Buying vacation rental with COVID concerns...seller concessions?

[Michelle Schrader]

I was scheduled to close on a NC beach vacation rental TODAY! We were able to negotiate with the sellers to put off DD and closing for 4 weeks and I am grateful for that.  The hope was we would see some settling down, but being a resident of New York that is far from what we are witnessing.  My agent is sure this will not affect summer rental season.

These are the situations I see playing out....1. We proceed with closing, have a summer rental season of $0, we are out $100k of income.  2. We back out and sellers have a summer rental season of $0, they are out $100k of income.  3. We agree at closing to have seller hold half of what rental season is expected to generate ($50k).  That $50k stays in escrow and if summer season is $0 we collect that $50k, they are out $50k, I'm out $50k.  4.  All this craziness ends, full rental income received, sellers get the $50k back, I get my $100k rental income.  I see it as a way to split the risk.

Is something like this even allowed? I feel like EVERYTHING has changed so could this be written into a contract?  I've seen some info related to seller paid repair credits but you basically have to term them seller concessions not exceeding closing costs.  But again, if rental season goes AS PLANNED, sure the sellers can take that $50k right back.

Let me know if my thoughts are crazy, this is our first attempt at a vacation rental property and I have a young family of 5 to support!

[Parker Borofsky]

@Michelle Schrader In terms of escrow for potential property income being allowed from a Fannie Mae/Freddie Mac standpoint the answer is a hard no if you are using Conventional financing. That would be a huge inducement to purchase and is not allowed to be considered as part of the sales price. The max allowable seller concessions are 6% of the sales price on a second home with 10% down or 2% of the sales price of an investment occupancy or the actual amount of closing costs and pre-paids, whichever is less. The sellers may not care about what income you will be out of and at this point they may be more concerned with the fact that they have a binding contract with you and depending on their situation, may be relieved that they will be out of this property in 4 weeks. I own 3 STR's and am closing on 2 more next week. My thoughts are that for the next 2 - 3 months, I will be perfectly happy if I can bring in at least enough just to cover expenses - anything additional would be great. I am sure the market will recover at some point (if it doesn't we are all screwed anyway) and I realize for the next 8-24 months, I may not earn quite as much as I would have before this, but anything is better than nothing, and my commitment to investing is for the long-haul and not specifically the immediate return. I always take the "can I live with the worse-case scenario" approach. My absolute worse-case is that these properties will produce $0 for a few months and I will be on the hook to use reserves to cover expenses. If necessary, we can do this for a little bit, and as a lender, I know that there are a lot of provisions being made when people really need the help like forbearance of mortgage payments etc. so I am not overly concerned about losing properties if this lasts longer than expected. The banks/lenders definitely do not want foreclosures because they don't want to deal with having to get rid of millions of homes, so there will be plenty of measures to keep people afloat until this passes. My advice would be to weigh out your worse-case scenario and the future/long term income potential and decide if it's worth it. If you can come up with some kind of income protection agreement with the seller - more power to you!