Thu. May 26th, 2022
what’s-a-rent-back-deal?-(and-two-other-reasons-a-seller-may-still-be-in-the-house-after-closing)

Nothing deflates the excitement of buying a home faster than a seller who’s still in the house after closing. Such a scenario truly takes the social faux pas of overstaying your welcome to a whole new level!

That said, a seller remaining in the home after closing isn’t always a nightmare scenario. Given the recent low-inventory market, many sellers are requesting rent- or lease-back deals, which allow them to remain in the home for a short period of time. In these cases, you’ll become the seller’s landlord while they continue to live in the home temporarily.

These deals are often quite amicable. But there are still other nightmare scenarios where a seller refuses to leave on the agreed-upon date, so buyers should tread carefully in this territory.

“I’ve had people literally crying in the driveway, moving vans in the driveway, and the other people haven’t moved out yet,” recalls Nicole Solari, a top agent and first-time homebuyer specialist in Fairfield, California. “And conflicting times. Just lack of coordination, and lack of communication, is the biggest thing.”

Depending on the sellers’ willingness to be reasonable and how urgently you need to move in, you’ll either need to work out an agreement or engage the help of an attorney if the situation escalates. We’ve got solutions and options for the specific scenario you face, whether it’s:

  • You need to negotiate a rent-back.
  • You’re worried the sellers will miss the move-out deadline.
  • The sellers refuse to move out, period.

Scenario 1: The seller asks for a rent-back in the contract

There are a number of reasons why a seller could request a rent-back deal. They may need additional time to find their next home but need the money from the home sale for their down payment. Or they may simply need more time to move due to a variety of life circumstances.

Ryan David, a real estate investor in Pennsylvania, recalls one recent rent-back deal he participated in where an older woman wanted to sell her home after her husband passed away, but she needed more time to sort through all of the belongings they had accumulated during their life together. The funds from the sale of her home, coupled with the rent-back agreement, gave her time to downsize and find a new place to live.

“It was beneficial for her just to sell it to us and then just rent it back for a period of time,” David says.

Still others may be building their next home, and maybe it’s the construction crew that needs more time. Edie Waters, a Kansas City agent with 28 years of experience under her belt, says this used to be one of the most common reasons someone requested a rent back deal.

“It’s typically when the seller is building a new home and the construction is delayed by a few days or weeks,” Waters explains.

These situations aren’t the norm when it comes to buying or selling a home, but they’re far from extraordinary. About 20% of sellers moved out during a rent-back period, a 2017 survey by the National Association of Realtors® found. In contrast, 50% moved out during the period between when they accepted an offer and when the sale closed.

In a hot market where sellers may have trouble finding their next home, these deals are undoubtedly becoming more common. Buyers may even find themselves trying to stand out in a bidding war by offering a seller a requested rent-back deal.

What to do?

Depending on your situation, a rent-back could represent a welcome offer or a housing headache. It all hinges on your flexibility, accommodations, and timeline.

1. Weigh the pros and cons of a rent-back for your situation

Pro: Sweeten the pot
Being flexible with a seller’s move-out options can help you stand out in a competitive market. Agreeing to a rent back could be the ticket to securing an offer in the first place.

“I believe the added value I was able to give the seller propelled my offer to the top of the pile on each occasion,” says Shaun Martin, a real estate investor with properties in Colorado, Florida, and Indiana. Martin has done three rent-back deals in the past year.

Con: You’ll need to play landlord
When the seller rents the property back from you, you assume the role of the landlord. That means any unexpected issues, like a burst pipe, broken fridge, or failed AC, are now up to you to handle.

Pro: Money in the bank
This isn’t a free deal for the sellers. They’ll be obligated to compensate you. To work out a prorated daily rate, divide the monthly payments (including  insurance and taxes) on your new home by the number of days in the month.

Con: You’ll need another place to live in the meantime
Depending on your housing situation, a lease-back contingency could leave you homeless, or scrambling for temporary housing. It’s one thing if you’ve still got a few weeks left on your lease. It’s another if you’re in the middle of moving cross-country with kids in tow and expected to be able to move in by a certain date.

