Comment: â€œThe selling agentâ€
A: I assume by â€œselling agentâ€ you mean the listing agent (normally, the â€œsellingâ€ agent is the buyerâ€™s agent).
Comment: â€œhas said that in this market with a short sale, that a 30-60 free rent back is completely normal and that we should have no reason for concern.â€
A: No, itâ€™s not â€œnormal.â€ It does occur every once in a while, but it is usually at the behest of the buyer who is trying to provide additional incentives to the seller to win in a bidding war. We currently have 2 normal transactions in escrow where the seller has a 30-day free rent-back after close of escrow, but this is not â€œnormalâ€ for our transactions â€“ these are the first 2 out of over 100 recent transactions.
HOWEVER â€¦ in contrast, rent-back in a short sale is typically NOT ALLOWED by the short sale lender. Buyers and sellers must sign (certifying under penalty of perjury) an Affidavit of Arms-Length Transaction which includes the following dialogue:
â€œThere are no agreements, understandings or contracts between the parties that the Borrower will remain in the Mortgaged Premises as a tenant or later obtain title or ownership of the Mortgaged Premises, except to the extent that the Borrower is permitted to remain as a tenant on the Mortgaged Premises for a short term, as is common and customary in the market but no longer than ninety (90) days, in order to facilitate relocation;â€
The intent here is that no recipient of a short sale may benefit from the short sale process in any way after the close of escrow. They may not receive funds, gifts or possession in any way that produces a benefit. From where I sit, (1) free rent-back is not customary, especially for short sales AND (2) is most CERTAINLY a benefit, thus violating the intent of the Arms Length Affidavit.
You state: â€œOur primary concern is that the current verbage provides no legal protection to us in the case that they do not leave, and although we have been told that they intend to, there has been no show of good faith by agreeing to stipulations provided they do not.â€
A: This is a real problem with short sales. In a normal sale with a normal rent-back, there should be a rental agreement for the rent-back with states the parameters of the rent-back (duration, per diem, terms, etc.) AND provides a damage deposit held back in escrow or given to the buyer at close of escrow. Upon a successful vacancy, the damage deposit is then given back to the seller. In a short sale, since there is usually no rent-back, there is no way to effectively leverage the seller to leave and ensure the property is in good condition when they do so.
(For more clarification, see Myths #6 & 7 from the following post: Short Sale Myths: 8 CRITICAL Issues You Need To Understand
Q: Is a 30-60 free rent back actually common in today's market, even in a short sale?
A: See above â€“ NO. It does happen occasionally, but is NOT the norm. And Iâ€™ve NEVER heard of free rent-back after the close of a short sale â€“ and weâ€™ve done a ton of them. My belief is that a free rent-back violates the terms of the Arms Length Affidavit and could leave you in a legally compromised situation.
Q: If we were to agree to a 30 day free rent back, is it unreasonable for us to request that stipulations be placed in the purchase agreement requiring the seller to pay our PITI if they fail to vacate the premises after the first 30 days, and after 60 days, should we have to take legal action to have them removed from the home, they would be responsible for all legal fees associated with that if we were to prevail?
A: In reality, this is what a normal rent-back should look like, regardless of the amount being paid per diem. It should also include a substantive damage deposit. These issues are covered by CAR Form PAA (up to 30 day rent-back) or CAR Form RLAS for periods over 30 days. I would never allow rent-back of any kind to occur without one of these forms.
Joel Lobb (NMLS#57916)Senior Loan Officer
Key Financial Mortgage (NMLS #1800) 107 South Hurstbourne Parkway*
Louisville, KY 40222*
NMLS # 6395
Financing Kentucky One Home at a Time
in a seller's market, it may be a negotiation tool to offer free rent, but it is by no means required. And no, it's not normal at all to have 30-60 days free rent. You are under no obligation to provide free rent. Look at your contract to buy --- how many days did you state that the house should be vacant before close of escrow?
Besides, in a short sale, the new owners are not supposed to rent the property back to the sellers --- that's one of the reasons why they require an arms' length affidavit, to make sure there's no relationship between/among the parties.
If you want to provide free rent out of the goodness of your heart, then fine...but be prepared to have a hard time getting them to vacate.
Perhaps you should read this advice from an attorney's website
After a real estate transfer, how can I remove a holdover seller who refuses to leave the property?
The trick to having anyone remain in the property after COE is to NOT create a landlord/tenant relationship. Once the occupant has tenant status they have tenants rights. Once the occupant is considered a tenant the only legal recourse to removing them is eviction. There are a couple ideas how best to approach this. Each one of them requires some airtight language. First, you can grant the occupant a short term "license" to use the property. We have one drawn by our legal counsel and it works well. Another option is to make the occupant a short term "guest" not unlike a house guest. Again this requires some good language in your agreement. Keep in mind that some municipalities consider an occupant a tenant after 30 days no matter how good and strong your agreement language is. If you must agree to a "rent back" don't use the term rent even if it is free and don't agree to anything more than 29 days.
These are some of the ways we have avoided issues. But I still recommend that you seek legal advice. Good Luck
Short sales are different. All terms must be disclosed and agreed to by the lender. I think it is unlikely that a lender would approve a free rent-back as they do not want the seller to have any benefit from a short sale whatsoever.
B) NO, not unreasonable at all.
Personally I would NEVER close on an occupied short sale. Consider this...these people are shorting their mortgage company. Why would it bother them to short you?
Allowing to do it for FREE is stupid!
With the wording in the Purchase Agreement; the Seller is required to vacate on the day of CLOSING, unless you agreed to something else. If they do not vacate; you have the paperwork to make them vacate.
If you agree to them staying, for any reason or any arrangement, then you will have to follow the procedures for evicting a tenant.
Where is your Buyer's Agent while all this is going on?
It is not common for the Seller to stay in possession more than 3 days after close of escrow in our area...