When owners become tenants - risk factors?

Question

I'm negotiating on a property where the current owners would like to stay for 60 days past close. We have agreed on a rental rate. I'm trying to figure out the things I need to think about to best mitigate risks here - I assume a security deposit in the escrow account? I'm investing from out of state so I have not met the owners. The property is pretty clean but I'd like to glaze the bathroom. Would you try to get that done while they are renting? Anything else I should be thinking about here?

Mike McCarthy · Answer

@Courtney M. Yeah, I’d want to know why they are staying past close. Is it waiting for their new build to be ready (good reason), or are they behind on their mortgage and getting out? Their rental rate should be higher than normal, and the security deposit should be higher as well. Also have a provision as to what happens after 60 days. Rate is $100 per day (or something similarly high to dissuade them from extending their time there). Of course if everything is going well and they ask nicely, you can always agree to extend another 30/60 days at the standard rate too.... but only if everything is on the up and up. I would not try to do much work with them in the house. It’ll be a pain for them and for you.

Courtney M. · Answer

Thanks @Mike McCarthy, I'm with you in that I need to create some strong disincentives for them staying. I've created escalating rent in the second month and am asking for a high security deposit. Maybe they'll decide it's not worth it and move out at close. LOL.

Ned Carey · Answer

IF the owners are selleing due to a distress sale then best procatice is not to rent back to them. If it is just timing while waiting for a new home to be build ar a new job to start for example then renting back is fine and fairly common. I would not do any upgrades while they are there. They will only put were and tear on your imporvements.

Ronald Rohde · Answer

Be sure to sign a lease and ensure that your Lender (if any) doesn't have any restrictions on leaseback.

Courtney M. · Answer

@Anthony Wick, this is what we're doing (getting the two months at close, plus the security deposit). They are in fact looking at a new house so it may be shorter than 60 days.

Courtney M. · Answer

@Dick Stevens Because I live in southern California and it takes a lot more to put 20% down out here. The home I'm buying is the area I grew up and where most of my family still lives, so I'm comfortable having an investment property there.

Dick Stevens · Answer

First rental property out of state? Not a good idea. Why did you pick an out of state property?

Anthony Wick · Answer

They could be selling for all sorts of reasons. Divorce, retiring, bought new house. This could be a good thing. However, if it is only 60 days, I'd ask for the 2 months rent at close. And a short term lease that terminates on a certain date. Then, if for some reason they want to stay longer, you could have an instant tenant that takes care of their old place. If not, you've been paid in advance.

Frank Chin · Answer

@ Courtney, I went through something similar. Seller needed 2 to 3 weeks to move out after closing. suggestion of taking escrow is a good one, and charging rent is the right thing, and after a certain period increasing it.The seller I bought from had no bad motives, and I even felt a little sorry for him at first. The story was, he needs to close with me, use the money to buy his home due to a job relocation in Texas. Without closing with me, he's can't close and move.So why several weeks? He's told the guy in Texas is doing the same thing, relocating to New Mexico, needs time to move out of his Texas home. Making a long story short, the New Mexico guy is moving to Utah.In all of this, I feel a little special. I'm selling my home in Jersey, but I bought the New York triplex before I sold and closed on the Jersey home, so I'm the only lucky one in the chain that owned two homes in the transition and didn't need the money to buy the next place. I felt good as I'm finally going into rentals.What went wrong? The P&S contract calls for his paying the pro rata share of my interest, taxes, insurance, utilities during his stay. Too complicated as it turned out. This was going to be prepaid to me for the two weeks at the closing. Anything beyond that I have to go after him. At the closing, I ask my attorney if that was done, and both my attorney and the seller's nodded and said YES. So I thought I was done with it.Well not so fast. A few months after closing he claimed his lawyer forgot to include the oil in the tank at the closing, and he said he can demand it because of the "errors and omissions clause" in the P&S contract. I was shocked, I went through the closing papers and found I was only paid $50/day during his stay, not around $110.00 that was actually due. Then I was only paid $50/day for two weeks, not $110/day for the actual three weeks.So if I had to do it again, I would negotiate an amount like $100/day, so I can easily see it in the closing documents, and if I have to chase him for more, I have escrow to cover.And the strange ending of the story was, I found all this out when he had the nerve to sue me in small claims for the oil that was omitted. I countersued for all the money he owed me, but the judge threw it out, saying he's not going to spend all night in court redoing the closing.

Courtney M. · Answer

@Andrew Boettcher my broker just suggested this. Thank you! I think that will be the best way to ensure they vacate.