Are Seller rent-backs a good idea?

Question of the week: Are seller rent-backs a good idea?

Answer:  In March we wrote about different options buyers could use for their offers to increase the chance of getting their offers accepted.

One of the options was to put in your offer, or convey to the seller through your agent, your willingness to let the seller remain in the home after closing and rent the home from you until they purchased their next home.

In the past few months, almost every purchase transaction in which I was the lender has had a rent-back clause. On a recent transaction as we were nearing the close of escrow, the listing agent contacted the selling agent (represents the buyer) asking if the buyer would agree to let the seller rent back after the close of escrow as the home the seller was purchasing would not be closing soon after our escrow closed.

The buyer, who is an attorney, asked a very good question of her agent. “That creates a tenancy relationship. What if they do not leave after the rent-back period, then I would have to evict?”

She is correct. Once you own a home and someone else is living there you have created a tenancy relationship and the occupant has all the rights of a tenant. As many landlords can attest, since the pandemic local, state and the federal government have issued eviction moratoriums. Currently the State of California eviction moratorium goes to September 30th, and the federal moratorium was recently extended to October 3rd.

Looking for more information on the landlord-tenant relationship and the eviction moratoriums, I called my attorney friend (friend attorney?) and asked him for more information. What happens if you purchase a home, you and seller agree that the seller will rent back the home for a period of time and then does not vacate the property? Do the pandemic eviction moratoriums apply?

According to Matt, technically no, the moratorium does not apply as the purpose of the moratorium is to protect tenants who are experiencing financial difficulties due to the Covid-19 virus. In a rent-back situation, typically the seller agrees to pay the daily equivalent of the buyer’s housing payment (PITI – Principal, Interest on the loan, property Taxes, and Insurance).

There are a couple of different options for transferring the rent from the seller to the buyer. One, is at the close of escrow the amount of rent for the agreed upon period of time is credited from the seller to the buyer at close of escrow. Two, the escrow company withholds from the seller’s proceeds the amount of rent for the period of the rent-back, and perhaps more to cover extra days or damages. Three, the buyer and seller agree that the seller will pay the buyer outside of escrow the amount owed on a weekly, or monthly if that is the case, basis.

If the rent is pre-paid through escrow, or directly at time of closing, clearly the seller is not impacted financially by the Covid-19 virus and would be exempt from the eviction moratorium.

So, we are safe from having to go through an eviction, or waiting until the moratoriums are lifted and then can evict if the seller does not leave our new home.

Maybe.

Matt also told me that while the moratorium would not apply to the seller as a tenant, the courts in Southern California have tremendous backlogs of eviction cases, he mentioned Los Angeles County has a backlog of around 500,000 cases. Essentially, landlords with lawful eviction processes in place with tenants who are willing to be taken to court, will be waiting a very long time before the court can give them satisfaction and force an eviction.

Please note, the regulations and process also apply if you purchase a home with a tenant occupant. When you purchase the home the tenant’s lease becomes yours, as does collection of rent or termination of lease and eviction proceedings.

In almost thirty-five years I can recall only a few times where a tenant would not leave after a property has been sold, and once when a seller stayed beyond the agreed upon time limit. In the latter case the buyer was properly compensated, in the former the new owners resorted to trading cashier’s checks in the street for keys to the property.

If you are entering a rent-back situation you are entering a relationship that relies on a certain amount of trust that the seller will move out in the agreed upon time. But this is true when purchasing any home where the seller is still occupying the property on the date you obtain ownership. Many, most, purchase contracts for residential real estate have a possession clause where the buyer and seller agree that the buyer will get possession of the property at “close of escrow plus 3 days,” or some other short period of time. During those three days there is a tenancy relationship between buyer and seller. The buyer is trusting the seller that they will vacate as agreed. If not…there is a huge back up in the courts.

Have a question? Ask me!

Lower but still high is the short statement on July’s inflation numbers. The Consumer Price Indexed increased 0.5% in July, down from June’s 0.9% surge. Two big factors in the price increase were used car sales, up 0.2% for the month after rising 30% from March to June, and energy costs which were up 1.6% for the month. Year-over-year consumer prices are 5.4% higher from July 2020. The news was a bit mixed for rates, read on for why.

To ease or not to ease, that is the Fed’s question. Since last March the Fed has been purchasing $120 billion of U.S. Treasury securities and Mortgage-Backed Securities (MBS). This move is called “quantitative easing” and has kept mortgage rates very low. “Easing” is the term for the Fed to reduce the number of securities and MBS it purchases each month, which should result in interest rates slow increasing. There are some in the Fed who would like to announce in September that the Fed will begin easing in the near future, say by December or January and feel the year-over-year inflation numbers support such action. Others in the Fed feel the reduction in month-over-month price increases support the estimates made several months ago that current inflation is “transitory” and the current quantitative easing policy should continue. Which ever side wins the debate will determine where rates will move in the near future.

Rates for Friday August 13, 2021: Starting at the end of last week there was a slide in MBS prices (higher rates) until Wednesday of this week when prices rebounded. Historically when this happens lenders push rates higher and then are slow to lower them to hedge against another spike. This has not been the case in the recent changes in prices and rates remain stable from last Friday and the four before that.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30 year conforming                                         2.625%  Flat

30 year high-balance conforming                   2.75%  Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

Today is pretty unique. According to my intensive search, the most time Friday the 13th can occur in any calendar year is three. Today is the only Friday the 13th in 2021.

Paraskevidekatriaphobians* let out a sigh of relief…

While triskaidekaphobia is the fear of the number 13, paraskevidekatriaphobia (please don’t ask me to pronounce it)is the fear of Friday the 13th. It is called friggatriskaidekaphobia, which is easier to pronounce and I feel could have been named by a still inebriated, or hungover, student in a psych class early in the 20th Century when the term may have been coined.

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog