Common Problems with Rent Backs and How to Avoid Them
Problems associated with rent back agreements can often lead to unhappy buyers or sellers, yet they can be easily avoided by paying close attention to the details. Here are some tips on how to avoid mistakes with your rent back agreements:
1) Begin with a well-written contract. Complete paragraph 17 of the Addendum of Clauses. Fill in exact dates, security deposit amount, and method of payment. For method of payment, PITI (principal, interest, taxes and insurance) is the most commonly used. When the property is subject to HOA or Condo dues and your buyer would like that included, you must add that to the PITI. Do not assume it will be included.
2) Most lenders allow rent backs up to 60 days. Always verify with the lender that a rent back will be allowed. Keep in mind that the rent back amount will be included on the HUD-1 as an adjustment between the parties and may affect the buyer’s cash needed to close. This is very important and should be verified prior to finalizing the contract especially if the buyer is asking for a seller closing credit. Otherwise, the buyer may lose some or all of the closing cost credit.
3) Rent Back days are calculated to include the first and last day. For example, if closing is on July 15 and the sellers would like to remain in the property until August 15, the contract would read July 15 –August 15, which is equal to 32 days.
4) Make sure you and your buyer or seller review carefully the Post Occupancy Settlement Agreement (attached). Pay close attention to Paragraph 4, "Final Inspection", which states that if your buyer decides to make a claim, they MUST submit a Claims List within 3 business days of the final inspection to both the seller or seller’s agent and the escrow agent. If this is not received within 3 business days, then the escrow agent is instructed to return the security deposit to the seller. This may be one of the most common mistakes we see with respect to rent backs. Remember, the claims should be for items beyond ordinary wear and tear of the property.
DISCLAIMER: This information is intended for educational purposes only and does not constitute legal advice. You should not rely or act upon any information contained in this article without seeking the advice of qualified legal counsel.