Rent-back: a good idea?

Question

I am a first-time home home buyer and am going to Settlement on Oct 20. The sellers were planning to move out and into an apartment while they wait for there new house to be built. They have asked if we would be interested in doing a rent-back. After closing, the would retain occupancy and pay me rent while they stay.

The pros are pretty obvious... I would have my mortgage paid for 2.5- 3 months. Also, I cant get out of my apartment lease until Jan 31. So I would no longer have to pay my rent and mortgage for several months.

However, the idea does seem a little daunting. Being a first-time buyer, I am already a little overwhelmed with everything. This seems like it could just turn into unnecessary complication. There seem to be more cons than pros.

Would I need a formal rental agreement?

Would I need to claim the rent as taxable income?

Plus, I'm sure after settlement I will be extremely anxious to get into my new home. Now, I will have to wait until the end of the year.

Has anyone had any experience with this? Your input is greatly appreciated.

Answer 1

This is a win win scenario.  As you said the positives are obvious.  Your broker would set up the rental agreement.   Make sure that you have a rental deposit, so that the house is not vandalized, and clean when you take occupancy.  The main difference is that you have just moved the 30 day occupancy to 120 days.  They have your money to close on their house.  As you can see there is somewhat of a domino affect.  As rent, you can charge anything.  They usually suggest a number equal to the monthly mortgage charge, but you have taxes, insurance, etc. so it should be more.   Also have in the agreement that they are liable for maintainance and repairs while they occupy the premises.  

Answer 2

is this something you have entered into personally as the seller has asked you?

or is the real estate agent presenting this agreement?

if your real estate agent is presenting this agreement they will write up a contract and terms and add this to the closing sale agreement.

Recommend the other party to get the real estate agent to write the agreement and get your agent to look at the agreement (it is part of the commission the agents get paid ).

For you to enter into this agreement , you should have a contract or this could end up going on for months beyond the time promised.

If your real estate agent is writing the contract, this then becomes part of the sale and firm and binding and you can evict them via the police etc without any problems.  Also you can hold the other party for damages to property beyond.  You can ask for the amount of rent ahead as proceeds of sale..etc etc...

(then you don't need to find the owners for payment , insufficient funds, etc)

conclusion: use your "real estate agent " to write this up.

good luck  

Answer 3

Never, EVER do a rent-back as a home buyer.  Obviously you don't have a Realtor involved telling you that we could write a book on everything that can go wrong.

1. Any rent-back must be disclosed to the bank.  If you do not take occupancy in 30 days from settlement (b/c you purchased the property as a primary residence, not an investment) they will be asking why....as soon as you tell them that it will be 2.5 to 3 months before you'll move in and you didn't disclose that, they'll be raising your interest rate to an investment or even have the authority to call the note due for occupancy fraud.

2. Your hazard insurance was issued on an OCCUPIED rate.  Insurance companies DO NOT issue full coverage/content policies on rentals...only a primary residence.  If you suffer a full loss during that time and the insurance company discovers you weren't even the one that was living there..they have the legal right to deny any claim due to material misrepresentation.

If you decide to do this anyway against all advice, just know that legally, when you close, that makes you a landlord, and you don't get any 'special' treatment by the law if they can't or refuse to move.

1.  You'll need a rental agreement with a security deposit...b/c you'll need his to legally prove they were going to pay you rent.

2.  How do you know that they are financially able to close on the new house?  Have you seen their credit? Do you have control over their credit?  Can you guarantee that they will maintain their credit so they can move?

3.  What are you going to do if they refuse to move out and/or stop paying rent?  Do you have the financial resources to pay both while you evict them? If you don't...then you can't afford to rent-back to them.

4.  Any damages that they do after closing is no longer a part of the purchase agreement, it's not a rental arrangement and like any other landlord, you'll have to go to court to get your money.

Please...just don't do this.  I have seen the worst nightmares possible b/c of it.

Answer 4

I have faced this many times.  The sellers did this in the house i currently own. It will probably be ok.  But if you paid for an attorney's advice, the attorney would say "Absolutely not".   THe sellers do not get to keep all the money and also keep the keys. They must get out. And that is really the correct approach because they are not your friends or family.

But if they are honorable people, this can work.  They do sign a lease.  You decide if you want a security deposit.  In my experience, the minute you ask for a deposit, the sellers decide that they will move out at closing..... they think you will keep the deposit; and for the first time they understand that this is a business deal.

You pay tax on the rental income.  You have the right to deduct the mortgage interest.  But that means that you are placing the house in the category of Income Property for IRS purposes.  Most people just cheat and report nothing.