Home Buying in Brentwood>Question Details

zomgjosho, Home Buyer in Livermore, CA

Is free rent back in a short sale normal? Selling agent states that it is

Asked by zomgjosho, Livermore, CA Thu May 16, 2013

The selling agent has 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.   Our 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.   A few questions: A)  Is a 30-60 free rent back actually common in today's market, even in a short sale? B)  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?

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Let me address your comments and questions:

Comment: “The selling agent”
A: I assume by “selling agent” you mean the listing agent (normally, the “selling” agent is the buyer’s agent).

Comment: “has 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.”
A: No, it’s not “normal.” 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 “normal” for our transactions – these are the first 2 out of over 100 recent transactions.

HOWEVER … 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:

“There 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;”

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: “Our 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.”
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
http://www.trulia.com/blog/carl_medford/2011/05/short_sale_m… )

You ask:

Q: Is a 30-60 free rent back actually common in today's market, even in a short sale?
A: See above – NO. It does happen occasionally, but is NOT the norm. And I’ve NEVER heard of free rent-back after the close of a short sale – and we’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.
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0 votes Thank Flag Link Fri May 17, 2013
I would be very wary about this. This does not sound legit at all.

Joel Lobb (NMLS#57916)Senior Loan Officer
502-905-3708 cell
502-813-2795 fax
jlobb@keyfinllc.com

Key Financial Mortgage (NMLS #1800) 107 South Hurstbourne Parkway*
Louisville, KY 40222*
http://mylouisvillekentuckymortgage.com
0 votes Thank Flag Link Fri May 17, 2013
They are not paying back all that they owe the lender that helped them buy the house, how do you think they will treat you?

Jim Simms
NMLS # 6395
JSimms@cmcloans.com
Financing Kentucky One Home at a Time
Web Reference: http://jamessimms.com/
0 votes Thank Flag Link Fri May 17, 2013
I would not allow a rent back., if possible. It's a can of worms and could present a lot of potential problems. Maybe things are different in Livermore, but that is not standard practice around here.
0 votes Thank Flag Link Fri May 17, 2013
The preference is always to have the property delivered vacant at close of escrow so that the buyer does not assume the responsibility to make them leave

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?
http://real-estate-law.freeadvice.com/real-estate-law/buy_se…
0 votes Thank Flag Link Thu May 16, 2013
FYI as a follow up. I do almost nothing but short sales the last few years. Some banks do not allow a short seller to remain under any circumstances. But more and more of them are adjusting this policy. Many banks allow up to 30 days and IndyMac/One West will allow up to 90 days!
0 votes Thank Flag Link Thu May 16, 2013
I have done a few transactions in which the seller remains after COE. Some were short sales and some were not. I am seeing it more frequently now days because buyers and their agents are trying to devise ways to make their offers more attractive. And with short sellers it's not strictly about the price offered because that seller might not care.

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
0 votes Thank Flag Link Thu May 16, 2013
No, it is not normal at all. The Seller/Borrower has likely been living in the home for months, maybe even over a year. There is no reason to allow this and I'm really glad you reached out. When I write offers to purchase Short Sales, I request vacancy 5-10 days prior to closing. This way you have time to see what you're really buying. I would not recommend closing with Seller still in possession. Good luck!
0 votes Thank Flag Link Thu May 16, 2013
A free (or low-cost) rent-back is becoming increasingly common as a bargaining tool in our area (San Francisco East Bay) but on regular sales, not short sales. In such cases, it would be reasonable to hold back a part of the proceeds as a security deposit (maybe $1-2,000) to be released on the property being vacated and retained if it was not vacated on time.

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.
0 votes Thank Flag Link Thu May 16, 2013
Everything is negotiable. However, most short sale lenders frown on the occupant or former borrower remaining in the home after close of escrow on a short sale. In fact it is quite possible that the lender approving the short sale will condition the approval on the property being vacated at close of escrow. As the buyer you have specific rights as outlined in the purchase agreement and the occupancy should be addressed up front by your agent and certainly prior to close of escrow. Best of luck. Short sales can be a challenge, but can also be a very good investment if you have an agent able to hurdle the obstacles that can come your way.
0 votes Thank Flag Link Thu May 16, 2013
No, it is not normal, not normal at all. In a rent back situation you basically become a landlord and the previous owner/seller becomes a tenant. If they do not leave, then you must evict them as such. Short sales are very hard on the sellers, they are more likely to do harm to the house and less likely to leave. Why do they need so much time...because they have not made plans to move and likely may not want to or simply cant afford to. Rent is usually at the buyers full PITI. Now...with that being said, it is a very tough buyers market and a buyer may offer free rent back as an additional term to win out in a bidding war. Haven't seen it yet, not to say it hasn't occurred. If you must take legal action, you incur all the fees and such. You may get a judgment and basically win monies for damages, past rent, damage to property, legal fees etc. what do you think your chances are of collecting that money?? its very small at best. Get an agreement with both you and the seller call agree on, in writing. Deposits are given etc. Sounds like they are just trying to get more time to find a place, at your expense. I would be very cautious if I were you. Please feel free to all me at 925-570-4901 if you have any questions.
0 votes Thank Flag Link Thu May 16, 2013
It sounds like you dont really trust your agent and they arent educating you on the details of how things work, thats the biggest red flag to me... If the contract is written right your safe, that said after the close of escrow you trun into a landlord, if they dont leave you would have to go to court to evict. If they damage the home you would need to sue for that too.
0 votes Thank Flag Link Thu May 16, 2013
Right now there isnt a normal, the maket is very competitive. It is a great way to strengthen your offer though. Keep in mind the standard deed of trust you will sign says that you will be living there inside of 60 days and for a min of 12 months. I would also recomend doing a non refundable deposit as long as the sellers lender approves the sale as written within 90 days. Thats a huge one for us when we list short sales.
0 votes Thank Flag Link Thu May 16, 2013
A) NO. I can't answer for Brentwood, but I seriously doubt it.
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?
0 votes Thank Flag Link Thu May 16, 2013
No, allowing the Seller to stay in the home is not NORMAL.
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?
0 votes Thank Flag Link Thu May 16, 2013
Have your agent prepare a Purchase Agreement Addendum (C.A.R. form PAA). Line item #2 will outline the specifics of the agreement to allow the Seller to remain in possession of the property after the close of escrow.

It is not common for the Seller to stay in possession more than 3 days after close of escrow in our area...
0 votes Thank Flag Link Thu May 16, 2013
I've never heard of a free rent back, unless it's a day or so after close. This does not sound quiet legitimate to me.
0 votes Thank Flag Link Thu May 16, 2013
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