Pro’s, Con’s ” & Pitfalls
“At the beginning (of the relationship), the developer had the experience and the insurance company had the money. At the end . . . the insurance company had the experience, and the developer had the money.”
I heard that line a couple lifetimes ago, when I was a CPA auditing the real estate portfolio of a big insurance company.
So, what’s that got to do with residential real estate?
Just this: before closing, the Buyer has the money, and the Seller has possession (and title).
When the Buyer rents back to the Seller, after closing the Seller has possession and the money, and the Buyer has . . . . a potential headache.
Three Issues
That’s true for three reasons.
One. The holdover Seller’s timetable for moving out has a way of sliding.
That’s especially a risk when the Seller is waiting on new construction or a major remodel, and is subject to work delays, shipping screw-up’s, and other variables that go along with the process (and are beyond their control).
While it’s possible for the parties to contractually address this ” for example, by including onerous fines for any delays ” putting such “teeth” in the lease can suddenly make a relaxed negotiation much more adversarial.
And good luck collecting any surcharges.
Two. Liability.
As owner (and now landlord), the Buyer will need to procure hazard insurance.
However, they may need a special rider if there are non-owner occupants.
Meanwhile, the Seller-renter should have their own insurance, to cover their personal property.
But how many Buyers are going to follow up to make sure the Seller-now-renter has done that?
Three. Hassle Factor.
Rental Leases are blissfully shorter than Purchase Agreements, but they both include Addenda and plenty of terms to address. See also, “And Repeat: “Never Negotiate Furniture.”
Will pets be allowed?
How about smoking?
What’s the security deposit?
Who’s responsible for mowing the lawn/shoveling the snow?
Whose name are the utilities in, and when is responsibility transferred?
What if there’s move-out damage?
Normally, the Buyer would do a walk-through just before closing to make sure that the property is empty, clean and damage-free.
However, as the now-Owner/Landlord, they have less leverage should there be issues related to condition (vs. delaying the closing).
Move-In Agreements
In contrast to a Rent-Back, a Move-in Agreement lets the soon-to-be Buyer get possession early.
The parties still have to navigate the same lease, insurance and liability issues.
But in addition, the Seller has one big additional risk: the Buyer won’t close as scheduled.
Most of the time, that’s because something happens to the Buyer’s credit or financing.
But what if the Buyer discovers some negative about the home that hadn’t occurred to them before, and no longer wants to close (or otherwise abide by the terms of the Purchase Agreement)?
That’s a helluva time for the Seller to discover that, at least in Minnesota, landlord-tenant law heavily favors tenants.
See also, “Early Move-in (No Agreement).”
