A seller leaseback is when the seller of a home becomes a renter after closing. A leaseback is included in a contract when the seller needs additional time to find a new home. The seller leaseback is also known as a rent-back agreement.
The rent-back or leaseback can be great for sellers because they have the peace of mind of not moving until after the closing funds are deposited into their bank account. Leasebacks can also facilitate a faster closing than would otherwise be possible.
This post will explain how to create a seller leaseback and what the owner occupancy requirements are.
Language to Create a Seller Leaseback
If a seller wants to counter to create a leaseback, the language looks something like this:
Possession shall be delivered ___ days after Close of Escrow. For this time period, Seller shall pay $___ to Buyer and a deposit of $___. During escrow, Buyer and Seller shall negotiate a written lease to cover this occupancy.
Sometimes sellers request the leaseback be free. In a seller favorable market, buyers may agree to a free leaseback with an adjustment to the purchase price. Most sellers will expect rent that at least covers the mortgage payment.
Be Careful if the Buyer Needs a Loan
If the buyer is using a traditional loan, the seller should not request more than a 59-day leaseback. That’s because a buyer who does not occupy the home within 60 days of closing does not qualify for an owner occupied loan. Failure to qualify can create havoc for the buyer and undermine their ability to get a loan.
Sometimes buyers and sellers circumvent this issue by agreeing on the leaseback outside of escrow, not referencing it in the offer to purchase real estate or any counteroffer, and not informing the bank that it is occurring.
Don’t do that. It’s mortgage fraud. You’d be opening yourself up to lawsuits, penalties, or worse.
A Leaseback Can Complicate a Sale
A seller leaseback adds one additional wrinkle to the escrow process: the buyer and seller will need to agree on the form of a written lease.
The lease should include security deposit amount, who pays utilities and rental time frame (less than 60 days).
Legally, the buyers are going to be landlords for two months or less. While usually this isn’t a problem, it’s a smart idea to consult a real estate attorney to draw up the lease and a realtor to negotiate the addition of a leaseback.
