Dear Monty: We just lost out on a house because the sellers needed time to move out after close for up to 30 days. We even offered to adjust the close date, but they were adamant. This practice is daffy. Do I sell you my washing machine but then get to use it for a month? Not having access to property that I own is not correct. Plus, will they take care of the house when they don’t own it? There was another offer a few thousand over list price with a financing contingency. We had a cash offer at the listing price. Is renting back after closing a common practice?
Monty’s Answer: The after-closing rent-back practice is common in real estate across the US. There is no comparison to selling a washing machine and a house. It also sounds like the reason you lost the home may have been “a few thousand dollars” rather than the rent-back contingency. It could also be that they would have preferred the cash offer, but the failure to agree on the rent-back was enough to push them to the higher bid.
Why Do Home Sellers Prefer To Rent Back?
Many real estate agents recommend delivering the property to the buyer at closing. While that is fine if the house is vacant, delivery at closing puts the seller at financial risk in most other circumstances. Here is a link to a sad story on the DearMonty website. Here are the reasons sellers should rent back:
— If the transaction fails to close, the seller has made many unrecoverable financial commitments. Depending on your source, fall-thru rates around the US vary from 10 to 20%.
— The rent-back relieves emotional strain that otherwise builds as the closing draws near.
— There are several arrangements now requiring extra time to be unwound. The inconvenience carries frustration with it.
— The rent-back removes these risks.
Why Do Homebuyers Agree to the Rent-Back
When the buyer and seller agree on the terms of the sale and the seller requires a rent-back, most home buyers (over 50% are coming from a home they recently sold) agree. They accept the rent-back request as a reasonable requirement. Here are the reasons home buyers agree:
— The document clearly outlines all the seller’s obligations during their occupancy. Items such as physical damage, move-out date, utility payments, a daily occupancy fee, condition upon vacating are broom clean, lawn and yard maintenance and any other obligations.
— Escrow money from the seller’s proceeds guarantees delivery to the buyer on or before a specific date. The seller must comply with all the terms of the rent-back agreement. These agreements usually include a holdback on the rent.
— It is a condition of the seller in the sale.
When Home Sellers Should Use the Rent-back
Here are the circumstances that make the rent-back contingency a handy tool:
— The buyer’s offer has any contingencies.
— In the event of a buyer default, ensure the deposit is large enough to cover your potential financial losses (does your broker share in the defaulted earnest money?).
— The seller does not have a home ready to occupy at closing.
Richard Montgomery is the author of “House Money — An Insider’s Secrets to Saving Thousands When You Buy or Sell a Home.” He advocates industry reform and offers readers unbiased
real estate advice. Follow him on Twitter at @dearmonty, or at DearMonty.com
