Here’s a common scenario: Both parties to a real estate deal are ready to close, but for some reason the seller can’t move out by the closing date. Maybe the seller is moving to a new home or place of business, and the new place isn’t quite ready yet. Maybe the closing date is the last day of the month, a notoriously difficult day on which to hire a moving company.
One solution is to go ahead with the closing, but have the buyer rent the property back to the seller for a short period to give him or her time to move out.
Is this a good idea? It can be … but it involves many more complexities than most people realize. At a minimum, you should have a written rental agreement that covers the most important issues.
For instance, you’ll want to consider:
- Rent. Typically, the buyer will charge the seller rent for the holdover period. But what’s a fair rent? If the buyer has a mortgage, one convenient way to determine rent is to figure out the buyer’s monthly payment for principal, interest, taxes and insurance. Divide that amount by 30 (to get the daily prorated amount), then multiply by the number of days the seller is staying.
A seller might counter by offering to pay rent based on the amount of seller’s mortgage payment, which will typically be smaller.
Sometimes, the rent is zero. This usually happens when the buyer includes a flexible move-out date as part of a purchase offer in order to sweeten the deal.
- Rental period. How long is the seller allowed to stay? Is there a fixed move-out date? If the seller is able to move out more quickly than anticipated, can he or she do so and reduce the amount of rent owed?
- Security deposit. Many buyers will insist on a security deposit in case the seller damages something. An agreement should cover whether the security deposit is held in escrow or given to the buyer at closing, how the deposit will be applied, and how the remaining money will revert to the seller.
- Utilities. Who will pay for utilities while the seller is staying in the property?
- Buyer’s rights. Does the buyer have the right to enter the property during the rental period? Many buyers will want access to take measurements or have other planned work done.
- Insurance. The buyer might want to insist that the seller keep his or her property insurance policy in place while the seller is staying there. This might protect the buyer, but it’s not clear. If something goes wrong, the seller’s insurance company might deny a claim on the grounds that the seller no longer owned the property. On the other hand, sellers will want to keep an insurance policy in place at least insofar as it covers their personal property, which won’t be covered by the buyer’s insurance.