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5 Reasons Home Buyers Should Avoid Sale-and-Leaseback Contingencies

5 Reasons Home Buyers Should Avoid Sale-and-Leaseback Contingencies . 0

When you buy a home, you might reasonably expect that you’ll take occupancy as of the closing date. While this is customary, it is no longer something you can take for granted. Due to low home inventory and rising rents, sellers are increasingly seeking to extend their own occupancy past the closing date. This can be accomplished with a sale-and-leaseback contingency.

Simply put, a sale-and-leaseback contingency allows the home seller to stay in the home after closing for a specified period of time. The home buyer is entitled to collect market rent during this period, but sometimes buyers do not realize this – and a typical agent, who serves the best interests of the seller, may gloss this over! Meanwhile, the buyer carries the legal ownership of the home, and all the liabilities and expenses that go along with it.

Sale-and-leaseback contingencies are problematic for buyers for several reasons:

1. Whatever is keeping the seller entrenched in the property for an additional week, month or 90 days, may not be successfully resolved by the end of that period. Eviction processes, if they become necessary, can be expensive, legally complex and stressful to complete.

2. A sale-and-leaseback contingency can signal financial problems on the seller’s side. The seller may lack the ability to purchase or rent another property until they have the sales proceeds from closing. A sale-and-leaseback might solve the seller’s cash crunch. But it comes at the expense of the buyer, who must put their own move on hold and incur further expenses with their own rent and storage costs, while carrying the property insurance and facing inherent risks.

3. Owner-occupancy is usually required by the buyer’s mortgage lender. A short term of seller occupancy may not violate this clause, but home buyers must verify the owner-occupancy requirements of their mortgage before agreeing to seller occupancy contingencies.

4. The homeowner’s insurance policy purchased by the buyer might not cover damages incurred by the seller. A separate insurance rider may be needed for the seller occupancy period, or an entirely different policy may be required.

5. Responsibility for maintenance costs and repairs can become a point of contention. For example, the sellers might agree to mow the lawn during their occupancy, but then neglect to do so, resulting in a fine by the city that is sent to the new owner of record - namely the buyer. To avoid such problems, myriad details must be ironed out in advance, in writing, such as the payment of utilities, and who is responsible for making any needed home repairs.

If a home seller has proven to be contentious during the purchase negotiations, a period of seller occupancy with this same party could prove untenable. There are also sellers who are deeply attached to a property and reluctant to leave. And in cases such as divorced sellers, there may be a lack of mutual motivation to make the deal work – especially when one party lives in the home, and the other party does not.

Of course, there are times a sale-and-leaseback can be harmless, and as a home buyer, you might be in a position to accept this contingency and perhaps even profit from it. The key is to have as much information about the seller’s needs and motives for this contingency as possible. Then, use your best judgment according to your risk tolerance. Your Exclusive Buyer Agent will help you obtain this information, and provide you with expert insights and advice to help you make the best decisions! Find an EBA in your area today!