This regularly-scheduled sponsored Q&A column is written by Val Sotillo, Northern Virginia-based Realtor and Falls Church resident. Please submit your questions to her via email for response in future columns. Enjoy!
Question: We’re considering buying a house and we’ve been attending a few virtual open houses. There is one property we really liked, and the agent mentioned the seller needs to do a rent-back for 4 weeks after selling. How does a rent-back work?
Answer: A Seller’s Post-Settlement Occupancy, more commonly referred to as a rent-back, allows a home owner to sell their home, collect the proceeds and continue living in the home for a pre-determined period of time after closing.
The most common scenarios for a rent-back are:
- The seller has a need for the sale proceeds quickly; such as applying them towards the purchase of their next home. A word of caution on this strategy for sellers — they have to make sure that they’ll be able to find and close on their next home before the rent-back period ends.
- Moving out is burdensome and/or highly disruptive to the seller’s family and/or job that they don’t want to start the process until they’re under contract and all buyer contingencies have expired.
- Sellers need to remain in their home until the school year is finished.
- Sellers want to avoid a double move, first to interim housing and then to a new home. It can be costly to store belongings, and moving twice can be a huge inconvenience.
- Buyers are flexible with their move-in date, or their current lease doesn’t end until weeks after settlement.
How Rent-Backs Work
The Northern Virginia Association of Realtors contracts (as well as other regional contracts) provide a standard form for a Seller’s Post-Settlement Occupancy Agreement so you don’t need to worry about hiring an attorney. It functions as a short-term lease including how much the seller will pay the buyer for the rent-back, how long the rent-back lasts, a security deposit and a penalty for staying past the rent-back period.
Buyers will conduct a pre-closing walk-through before they purchase the home where they have all the rights provided to them in a normal sale. At the end of the rent-back, the new owners will conduct another walk-through once the previous owners move out, which is similar to that of a walk-through at the end of a normal rental period.
If the buyers are financing the home as a primary residence, the rent-back has a limit of 60 days per the buyer’s loan regulations.
If the previous owners caused damage during the move-out, the new owners can make a claim against the security deposit, generally held by the Title Company who handled the sale.
What’s At Risk
As a buyer, you might gain favor with the seller by offering a rent-back. This can work to your advantage if you’re trying to negotiate a lower price, or if you’re in competition and you need to pull out all the stops in order to make sure that your offer is accepted.
One option would be to delay the closing until the sellers can move in to their new home. However, we don’t usually see very long settlements in our market and sellers may want to have cash in hand and not have to worry about whether the sale will close.
For the new owners, a rent-back carries with it some of the same risks involved in being a landlord. Disputes over security deposit, damage in excess of the security deposit, or trouble with the previous owners moving out on time are all realities that buyers need to consider. As with many decisions in a real estate transaction, your willingness to agree to a rent-back is a matter of risk and reward.
Sometimes They’re Free
The fee for a rent-back is usually calculated off of the new owner’s carrying costs (mortgage + taxes + insurance), but in our hyper-competitive market, I’m seeing aggressive buyers offer seller’s a free rent-back as a way to increase the competitiveness of their offer. A free rent-back isn’t worth much if the seller is asking for an extra week, but it certainly adds up if they’re asking to stay for 6-8 weeks past closing. The rent-back fee is negotiable.
On both sides of the transaction, the use and structure of a rent-back is one of many important strategic decisions you may face in this market. It’s a good example of an area where an agent who understands the local market and how to maximize your risk/reward position can add real value.
Whether you’re reaching out to me or not, I want to stress the importance of making sure you have the confidence in your agent to truly protect and maximize your interests through the entire transaction lifecycle.
If you’d like more information, or would like a question answered in my column, please reach out to [email protected]. I hope to hear from you soon.
Val Sotillo is a licensed Realtor in Virginia, Washington D.C., and Maryland with Real Living At Home, 4040 N. Fairfax Drive, Suite #10C Arlington, VA 22203, 703-390-9460.