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'Rent-back' options can work in home buyer's favor
Some home buyers can gain an advantage over other buyers in negotiations with sellers by offering a rent-back. Normally, buyers take possession of the home they're buying either at closing or a few days later. A rent-back gives sellers permission to stay in possession of the home they've just sold for a longer period of time. This can be a big advantage to sellers who aren't able to move in to a new home right away.
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Without a rent-back, the sellers might have to make a double move, first to interim housing and then to a new home. It can be costly to store belongings, and moving twice can be a huge inconvenience.
Let's say you're currently renting, or you haven't yet sold your current home. You're in no particular hurry to move in to a new home, but you're ready to buy. The sellers are in a bind because they can't take possession of their new home until several weeks after closing.
One option would be to delay the closing until the sellers can move in to their new home. However, it may be advantageous to the sellers to close earlier. This way they have cash in hand and don't have to worry about whether the sale will close.
HOUSE HUNTING TIP: As a buyer, you might gain favor with the seller by offering a rent-back. This can work to your advantage if you're trying to negotiate a lower price, or if you're in competition and you need to pull out all the stops in order to make sure that your offer is accepted.
The amount of rent a seller pays for the privilege of renting back is negotiable. If you're not in competition with other buyers, you should ask the seller to cover your ownership costs. This usually amounts to the sum of your mortgage payment, property taxes and homeowner's insurance (called PITI), prorated on a per day basis.
Some sellers will balk at paying this much. If they have owned the property for decades, the buyer's cost of ownership is likely to be much less than they are currently paying. However, the sellers will be relieved of their ownership costs once the sale closes. And they can invest the proceeds.
Virtually everything is negotiable in a real estate transaction, so you can agree to let the sellers rent-back for less than your ownership costs if it works to your advantage. In a competitive situation, some buyers offer a rent-back at no cost to the sellers for a while.
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Buyers who enter into a rent-back agreement should require that the sellers sign an occupancy agreement that is specific to the situation where sellers stay in possession after closing. In California, the California Association of Realtors has a form that can be used for this situation. If you're buying in a state where attorneys draft home purchase contracts, ask your attorney to prepare the agreement.
Most all States have an interim occupancy agreement requires the sellers to keep the property in the same condition it was in when the buyers' purchase offer was accepted. In addition to maintaining the property, the sellers must continue to pay the utility bills and keep insurance in place to cover their personal possessions and liability. You might want to ask the sellers for a security deposit.
THE CLOSING: Make sure your contract includes a provision for the sellers to give you notice a certain number of days before they vacate. You'll need time to give notice if you're renting. And you'll also want to plan your own move in advance.
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