What to do when seller wants to rent back for a year???

Question

I just got the approval from the bank that we are in for a single family house in San Jose, this is a short sale. The seller told us before they presented my offer to the bank that they wanted to rent the house back for a year. I'm getting a little nervous because what if the tennants dont pay rent and if this happens and I start the eviction process, they might thrash the house. How should I proceed? Has anyone had similar situation before? Any advice would be appreciated!!!

Aaron Mazzrillo · Answer

The bank will more than likely request you sign an addendum stating you have no previous agreement with the borrowers to lease or sell the property back to them.

Your contract should state the day/time you want possession and most agents put somewhere around 3-5PM day of escrow close.

Find out what day you are supposed to close and request a final walk-thru the night before. If they have not made any attempt at moving inform escrow that you do not want to close until the buyers are packed and out.

I just had this exact same experience and this is how I handled it. The sellers also took the stove and left a bunch of trash. Most short sales have a check going to the sellers for moving expenses. Have your Agent contact their agent and see if this is the case. In my situation, their agent told us he would withhold the check ($3,000) until they turned the property over to me in a condition I deemed acceptable and returned the stove.

By the next day, the place was empty of trash (not clean though) and the stove was sitting in the back yard.

Jon Holdman · Answer

Sellers are out before closing or don't close.  If they insist they want to rent after you buy the property, move onto the next deal.

Jon Holdman · Answer

The underlying lesson to the story Marty linked (READ IT!!) is that you will be the hero when you buy the house and rent it to them.  It won't long before you turn into the evil landlord who stole their house.

For a rental to be just break even on a cash flow basis, the rent you charge needs to be at least double the P&I payment you're making.  More than that, if you have a down payment into the property and want any return on your cash.  (There may be other reasons to buy a property besides cash flow, but then you're kicking money into this deal each month.  Your new tenant will have a very good idea what your payment is, since they know what you paid.  You will quickly turn into a thief who's gouging them for rent when they know your payment is much less.

If you do a repurchase option, which will be their next request, this can be viewed as an "equitable mortgage".  A judge might decide you didn't buy the house at all.  Instead, you made a loan to them (the amount you paid.)  You're collecting payments (rent).  You have a balloon payment (the future sales price in the option contract.)  The judge may forbid an eviction and force you to do a foreclosure.  Or, the judge may declare the whole deal invalid.

Not to mention, the lender can come after you for fraud because you signed a statement saying the sellers were receiving no benefit.

In a short sale, sellers leave or you walk away.

Marty Boardman · Answer

Here's why you should never ever ever ever ever do this, http://www.biggerpockets.com/renewsblog/2011/05/12/the-call-every-real-estate-investor-will-eventually-get

Rob Gillespie · Answer

I am sure the reason they are dealing with you is because they need you to rent this to them. You may want to offer to put down a security deposit and pay first month rent elsewhere at closing if they will still agree to sell you the home. I am not sure how sexy this deal is and if it is worth it to ya, but I would try to work something out with them to make them happy if you want the house. 
You gotta remember their favorite radio station W.I.I.F.M. ( whats in it for me!)What incentive do they have to leave a house that they are not paying for to go out on the street? gotta dangle some sort of carrot! Just my 2 cents. Good luck!  :mrgreen:

P.S. DON'T RENT IT BACK TO THEM!

Vicky Yu · Answer

Thanks for everyone's advices. Seems like no one would like to have seller rent back? did anyone had bad experience? what are the down sides? it would be convenient to rent it out right away.Please share!!! Thanks a bunch!

Maryann L. · Answer

Vicky, you cannot do it.  Who is the lender?  It's likely they are having you sign an arms length transaction stating you are not renting back the house to the seller.

No matter what, do NOT close on that property if the seller plans on occupying it.

Joel Owens · Answer

Just say NO.

What to do when seller wants to rent back for a year???

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