How Are Seller Rent Backs After Closing Handled?

seller rent back
••• In some markets, sellers rent back for free. © Big Stock Photo

Question: How Are Seller Rent Backs After Closing Handled?

A reader asks: "We are buying a home and the seller has asked to rent back for 30 days after closing. In other words, we would become landlords before we've ever moved into our new home. This sounds really strange to us. Why would a seller want to rent back? Do we have to allow this?"

Answer: The reasons why a seller might need to rent back after closing vary, but it's not uncommon for a seller to request a rent back.

The home the seller is buying might not be available at the time your transaction closes or the seller might not be able to find a moving van on the last day of the month, when demand for moving vans is high.

Of course, as a new home buyer, you might find this situation unsettling. After all, you've paid a lot of money for your new home, on top of paying interest on a loan for a home that you can't yet occupy. It's understandable that you are eager to move in and take possession right away. Plus, you may not have anticipated finding yourself in the position of being a landlord.

How to Protect Seller / Buyer Rights When Sellers Rent Back

Treat this situation as you would any other business relationship. Buyers should never let sellers retain possession of a home without executing a formal occupancy agreement. These agreements spell out the terms and conditions of the seller's occupancy and protect buyers as well as the sellers.

In California, real estate agents have at our disposal a handy form called the Seller in Possession, which among other contract terms, addresses seller rent backs. When the appropriate box is checked, this addendum modifies the purchase contract.

The SIP handles short-term seller rent backs that are less than 30 days and contains the following elements:

  • Term of the rental period
  • Amount of rent per day
  • Amount of security deposit
  • Whether the security deposit will be held in escrow or released to the buyer at closing
  • Late charges, if any, pertaining to non-sufficient funds and / or payments that are received late outside of escrow
  • Who pays for which utilities
  • Right of buyer to enter property
  • Seller's duties to maintain the property
  • Lease assignment and subletting rights
  • Seller's obligations upon surrender
  • Insurance for seller's personal items
  • Miscellaneous conditions

If a seller stays 30 days or longer, then a lease agreement should be executed.

Insurance Coverage for Seller Rent Backs

Sometimes, buyers will insist that sellers maintain their existing homeowner insurance policy during the rent back period. While insurance companies are not happy to keep coverage in affect, many will continue the policy upon request.

However, there are several problems associated with this. The seller no longer owns the home, so in the event of a claim, the seller's insurance company may refuse to pay the claim. Moreover, the buyer has insurance coverage because lenders insist that a buyer's insurance policy be in force at closing.

Some insurance companies have argued that if a claim were to occur and the seller submitted a claim to the seller's company, even if the seller's company paid it, the seller's company might look to the buyer's insurance coverage for reimbursement.

In either case, the seller should carry coverage for the seller's personal belongings and automobiles.

Determining Rental Amounts for Seller Rent Backs

The rent the seller pays is negotiable. Sometimes seller don't want to pay any rent but ask to stay in the home for a few days rent-free. In that event, it is still wise to execute an agreement that addresses liability issues and term.

Because most buyers finance a new home, buyers are incurring interest and paying taxes and insurance for a home they do not occupy. It is reasonable, in most cases, to charge the seller an amount that is equal to a daily proration consisting of the buyer's principal, interest, taxes and insurance.

If the buyer's new mortgage payment includes impounds (taxes and insurance), it is fairly simple to divide the PITI payment by 30 days and charge the seller that prorata amount per day.

For example, if the buyer's new payment is $3,000 PITI, that would equal $100 per day.

But a PITI payment for a seller rent back is not required. Smart buyers would check existing rental rates. They may find a PITI payment calculation is less than average rental rates.

For further protection -- and to comply with local rent control laws or other state-specific laws governing landlords and tenants -- buyers and sellers might want to consider signing a standard residential lease agreement. For more information, consult a real estate lawyer.

At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.