In a tight rental market, finding another place to live could be a challenge. In 2021, CNBC reported that bidding wars were becoming more common for rentals, with landlords receiving dozens of applications for a property from prospective renters.

2. Set up a detailed lease or contract

The rent back isn’t a handshake deal. Just like any rental agreement, you’ll want to work with your agent or real estate attorney to nail down the terms of the agreement, including:

  • Term of the rent-back period — the rent-back should last no longer than 60 days. Any longer, and the property is classified as an investment residence instead of primary residence, and the terms of your mortgage will likely need to change.
  • The amount the seller is expected to pay in rent per day
  • The party responsible for utilities
  • The buyer’s rights to enter the property

West Virginia real estate agent Patrick Lyons, recommends that buyers get sellers to agree to the terms of a rent-back agreement before closing.

“As a buyer, the biggest leverage you have is … you could just say ‘well, I’m not going to close,’” Lyons says. “In my experience, it’s always best to have the agreement signed before you close so everybody knows what is going on and what’s supposed to happen.”

Of all these terms, setting the daily rental price is key. In a tight rental market — single-family home rental prices rose 7.8% in 2021, per Bloomberg — you should take into consideration both the mortgage payment, plus any insurance and tax costs you’ll be responsible for, in addition to the market rate for rentals in your area. If the market rate for rent is higher than your mortgage, you could make some money off the agreement.

You can also tack on a premium for the inconvenience: “I’ve had sellers pay up to $500 a day to stay in a home,” says Waters. If you’re willing to be flexible, you can make a quick buck leasing back the property.

The buyer can also ask for a daily fee if the seller stays beyond the agreed date, and a security deposit for damages incurred during the rent back.

You might also consider asking the seller to put some money into an escrow account as an incentive to get them to move out quickly. If the seller moves out on or before the agreed upon end of the rent back deal, they’ll get this money back. If they don’t, they’ll forfeit the cash.

And the initial agreement should spell out exactly what will happen if the sellers fail to move out by the agreed-upon date. That way, you’ll feel secure in knowing that you’re protected from the beginning of the agreement.

3. Get the right insurance coverage

Since you won’t be living on your property, the sellers will need to get renter’s insurance to cover the belongings in the home in the event of fire, theft, or vandalism. Your homeowners insurance won’t provide coverage to the property because you’re not living in it. You should require proof of insurance before agreeing to a rent-back contract.

4. What happens if the seller needs more time in the house as the rent-back term approaches its end?

If a seller approaches you asking for more time at the end of a rent-back deal, you have a few options.

The first is to grant them their extension. If you’re also renting, you can talk to your landlord about extending your lease, or you can see about renting a place on a month-to-month basis.

Then, have the sellers sign a new rent-back agreement, with increased fees to encourage them to move out promptly.

You can also refuse — but be warned, you may end up in eviction court. Both Martin and David have seen cases where rent back deals resulted in evictions.

In David’s case, the seller had to be evicted after they began doing damage to the property and refused to pay rent. David’s company asked the seller to move out or start paying, but they refused.

“We had to actually go to an eviction court,” David says.

To avoid a nightmare where a seller refuses to move out, an airtight lease agreement is key. Martin recommends working with an attorney to draw up the agreement to ensure that a judge will side with you if you end up in eviction court.

“A real estate attorney will ensure all the i’s are dotted and t’s crossed,” Martin says.

“You will be able to sleep well at night knowing that you and your interest in your new home-to-be are protected by the law. The few hundred dollars you spend making sure the deal is done right is an insurance policy in case the deal goes sideways.”

Scenario 2: You discover a house full of stuff during the final walkthrough

It’s 24 hours before closing, and you arrive at the house for a final walkthrough. You expect to open the doors and see the home in a “broom clean” state, which means swept, vacuumed, and free of debris or excess stuff you haven’t agreed to keep.

