Title Tip: How Does a Seller Lease Back Work?

How to make a buyer’s agent cringe: Ask for a 60 day seller lease back. While lease backs hold appeal for many sellers, it’s enough to make Realtors shudder at the thought of the problems that can accompany them.

A Sellers Temporary Lease allows the seller to continue living in the home after closing for a short time – anywhere from one to 90 days. It is designed to allow for delayed possession of the property by the buyer.

This temporary lease is used when a seller needs additional time after closing to relinquish the property. This may be for any number of reasons. The seller may be waiting for school to finish or need more time to move their possessions. Or they may just want to ensure the transaction actually closes and their funds are in the bank before moving out.

Negotiating a Lease Back

The TREC Seller’s Temporary Residential Lease form is a simple, two-page document used only when the seller occupies the property for no more than 90 days after closing the purchase. Buyer and seller agree in writing to the rental amount, deposit required and other details like who pays the utilities.

The lease starts when the sale is closed and funded. It ends on a specific date listed on the form. In this lease, the seller becomes the tenant and the buyer becomes the landlord. For the most part, standard tenant/landlord rules apply. Typically, the entire amount of rent and deposit is paid by the seller upfront at closing and credited to the buyer on the settlement statement. It is usually handled by the title company.

This Lease assigns a set daily rental rate and a security deposit amount. The daily rental rate is negotiable and could be as small as $1 a day for just a couple of days. It is more commonly calculated by looking at what it is costing the buyer per day that they are paying for a home they’re not yet occupying.

Such a PITI

It is considered fair for the seller to pay the buyer’s PITI as rent. PITI stands for principal, interest, taxes, and insurance. The cost is calculated by dividing the buyer’s monthly mortgage payment (including principal, interest, taxes, insurance and any HOA dues) by the number of days in the month.

Don’t put the phrase “PITI” in the contract for the lease amount. Get a calculator and insert an actual figure. The buyer’s PITI could change based on their down payment amount or interest rate. That could spark quibbling over the actual PITI amount.

Don’t Forget a Deposit

The temporary lease should include a security deposit amount which the seller/tenant pays the buyer/landlord to cover damages to the property or to satisfy their obligations under the lease. Like with other lease agreements, damages may be deducted from the security deposit at the end of the lease. The security deposit should be sufficient to cover potential property damages. Once the seller has moved out the likelihood of collecting for damages to the property could be small.

The lease should also set a daily holdover rate if the seller/tenant stays past the lease termination date. The amount should be high to discourage the seller/tenant from staying in the property for longer than the lease intends. A holding over charge in the range of $200 to $500 a day can be a good incentive to vacate.

An intent of the temporary lease is to make the seller/tenant obligated to keep the property in its current condition and deliver it to the buyer as it was contracted, allowing only for normal wear and tear. Difficult situations may arise if something breaks.

The seller/tenant is usually responsible for all expense of repairing and maintaining the property while they occupy it. This goes back to the requirement that the seller turn over the property in the condition agreed upon in the contract. They must keep the grass watered and landscaping in good condition.

Insurance is Important

Both buyer and seller should check into what impact a leaseback can have on their insurance policies. Suppose the leased back house burned to the ground. Many homeowner’s insurance policies do not cover rental situations, so you’ll want to ensure you put the property policy into place. Likewise, the seller should maintain their property insurance or get renters insurance to cover their possessions.

Suppose the seller damages something when moving out. Hopefully you have collected enough security deposit to cover it. With a traditional sale and no lease back, you could have done a walk through before closing to make sure the property was in the proper condition. Buyers should still do a walk through before closing even if the seller is still there. However, with a lease back situation, if damages are discovered after closing, you have little recourse without an attorney.

Nightmare Fodder?

While nightmare scenarios of sellers refusing to leave or damaging property isn’t the norm, it’s always best to be aware of the potential drawbacks. If a buyer has issues with the seller moving out on time or the condition the home is left in, they will need to obtain legal advice. Neither the real estate agent or the title company is in a position to help a buyer collect additional money from the sellers after closing. That needs to be handled by an attorney.

Lydia Blair (formerly Lydia Player) was a successful Realtor for 10 years before jumping to the title side of the business in 2015. Prior to selling real estate, she bought, remodeled and sold homes (before house flipping was an expression). She’s been through the real estate closing process countless times as either a buyer, a seller, a Realtor, and an Escrow Officer. As an Escrow Officer for Allegiance Title at Preston Center, she likes solving problems and cutting through red tape. The most fun part of her job is handing people keys or a check.