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Seller Leasebacks — Everything Buyers and Sellers Need to Know

Last week we covered the bridge loan, which creates an opportunity for a qualified seller to move out of a home before it’s sold. Option two is the seller leaseback, a scenario in which the seller asks the buyer for permission to stay in the home for a predetermined length of time. If you’re new to seller leasebacks, read on for everything buyers and sellers need to know. 

The Role of the Seller Leaseback

Imagine that you’re selling a property, but you don’t yet have a place to move. You just know you want to move, or maybe the timing is right. A bridge loan is one option, but if you’re more conservative and feeling anxious about not knowing how much your current home is going to sell for (even with an appraiser stating their opinion), the seller leaseback is worth understanding.

As a buyer’s agent, we’re very adept at spotting in the private “agent only” remarks some version of “seller requires a leaseback of 30-60-90 days.” Sometimes, sellers want to take advantage of the spring selling season, considered the best seasonal time to sell in most markets, but they have school-age children and want to finish the year without switching schools. Often, sellers don’t know where they’re going to move yet and are gambling they will be able to complete a purchase within the 30 or 60 days after they close on their home.  

What Sellers Need to Know about a Leaseback

You as a seller may believe you’re in the driver’s seat, with a coveted property that every news outlet is reporting is in historically short supply. For single family homes, that’s largely true, but not so much for condos and townhomes. Asking for a short time to either rent the property from your buyer, or if you’re really lucky, negotiating the inclusion of a “free” rent-back period to sweeten their offer isn’t asking too much, right? Well, yes and no. Sellers need to consider a few things first.

  • Every point of negotiation where you “need” something from the buyer can lessen the offer amount by clouding the close of escrow for that buyer.
  • You have to keep the home in pristine condition and short, last-minute showings are key to getting maximum exposure and the highest price. Some of the best buyers — AKA the ones that can afford current market prices — work 18-hour days and are cramming viewings with very short marketing windows into their insane schedules. In some cases, eight and nine pm showings are the only times they can manage. Limiting showings limits the access to those buyers and is not a good idea.
  • Most lenders do not allow buyers to “lease back” properties for more than 60 days and some lenders do not allow more than 30, which can cause problems for your buyer’s loans. What’s more, many inexperienced buyer’s agents will not know how to troubleshoot this issue.
  • There is a liability risk when you no longer own the home but you’re still living in it. I’ve seen water heaters break the day after close. Nothing was wrong before close, but Murphy’s Law… And the big question is, who pays?

What Buyers Need to know about a Leaseback

  • There is liability on all fronts, from your lender to your insurance. And what if the seller doesn’t move out on time?
  • It can be the make or break for getting your offer accepted in a multiple offer standpoint. Often sellers who need the time are willing to take a lower offer for a generous rent-back time.
  • It can save you money and be navigated effectively, but you need a good agent experienced in troubleshooting rent back periods and a well-drafted Seller to Occupy after Close addendum. Preferably, you’ll also have a deposit amount held in escrow (and different escrow companies have different policies about if they will/won’t and for how long hold a deposit post close of escrow).

Making It Work

The trick to successfully navigating a seller leaseback is clarity. Both the sellers and the buyers need to clearly delineate their rights and responsibilities. In the seller leaseback scenario, it’s the buyer who assumes the greatest risk, but the sellers are not without liability. What if the property isn’t in the same condition at the end of the leaseback as it was at closing? To mitigate the risks, here’s what to consider:

  • Formal agreement. It’s important to draw up a contract that clearly stipulates all aspects of the agreement, including property maintenance, timeframes, property uses, property insurance, late charges, etc.
  • Walk-throughs. These should be done at closing and at the end of the leaseback period, preferably with a deposit held in escrow that gets released back to the seller by mutual agreement within 24 hours of a final walk through. 

Both the buyer and the seller will benefit from a contract that safeguards their respective rights. Depending on where you live, the legalities will vary. The more experienced your agent is in helping you troubleshoot this as an option, the better your chances of having a smooth experience with a seller leaseback.  

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