As Always, Commenting Disabled so Author Can Have the Courtesy of Receiving Comments:
5 MONTHS FREE RENT? AFTER 6 MONTH OF FREE OCCUPANCY??
SURELY THERE'S A LIMIT TO LIVING RENT FREE??
Inspired by an interesting post by Richard Johnson this a.m., Short Seller Wants 5 Months FREE Rent!, about a Short Sale seller wanting to occupy the property for 5 months following settlement, I started to comment, but it got too long. Then I started to ReBlog, but even that got too long. So, for the benefit of new licensees, the matter of "Rent-Backs" can be very interesting. The Short Sale seller in Richard's post has already lived in the property for 6 months without any mortgage payment. They now propose to occupy the property for an additional 5 months rent free. The proposal to "pay" the rent by a reduction in the Short Sale price for the property sounds good but it would require that the seller's lender approve that price adjustment.
Rent-Backs are not as simple as many believe. Agents should always be aware of the "RISKS" involved in any real estate transaction.
Richard describes a Short Sale seller who wants the Short Sale buyer to agree to a 5 month rent free occupancy post settlement of a Short Sale in exchange for a lower price. The likelihood of the buyer's mortgage company approving a 5 month rent back and the likelihood of the seller's lender approving a reduction in price in exchange for extended occupancy is remote. However, the lenders can take care of themselves as we are all aware. For real estate agents and brokers however. . . .
There are so many things wrong with this proposal it will require a list:
1. AGENTS ENGAGED IN THE PRACTICE OF LAW. To protect the buyer's agent, the agent's E&O, the agent's broker and the agent's license, any agreement between the buyer and seller that would affect the purchase price, occupancy, the mortgage loan, etc. of the property should be in writing. What the buyer and seller do after settlement is none of the agent's business, but prior to settlement, everything should be by written agreement between the parties on NAR board approved forms or attorney prepared agreements.
WARNING!! An occupancy agreement is not the time or place for agents to get creative. It may sound simple enough to just write an agreement, but if there is not already a board approved form in place to provide the type of occupancy expected, there's probably a reason, i.e., what the buyer and seller want to do may not meet the test of law.
2. HAS THE PURCHASER BEEN APPROVED FOR A LOAN WITH OWNER OCCUPANT INTEREST?? If the Post Settlement Occupancy is for more than 60 days, the buyer may lose their standing as an owner-occupant and the concomitant interest rate. Many Post Settlement Occupancy Agreements are available for a 60 day occupancy only. For an occupancy to last for more than 60 days, a standard Residential Lease Agreement may be required involving Landlord and Tenant law. While a real estate broker, escrow company, etc. may hold a security deposit in an escrow or trust account for a Post Settlement Occupancy Agreement, once the occupancy goes over 60 days, Landlord and Tenant law rules and it's far more complicated for the agent in terms of deposits and the Lease Agreement.
3. WHERE IS THE SECURITY DEPOSIT? Richard's description doesn't mention a security deposit. What protection does the purchaser/landlord have if the seller/tenant decides to engage in a hold-over occupancy??
- a) Hold-Over. If the purchaser/landlord has to evict the seller/tenant at the end of the 5 months occupancy, there will be significant costs involved.
- b) Damages. What if the seller/tenant neglects and/or damages the property? There will be significant costs and/or loss of value on the part of the purchaser/landlord. An adequate security deposit is the only way to mitigate the new owner's costs and/or loss.
c. Utilities. Who is going to pay the final utility bills? Without an adequate security deposit, the new owner will have no funds to cover the final utility charges if the seller/tenant fails to pay for their usage. Without a zero balance when the utility service is transferred from the former to the new occupant, many utility companies will not provide service to the new occupant. Water is usually a lien on the property. However, electric/gas is usually in the name of the occupant and final bills have to be satisfied or the new occupant may not have electricity/gas.
AGENT ALERT! Richard's post asks many of the questions above.
"If my buyer buys the home at a discount and both the seller's lender and my buyer's lender agree that the purchase price makes sense per appraisal, then the bank shouldn't care on who stays in the house, right?"
"One issue that comes to mind is if the buyer is purchasing the home as a owner-occupied, how would this affect the buyer's lender?"
Richard knew that the seller's request involved more than a simple quid-pro-quo, i.e., the seller will reduce the purchase price in exchange for 5 months free occupancy.
New and inexperienced agents can thank Richard Johnston for posting about this unusual situation and learn to be very careful when a buyer or seller is requesting that the agent be involved in procedures that may sound simple, but are usually not.
Courtesy, Lenn Harley, Broker, Homefinders.com, 800-711-7988.
"Jim, now that your home is sold, when are you moving?"
"Not until we have to. Rent free is just fine with us."
