Extend Close of Escrow date VS. have seller pay Rent until buyer can posess property?

Asked by Mahar, San Francisco, CA Thu Apr 28, 2011

If a seller needs to remain in the property through mid-summer, is it better for a buyer make an offer with an extended close of escrow date -OR - complete the purchase on a normal schedule but have seller to pay rent until they vacate? What are the benefits/dangers of either option?

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7
..., , Lexington, MA
Thu Apr 28, 2011
Bill had said what popped into my mind: Check with your lender. You have a finite time period in which you would need to move into your new home - going beyond that you risk the loan being converted to an investment property loan or even being called in by the lender. Since you would also need a place to live if the property becomes an "investment" instead of your "primary" home, the lender would need to consider your present housing expense PLUS the new home. Your rent from the new home would not be considered in most mortgage programs.
I would be careful in opt for an extended close-of-escrow.
1 vote
Steven Ornel…, Agent, Fremont, CA
Thu Apr 28, 2011
Mahar:

I'm going to suggest the Seller Rent Back over the COE extension to mid-summer.

COE extension to mid-summer:
IF interest rates were static this would probably be the "safest way" to proceed; however, there is much more evidence that rates will in fact increase throughout the rest of the year due to inflationary pressures.

Seller rent-back over the COE extension to mid-summer:
There are potential risks and important considerations that must be weighed by the Buyer when the Seller wants to maintain possession after close of escrow. My understanding is that allowing a Seller to occupy the property even for one day after the original possession date may create tenancy rights. Therefore, issues and topics common with rental property come into play regarding such a decision.

Everyone has a different level of personal risk aversion. At a minimum I would advise you to obtain a crystal clear agreement in writing regarding the following terms before moving forward:
1) The exact term of possession
2) Compensation to cover Buyer’s costs
3) Late charges
4) Responsibility for utilities
5) Buyer’s entry rights
6) Responsibility for maintenance
7) Assignment/subletting
8) Responsibility for insurance
9) Any other special terms deemed necessary.

Make no mistake; not having such an agreement would be unwise. Consider it the cheapest insurance you will ever invest in.

Section two of CAR Form Purchase Agreement Addendum (PAA, Revised 4/08) was created to address the considerations above when Buyer’s possession is delayed due to the need to remain in the property past COE. I would highly recommend you cover section two with your Realtor® to decide whether its use might be appropriate in your situation.

Best, Steve
0 votes
Norman Aless…, Agent, San Jose, CA
Thu Apr 28, 2011
Mahar,
I would complete the sale and have the seller pay rent. The main reason for this is because I don't see interest rates staying this low for long and that would be the main danger of waiting. The danger of renting is that the condition of the home will have to be maintained if something breaks you have to fix it. There are ways to off-set this, a good hold back in escrow will act as a deposit and a home warranty will help cover any break downs.
I hope this helps.
Feel free to contact me with any questions.
At your service,
Allyson
408-705-6578
allyson@homesbyallyson.com
#01397256
0 votes
Lance King, Agent, San Francisco, CA
Thu Apr 28, 2011
Mahar,

First, as pointed out below, typically sellers pay buyers per diem costs in a rentback situation, although that is negotiable.

Generally speaking these rentback situations work out fine, but when they don't it can get ugly. The best way to avoid that is to get a very large holdback in escrow that doesn't get released until the sellers are out. It has to be large enough that they will be highly motivated to turn over the property to you in great condition.

If they aren't willing to do that I would extend the escrow to be assured the sellers are out and the house is in good condition before turning over all your hard-earned money.

Best Regards,

Lance King/Owner-Managing Broker
lance@fixedrateproperties.com
415.722.5549
DRE# 01384425
0 votes
Andrea Wince…, Agent, Milpitas, CA
Thu Apr 28, 2011
Hello Mahar, a rent back in my area is not market value rent but usually the buyers 'actual' costs; the buyers mortgage payment+insurance+property taxes, etc. If you have a substantial down payment and not a huge mortgage, the sellers could end up living there for a song. However, everything is negotiable. In this situation, I would recommend that my buyer close escrow per normal schedule but do a rent back agreement. A formal rental agreement signed by buyer and seller (after COE would be landlord and tenant). The dates of the tenancy, the monthly rent, a cleaning deposit and any other stipulations you would like to include can be outlined in the contract. On the flip side, what if they don't ever move out? Now you are a landlord and have to evict them through process of law. I would closely analyze why they can't move at close of escrow. Is there something on the other side that could fall apart and leave them houseless? Are they people with integrity who will abide by the contract and still move out even if they have to live with family or go rent elsewhere? Whatever you decide, MAKE SURE YOU DO IT IN WRITING.
0 votes
Bill Mccord, Agent, San Jose, CA
Thu Apr 28, 2011
I recomend closing escrow as soon as possible, and having a formal rent back after close contract. Make sure you check with your lender to be certain they will accept this as it will sometimes be seen as though you are claiming it to be your personal residence when it is actually going to be an investment property. This would be fraud.
The main reason for my recomendation is to lock intodays low interest rates. I expect they will be rising throughout this year.
Good luck,
Bill
0 votes
Angela White, Agent, Saratoga, CA
Thu Apr 28, 2011
It is always best to establish this into the contract BEFORE you are ratified. It is always best to close escrow and have a rentback predetermined. The only exception to this is if its not owner occupied. You will want the home vacated prior to close of escrow. I would not go beyond a 45 day close of escrow with a full 3% good faith deposit in place.
Period.
0 votes
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