Let’s be honest – no one enjoys moving, and certainly no one wants to move twice. But, when you’re selling one home and buying another, and you need to sell first in order to buy, how do you make your process smooth with only one move, as most sellers would prefer to do? Either the sun, moon and stars have to align with perfect timing for your two closings or you have to negotiate a rent-back.
What is a rent-back? A rent-back is an agreement that allows a seller to rent the house back from the buyer after the closing for a specified length of time. This practice has become so common that the Colorado Real Estate Commission created a formal rent-back agreement, also known as the Post-Closing Occupancy Agreement (PCOA), to help buyers and sellers enact rent-backs. When a rent-back will go into effect, the buyer and seller must execute a PCOA, and then the PCOA becomes an addendum to the purchase contract, it’s that serious.
Renting back isn’t necessarily cut-and-dried (there’s a reason that a Commission-approved form exists to address this phenomenon). There are several issues buyers and sellers have to think about and negotiate in order to make a rent-back work; not only is the length of time pertinent, but terms like rental rate, security deposit and utilities are all important pieces to consider as well.
So, what is reasonable for a rent-back?
What lenders think
In terms of time, most lenders will allow a seller to stay in the property up to 60 days after closing. Why would the lender care, you ask? Well, by that time, buyers will have started paying their mortgages and lenders want to know that the buyers they’ve approved for the loan are the ones occupying and maintaining the house.
What should the buyer charge the seller in terms of a rental rate?
In a balanced market, rent-back rates are calculated by dividing the buyer’s new mortgage payment by 30 to determine a per diem rate, then multiplying the per diem rate by the number of days the seller will rent the property. For example, if the buyer’s new mortgage payment is $2500/month, the per diem rate would be $83.33/day ($2500/30=$83.33). If a seller rents for 45 days, then they would owe the buyer $3750 ($83.33x45=$3750) in rent for the rent-back period. In a seller’s market or a buyer’s market, one party tends to have more leverage over the other, and in this seller’s market we’re currently experiencing, it’s not unusual for buyers to allow sellers to rent-back at a significantly reduced per diem rate or even rent-free.
What about a security deposit?
Similar to the rental rate, it depends on the market and who has the leverage, and the length of time for the rental period. For a rental period of a few days, it’s not unusual for there to be no security deposit, while for a longer rental period a security deposit is a good idea. It’s important keep in mind the purpose of a security deposit - what happens if the property is damaged during the rent-back period? The security deposit offers the buyer some assurance that the seller will take care of the property during their occupancy and some coverage to handle repairs in the event that they don’t.
Who is responsible for utilities?
At the closing, the title company transfers the water and sewer utilities from the seller to the buyer because those are lien-able utilities; therefore, the buyer should be responsible for those utilities while the seller should be responsible for their gas and electric usage while they are renting.
While these are the “reasonable” guidelines, all of these terms are negotiable and they’re defined essentially by the party with the most leverage. If the seller has multiple offers from which to choose, they may opt to select the offer where the buyer has given them the most flexibility in the rent-back (longest rental-period, lowest per diem rental rate or rent free, minimal security deposit, etc). The buyer has to weigh how lenient and flexible they can afford to be with their time and money against how much they really want the house.
Rent-backs add a new dimension to negotiations between buyers and sellers, but if buyers have flexibility a rent-back can really work in their favor in terms of winning in a competing-offer situation and certainly a rent-back can help reduce the stress level for sellers trying to manage all the “moving pieces” (no pun intended) of an already stress-provoking process.
Please let me know if you have any questions about rent-backs or the market in general. And, as always, if you know of someone looking to get into the market, please feel free to pass along my name. It would be my pleasure to help them if I can!
Renee Cohen is a Colorado Realtor with a passion for helping her clients find their dream homes in the challenging Denver market. She loves educating her clients about the market, advocating on their behalf, and helping them make informed decisions. Reputable. Reliable. Remarkable. Real Estate. Contact Renee to assist you with your real estate needs!