Clauses and contingencies are important parts of any real estate sales contract – and they’re endlessly customizable to cater to the needs of both buyers and sellers.
When it comes to providing flexibility and convenience for sellers, a rent-back clause can be an invaluable provision to include in the sales contract.
What’s a rent-back clause?
Also referred to as a post-settlement occupancy agreement, a rent-back clause basically allows the property’s seller to remain in the home after closing for some specified period. The seller then becomes a tenant, and the buyer becomes their landlord.
Why would anybody do this? Well, sellers are frequently caught between a rock and a hard place when it comes to navigating the sale of one home and the purchase of another.
Unless they’re able to get a bridge loan that will allow them to cover the mortgage on both the home they’re selling and the one they’re buying at the same time, a seller may not be able to afford a new home until the sale of the old one goes through. Stated differently, especially in the current housing market, many sellers rely on the sale proceeds of their current home to be able to afford a new home, as not many people can come up with a down payment on a new home while their funds are tied up in one they are currently trying to sell. Therefore, a rent-back clause may be a good option to allow the seller time after they sell their current home to find a new one to move to. The closing occurs and the sale goes through, but the seller is permitted to remain in the home for an agreed upon period of time, so that they can find a new place to buy. This is a good option for many people because the seller would then have the proceeds from the closing available for use and can then put a down payment on a new home.
In other cases, sellers may have their next home lined up and waiting, but there could be delays with the movers, mobility issues that make vacating the home more of a struggle, or a slight gap between the closing dates on the house they’re selling and the one they’re buying that could cause a problem. A rent-back clause can ease a lot of logistical concerns for the seller and prevent them from having to put their possessions in storage while they camp out at a friend’s house or a hotel for a while.
A properly drafted rent-back clause can benefit both parties. The seller, as discussed above, gets to remain in the house until a specified date. The purchaser is then compensated for allowing this to happen. There are many ways to structure payments to the purchaser, from standard “rent” payments each week or month, to escrow holdback provisions. These provisions basically hold a certain amount of sale proceeds in escrow pending the seller moving out. If the seller moves out by that date, the funds are released to the seller. However, if the seller does not, then the funds are released back to the purchaser. It is important to consult with an attorney to discuss which option is best for your situation and to ensure both the seller and buyer are protected.
Permitting a rent-back clause in your real estate contract is also a way buyers can “sweeten the pot” for the seller. The flexibility they offer could also make the difference between a successful bid on a new home and one that’s passed over. That being said, however, it’s important to make sure that your contract is clear regarding the duration of the rent-back period, the cost, security deposits, insurance and other practical concerns. Legal guidance can make sure that nothing essential is overlooked. Here at Corey Szalai Law, PLLC, we have helped numerous clients draft these rent-back provisions and contracts and can help you, as well. Call today to set up a consultation to see if a rent-back clause is right for you.