Instead, you enter a home packed with junk: closets full of old winter coats, heavy bureaus in the bedrooms, piles of stuff everywhere. It’s clear from the moment you walk in that the seller isn’t going to meet their move-out deadline.

Whether the sellers left a basement full of seasonal decorations and heavy furniture or just flat-out refuse to leave your new home, you’ll need to reopen those lines of communication and consider striking a compromise.

What to do

Stay calm, cool, and collected, and then take care of the following.

1. Double-check your contract

If it looks like the sellers won’t be out by the date you agreed to, the first step is to confirm the details of your contract to make sure they didn’t ask for extra time after closing.

You might be 100% confident that you’re on the same page, but mixed signals happen when you’re managing so many details.

It can’t hurt to confirm once more what’s in writing (note that it’s common for buyers to allow a week to 10 days for the seller to vacate after closing).

2. Work out a compromise

The purchase contract is crystal clear. Now, it’s T-minus 24 hours before the sellers agreed to leave, but based on the condition of the house, you have strong reason to believe they’re not going to make the deadline.

Before you threaten legal action, try compromising with the seller. Perhaps there was a miscommunication or last-minute emergency on their end.

“My advice to everyone is always the same: I try to work it out first,” says Zach Schorr, a Los Angeles-based attorney with nearly two decades of experience in the world of real estate litigation. “If they’re not getting out, it can be quicker to get them to agree on a certain date rather than spending a month or two in court.”

If you need to start moving things in, perhaps you can offer the seller limited storage in the garage for a couple of days after closing. Make sure to discuss these options with your agent — and, if possible, a real estate attorney — to ensure you aren’t incurring any liability for items that don’t belong to you!

3. Delay closing and withhold funds in escrow

If you haven’t signed the final closing paperwork yet — don’t. Once you close, you lose leverage. The sellers have the cash and the house at that point.

“Your only leverage is to say, ‘I’m not going to close until these things are gone.’ And that’s the purpose of the final walkthrough,” Lyons says.

Agree to a delayed post-closing move-out date with the seller, and keep some of the closing funds in escrow until they’ve fulfilled their end of the deal.

For a first-time buyer, delaying closing might sound like a headache, but Waters says it’s a non-event for most agents. In fact, an agent will often plan for a closing mid-week so if you need to push it back 24 to 48 hours, you can still close in the same week.

4. Haul the stuff yourself and decide whether it’s worth suing over

Let’s say you make it to the closing table, receive the keys, and start moving in. You then find the seller left more than a few small items behind: There’s still equipment in the shed, boxes in the attic, and piles of junk in the hall closet. You’ve asked your agent to contact the seller and requested that they come back to remove their possessions.

Radio silence.

At this point, you’ve got two main choices:

  1. Cut your losses. Toss, donate, or otherwise get rid of the stuff yourself. (Are any of the items worth keeping?)
  2. Keep track of what it costs to remove the items and sue the seller for the expenses.

Schorr once had a case where the seller of an estate left a ton of junk behind, and the buyer wound up spending several thousand dollars to have it removed. The purchase contract didn’t specify that the seller would leave the items, so the sellers were in clear violation of contract.

The buyer decided not to bother with small claims court, knowing the case would be long and drawn-out, and that paying a lawyer and showing up for court would ultimately be more expensive than what the buyer paid to get rid of the junk.

But, that’s not always the case, Schorr reasons: “it’s up to the buyer to determine if the cost of removal is worth suing over.”

Scenario 3: You’re in the driveway with your moving truck, and the sellers won’t leave

You pull up to your new home in a van packed tight with your belongings, only to discover the sellers haven’t moved out yet. Maybe you’re running up against the end of your lease, and if they’re not out within the week, you’re homeless. Or, maybe like this investor in Idaho, your seller moved more things into the house and even installed an additional satellite dish to the roof.

Bottom line — you’re ready to move in, and your seller isn’t moving out.

