Security Deposit for Sellers who are temporarily renting?

Question

When a Seller wants to rent out the home until their new place is ready, is advisable to charge them a security deposit? Since a walkthru prior to closing doesn't sound useful, would a security deposit offer similar protection? If so, how do you determine what's an acceptable condition that the Seller has to leave the home in? TIA

Alex

Nathan Gesner · Answer

That's not right, in the legal sense.

Let's say you rent to the owners for two months. They move out and you discover floor damage that was hidden under an area rug. Could you deduct the cost from their security deposit?

NO! The security deposit only covers things above "ordinary wear-and-tear" that occur during the term of the lease, meaning the two months you rented to them. If the floor damage was caused a year ago, you've already purchased the home and accepted that condition. You can't charge them for things you failed to catch during your inspections.

JD Martin · Answer

100% here. Do not allow the previous owners to rent your house without leaving money in escrow or them paying you out rent/deposit just as you would any other renter. You would be surprised the way people that are moving out will leave a place without a chunk of their money sitting in escrow. The other thing is it's amazing how fast sellers figure out other arrangements when they know a chunk of money is going to sit in escrow until you sign off on it to release it.

I bought a house a couple of years ago where the seller was broke as a joke and said he needed the money from closing in order to move. I gave him a couple of options and we settled on him re-renting the house from me. I didn't want anyone squatting BSing around so we gave him a high daily rent rate after he exceeded 3 days past closing, a nominal rent for the three days and about 5k in escrow that would be released to him after he vacated and professionally cleaned and repaired any unnoted damage or left it in like condition. It worked out well. I had another place where the seller wanted to occupy for an extra week or two for free after closing. When we gave them the same kind of option as above they magically didn't need to stay anymore.

Bill B. · Answer

Assuming the seller is walking with a big check I’ve had them leave $5-$10k in escrow with title company. I also write a lease with a quickly escalating rent. (What if they say they are staying a month and don’t move out?) are you buying as an investment or a primary? If primary you’re going to promise to move in with 60 days. What if they won’t move out?

I also fear the unseen damage from the house not being empty. And I assume there is always some damage while moving out, even if it’s your “useless friends” helping you pizza and soda. On the other hand I’ve done normal 2 months rent security deposits for sellers that want to become long term tenants.

Nathan Gesner · Answer

And as others are saying, your biggest risks are Sellers that don't move out on schedule or sellers that leave the place a mess. A couple tips:

1. Have a specific deadline for vacating and include stiff penalties for staying longer.

2. Write down some basic cleaning standards. You didn't clean it before they occupied, so you can't really hold them to high standard. However, you should insist that their belongings and trash be removed, floors swept and mopped, carpet cleaned, appliances cleaned, and general dusting. It's best to negotiate this list as part of the rent-back agreement; it's too late to negotiate once you've closed on the house and converted them to renters.

3. Rent should be paid in advance for the full term OR hold a significant amount in escrow until you've got possession and it's as agreed. I personally don't recommend holding funds in escrow because escrow funds usually can't be released until both parties agree in signing. Even if the Seller/Tenant is 100% guilty of staying an extra month, they can refuse to sign the escrow release and the money could sit there forever or until you get a court order. Best to collect and hold the funds yourself.

Alex Tang · Answer

My concern was a final walkthrough is a chance to spot anything that an inspector might've missed, was hidden by furniture, or happened subsequent to the inspection.  If the Seller is staying on as a short term tenant, then a security deposit will provide at least some of the same protection.

Nathan Gesner · Answer

Sometimes I do, sometimes I don't. If they are the sellers and kept the home nice, surely they will keep it nice as renters. IF you feel there's risk, charge them the same as you would a renter.

Security Deposit for Sellers who are temporarily renting?

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