Thursday, July 15, 2010

A Short Guide to Rent-Back Situtions

magine this: you have just bought the apartment of your dreams. It is, for a lack of a better word, your dream home. As soon as you saw it on the market, you made a direct buy order and in a matter of weeks, the apartment is yours! The movers have already taken all your furniture out of your previous apartment and are en route to your new home. Eager to move in, you have already hired an interior decorator and the cable guy is due to come later that evening. Overcome with joy, you turn the key and enter your new abode only to find… the previous tenant asleep on the couch.

As the real estate market gradually evolves, the notion of a post-closing occupancy becomes more and more widespread. An increasing number of sellers demand the property they are selling to be rented back to them, at least for a temporary period. The reasons for such a request are many. Perhaps the seller could not close on his new living quarters quickly enough and thus was stuck; temporary housing can be very expensive and the seller could simply have no place to go. Agreeing to a temporary rent-back would ease the seller’s suffering, and it could ostensibly bring in some temporary income. However, such an agreement must be done in a fashion preventing any unfortunate outcomes.

First and foremost, you as the buyer along with your lawyer must asses the risks of a rent-back. If the property is being mortgaged, there could be a clause in the loan that specifies the property must be occupied by its owner. You do not want to have your loan taken back because your seller was not competent enough to find new housing.

If your lawyer approves, and no legal issues arise from a rent-back, you are clear to negotiate with your temporary tenant. The obvious first step is to agree on how long the tenant will be occupying your new property. Once you have established the time period, you and the tenant need to discuss and come to an agreement on the amount and form of payment. Remember, there are a number of ways in which your tenant could pay you – including rent out-right, covering the mortgage payment and daily expenses, etc. Your lawyer will also need to create an addendum to the purchase contract.

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