What to do

With closing paperwork signed and the deed in hand, you’re now the rightful owner of this property. However, getting the sellers to move won’t be as simple as asking them nicely to leave or changing the locks while they’re out. You’ll need to tread carefully to avoid any legal blowback.

1. Talk to your agent about next steps

Reach out to your agent ASAP. In phone-tree fashion, your agent will contact the listing agent and broker to bring everyone up to speed, with the goal of helping the seller vacate the home before the situation escalates further.

Your real estate agent will also be able to connect you with reputable real estate attorneys in the area…because chances are high you’ll need one at this point.

Use your agent as a resource to find an attorney, then vet your attorney candidates with the following questions:

  • How many seller holdover cases have you handled?
    Try to get a feel for how often the attorney deals with this type of scenario and whether it’s a type of case he or she gets hired for regularly.
  • How many of your cases end up in court?
    Once holdover cases reach court, a long and expensive process ensues. Check if the attorney has a history of settling or mediating these disputes — avoiding court saves you time and money in the long run.
  • How long do you expect this case to take?
    Attorneys well-versed in holdover cases should be able to ballpark how long the case will take based on previous experience.

With an attorney by your side, you’ll be in a position to start the eviction process if necessary.

2. Send a demand letter

An attorney will help you submit what’s called a demand letter to the sellers. A demand letter describes your problem (you closed on a house but the owners won’t move out) and what actions you need the other party to take (vacate the property). It’s the first step in resolving an issue, and in one-third of all potential disputes, a demand letter leads to resolution.

When a seller won’t vacate the property even after delivering the demand letter, you’ll need a legal resource who’s well-versed in tenant/property laws in your state.

“You can’t just change the locks or force the sellers out without the proper process, or they’ll sue you,” Schoor explains. That means it’s a good idea to bring on a lawyer at the very beginning of a seller holdover, even if only to work behind the scenes.

Once a seller remains in the home after closing, they’ve basically become your tenant. Forcing them out by changing the locks or intimidation, or entering the property without notice, can lead to retaliation lawsuits.

3. Check your state laws

Getting a seller to vacate the property is similar to evicting a tenant, though how long the process will take depends on where you live. Most states have unlawful detainer statutes that fast-track the dispute to trial within 45 to 60 days.

Eviction processes do vary state by state, but they generally follow this formula.

  1. You file a complaint with the court. You’ll need to file the appropriate paperwork and in some cases pay a small fee (an average of $50).
  2. From here, the person being evicted can:
    1. Move out
    2. Contest the complaint
    3. Not respond at all
  3. If the seller challenges the complaint (sometimes called an unlawful detainer), the trial will take place within 30 to 45 days. If the seller doesn’t respond, the court will often rule in favor of the buyer.
  4. The complaint goes to trial. If the seller shows up, both the buyer and seller will present their points. If the seller is a no-show, the judge typically sides with the buyer and grants eviction.
  5. Writ of execution or possession. If the judge rules in favor of the buyer, a marshall or sheriff will deliver the eviction notice. From there, the person will have between three and five days to vacate, depending on the state.

Eviction can be a long, complicated, and emotional process. You shouldn’t resort to it unless you’ve exhausted all other options to compromise and negotiate with the seller.

Thankfully, this type of extreme situation is rare: “Knock on wood, but I’ve been selling real estate for 25 years, and our team will sell over 500 homes this year, and I’ve never had this happen,” Waters says.

Source: (Kelly Sikkema/ Unsplash)

The moment you realize the move-out isn’t moving smoothly, loop your agent in and consider consulting an attorney. When the seller lingers like a bad smell, you need to start protecting yourself using the leverage you still have, whether that’s crafting an airtight rent-back lease, keeping funds in escrow, or filing a formal letter of complaint. Don’t let a seller’s refusal to leave defeat your achievement of buying a home.

Disclaimer: Information in this blog post is meant to be used as a helpful guide, not legal advice. If you need legal help with a seller holdover situation, please consult a skilled lawyer.

Header Image Source: (Di_An_h / Unsplash)

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