is less incentive for previous owners to deal with these details.
While the main concern is usually that sellers leave homes in a mess or refuse to move out, many of the potential complications are due to the from the buyer side instead.
Although the market is still white hot, things have cooled down a bit in some areas. Buyers who have chosen to spend tens of thousands of dollars rather than asking, or who have opted for a free two-month rental agreement, are now feeling a bit of remorse and are looking to get some of their money back.
This can create a powerful incentive for buyers to look for any reason to keep the security deposit. And the last thing sellers want – because they’re probably trying to move into a new home – is to face a battle in small claims court.
Because of all the potential complications that can arise, it is important to work with an experienced agent. This is especially important in a situation where a seller will continue to have a relationship with the buyer after the house has closed.
How to structure an annuity contract
A well-structured post-occupation agreement is essential to limit liability. It’s not a part of the contract that can be copied / pasted from a previous settlement – it really has to meet the needs of the individual buyer and seller.
if the buyer is working with a lender, it may be necessary to maintain the on-lending agreement for 60 days or less. In some loan policies, 60 days is the limit for a residential move – at this point the house moves from a primary residence to an investment property, and investment property carries higher interest rates. This is the case for Fannie Mae, Freddie Mac, FHA, VA and USDA loans: the buyer must establish occupancy within 60 days of signing the contract. The buyer can also have tax implications if he rents his house for more than 60 days. Sellers seeking longer post-occupancy periods may be encouraged to accept cash offers to avoid potential loan qualifying setbacks.
A homebuyer should also take it upon themselves to recheck their insurance plans and make sure that both rental and home insurance can cover a reassignment situation.