What if Your Sellers Have Nowhere to Go?
They may need to enter into a leaseback agreement with the buyer while searching for another property, but there can be unforeseen risks if the contract isn’t structured carefully.
August 9, 2021
For sellers, it’s more difficult than ever to get the timing right between the sale of their current home and the purchase of their next property. Low inventory, high prices, and quick transactions work against them as buyers, so many sellers may need extra time to figure out their next move. One solution is to ask for a leaseback agreement, which allows the seller to stay put and rent the property from the buyer after the sale. Such an agreement is typically meant for a short period of time—a matter of days or a week. But in this feverish market, some agreements are stretching to a few weeks or even months, which can pose problems if they’re not structured to account for various risks, says Deanne Rymarowicz, associate counsel at the National Association of REALTORS®.
Some sellers are delaying their search for a new home until they’ve sold to avoid the need for contingencies, which can undermine a person’s competitive edge in today’s market, says Michael “Smit” Smith, C2EX, RENE, a sales associate with Windermere Real Estate who is licensed in Arizona and Washington. Of course, that strategy also can land sellers in housing limbo. Sellers often have little time to organize a move, as the typical home sold in just 17 days in June, according to NAR data.
Leasebacks, also known as post-possession occupancy agreements, not only help sellers but also can give buyers an advantage in bidding wars. “In this market, buyers are putting these in to sweeten their offers in a multiple-offer situation,” Rymarowicz says. “Sellers are selling their homes so quickly that they may not have even started packing.”
But—and This Is a Big ‘BUT’…
These agreements turn home buyers into landlords and sellers into tenants. Giving a seller a few extra days to move out is fairly common. “But it’s when we’re talking about more than a few days that there’s a lot more to consider, like any potential risk of loss, insurance, and rent,” Rymarowicz says. For example, should the buyer charge a security deposit? Do any state or local landlord rules apply—particularly if the seller-turned-renter is staying longer than 30 days? Here are some tips to keep in mind when your client needs to enter into a post-closing occupancy agreement.
- Put everything in writing. Buyers shouldn’t let sellers retain possession of a home for any amount of time without an agreement in place that lays out all the conditions. Your clients may need a short-term lease agreement in place while drafting a longer-term contract if the seller plans to stay for 30 days or more, Rymarowicz says. Leaseback agreements should spell out the length of the rental period; the amount of rent per day, week, or month, if applicable; penalties for late payments; who pays for utilities; the buyer’s right to access the property; and the seller’s duties to maintain the home while they’re living there. The agreement may stipulate that the buyer has the right to inspect the property and ensure no damage was done.
- Double-check insurance coverage. An insurance agent can help clear up any confusion about who’s responsible for what if the home is damaged during the leaseback period. For example, who has to pay if the water heater breaks or a tree limb falls on the roof? The responsibility likely will fall on the buyer as the new homeowner. However, the seller isn’t off the hook. Once becoming a tenant, the seller’s previous homeowner’s insurance policy no longer applies, Rymarowicz says. “The seller will need to talk to an insurance agent to discuss converting it to a renter’s policy to ensure their possessions are still covered,” she adds. Also, buyers should ensure that there are no gaps in their insurance policy during the leaseback period. Otherwise, they’ll need to carry supplemental insurance, like fire coverage.
- Charge a deposit. The buyer may want to charge a refundable security deposit just like a landlord would. Damage to walls, for example, can occur when the seller finally moves out, and a deposit can offer protection against any losses. Consider whether the security deposit should be held in escrow or released to the buyer at closing. A security deposit can also send a message to the seller: This isn’t your home anymore, and you’ll be on the hook for damages like any tenant would.
- Get the lender’s approval. Many lenders won’t accept leaseback agreements that are longer than 60 days, at which point the home can be classified as an investment property instead of a primary residence. Investment properties come with different loan terms—and, typically, a higher interest rate. Make a lender aware of any leaseback arrangements up front to make sure the buyer’s loan won’t be put in jeopardy.
- Know the risks. Buyers must have safeguards in case a seller refuses to leave at the end of the leaseback period, though this situation rarely occurs, real estate pros say. Still, it’s increasingly a possibility in an environment where many people are taking advantage of eviction moratoriums, Smith warns. With this in mind, buyers may ask sellers to waive their rights as tenants under current COVID-19 protections. As another safeguard, buyers may hold a portion of the home sale amount in escrow and release it to the sellers once they finally move out.
- Consult an attorney. A real estate attorney can review any post-possession occupancy agreements, particularly those that stretch beyond a few days, to help minimize the risks. “The longer [the time period] these agreements are structured for, the more both parties will need to think about avoiding potential issues that could arise,” Rymarowicz says.