What to Know About Leasing a Home Back to Its Previous Owner

When Jessica Piha, the director of communications for home improvement site Porch.com, bid on a single-family home in the Seattle area, she knew hers wasn’t the highest offer presented to the seller.

She’d offered to pay around 25 percent more than the asking price, but in a hot housing market like Seattle, other buyers were offering as much as 75 percent more than the asking price, sometimes without financing or inspection contingencies. “I knew that to be competitive I had to be able to leverage what I had – and that was flexibility,” Piha says.

The current owners of the home were building a new property, so they wanted to close on their current home sale and lease it back from Piha. That way, they could continue living in the home for a few weeks while the new property was completed. Piha allowed them to lease back the property for free until May 15, and that flexibility got her the house she wanted. “I waived utilities, rent, everything,” she says. “The only thing I required them to have was renter’s insurance,” she adds. Piha stayed in her apartment a few weeks longer and, fortunately, the previous owners moved out ahead of schedule and she was able to take possession of her new home.

This type of arrangement is called a sale-leaseback or a post-closing possession agreement depending on where you live (for instance, you might hear sale-leaseback in the Southeast or Northwest, while you might hear post-possession in the Northeast).

“The seller has sold the property, and they remain in the house for X amount of time so they can figure out their next move or close on their next house,” explains Janine Acquafredda, associate broker with House-N-Key, Realty in Brooklyn, New York. “It’s very common, but it’s not going to work for everybody,” she says. Often, she says, those willing to agree to this arrangement are first-time homebuyers who can simply stay in their rental a little longer like Piha did. Another situation where this might work is if the buyers are real estate investors who plan to rent out the property anyway.

While Piha’s sale-leaseback went smoothly, that’s not always the case. What happens if the condition of the property changes between closing and actual possession? Or what if the sellers’ new home takes longer than expected?

These are just a few of the potential problems that can arise, so Bruce Ailion, a real estate broker and attorney with Re/Max Town and Country in Atlanta, recommends that buyers and sellers who want to go this route work with a real estate attorney or agent who’s familiar with these types of transactions. “An owner may think they’ll put a for-sale-by-owner [sign] up, have somebody in January who wants to buy now and move in in June, but I would definitely have someone who knows what they’re doing draft or review the agreement,” Ailion says.

Piha didn’t charge her sellers rent, but buyers can include rental fees and a security deposit in their agreement. However, if buyers get too demanding, it may scare off the sellers. Ailion points to a deal that fell apart after the buyer requested $50,000 in an escrow account in case the seller (a senior partner at a major law firm) damaged the property during the two weeks it was leased.

“That’s totally unreasonable,” he says. “Yes, they could take the appliances and they could take the mirrors and mark up the walls on their way out … but the seller was offended and didn’t want to put up the money,” he adds. According to Ailion, $5,000 would have been more reasonable, and in the unlikely event that damage exceeded that amount, the new seller could have sued the previous owner for additional damage.

Ailion says it’s more common to charge rent that roughly covers the carry costs (mortgage, utilities, condo or homeowners’ association fees, etc.) for the new homeowner. And if the seller stays beyond the agreed upon occupancy date, the agreement might charge a daily rate of, say, 150 percent of the daily rate for each extra day, incentivizing the previous owners to move out. For a longer-term lease, for instance, if the owners need to access their home equity, sell the property to an investor and lease it back, the new owners would likely charge higher rent.

To avoid delays with possession, Acquafredda suggests that buyers considering a post-closing possession understand the sellers’ situation. Do the sellers have a new home picked out or are they still looking? Are they planning to build or renovate and if so, what’s the timeline? “If they’re relying on the purchase of a home, make sure their financing is qualified to buy the home,” she says.

Ailion says buyers and sellers need to be comfortable with a little uncertainty, and the longer the timeline before the new buyer takes possession, the more uncertainty. “Both parties are taking some risk that it will work out the way they planned,” he says. “People’s circumstances may change over that time.”

While a post-closing possession agreement has its potential pitfalls, Piha feels it was worth it for her. “I was willing to do whatever it took to make the sellers pick me,” she says.

 

Susan Johnston Taylor
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