- The Washington Times - Friday, January 18, 2002

You have found the house of your dreams, have made an offer and the sellers have accepted. Just one hitch: The sellers discover that the house they are having built will not be ready for another month or two. They want to go to settlement, sell you the house, then rent the house back from you for a few weeks.

Should you agree to this? What does this rent-back agreement mean? Should you have any concerns about signing such a contract?

Plenty can go wrong with rent-backs, according to local Realtors. Nevertheless, in the current seller's market, these type of agreements are occurring much more frequently, despite the risks involved, says Nathan Carnes, branch manager and associate broker with W.C. & A.N. Miller in Chevy Chase.

"This is a very common scenario," he says. "What we are seeing now is a result of a seller's market. The sellers can ask for a rent-back so they can get the money and fix up the house they are getting ready to move into."

If you are going to be renting back to sellers or renting as a buyer there are certain steps you should take to protect yourself, should this scenario take a turn for the worse, Realtors say.

The crucial element of a rent-back agreement is defining precisely what it means to both parties. Industry observers say both parties in a rent-back must sign a Post- or Pre-Settlement Occupancy Agreement.

Realtors say the only distinction between the forms used in Virginia, Maryland and the District is that, in the District, the occupancy agreements ensure that the buyer and seller do not enter into a tenant/landlord relationship. The documents make it clear that the sellers, while renting, are stripped of any tenant rights, which makes rules for eviction more lenient.

"The agreement negates any tenant laws or rights, which, in D.C., are liberal in favor of the tenant," Mr. Carnes says.

The agreement must stipulate what the rent amount is going to be and how long the renters plan to stay. Claire Larson, associate broker and agent with Coldwell Banker Fred Hetzel Realty in Virginia, says that the rights both parties have depend on the obligations and time frames outlined in the agreement.

"If it's not properly written, it could cause a lot of trouble," she says. "It's crucial that it states the renter will vacate the premises by a certain date."

The amount of rent due is the monthly mortgage payment, including taxes and insurance, to be prorated if the renters are staying for less than a month. If the renters are not out by a certain date, the new owners can increase the rent to whatever amount they choose.

Mr. Carnes points out that the buyers can increase the daily occupancy rate to make it astronomical, to motivate the renters to move out on time.

"You can say that if the seller or tenant doesn't leave, you'll increase the rent to $1,000," Mr. Carnes says. "Make it high, so that it's clear so that if they don't cooperate, the agreement will hold up in a court of law."

Another way to avoid conflicts when negotiating a rent-back agreement is to verify that the house is delivered in substantially the same condition it was before settlement. A security deposit is built into the agreement, and this money is held in an escrow account with the title company, to ensure that the buyers have protection against any damages incurred by the sellers.

"The major issue is just making sure that we have a sufficient deposit $1,000-$2,000 to handle any damages that occur," Mr. Carnes says. If damages do occur, the settlement attorney or escrow agent is the designated arbiter.

A home warranty, effective at settlement, is also highly recommended, and both parties should agree on who will pay the deductible if any claim must be filed during the rent-back period. Bob Comerford, associate broker and co-owner of ERA Teachers Inc. in Herndon, says that a warranty offers both parties "peace of mind."

"It's extremely beneficial," he says. "If you have a home warranty, you're talking about only paying maybe $100 deductible, as opposed to thousands of dollars," for any necessary repairs.

Mr. Comerford also suggests a second walk-through of the property, after the renters have moved out. Mr. Carnes agrees and even suggests going through the home with a video camera after settlement, so no disagreement can occur about the condition of everything in the property.

All of the Realtors asked agree that rent-backs, while a viable option, can often lead to headaches and protracted disagreements.

Ms. Larson says the worst rent-back scenario occurs when the sellers allow the buyers to take pre-occupancy of the home and to rent the property before going to settlement. In this circumstance, the buyers may find damages or deficiencies in the home that they did not notice during the initial property inspection. The buyer can then bring up these problems at the settlement table and demand that they be addressed.

"It can be a real horror show," she says. "It's not a great idea."

Rent-backs also can get sticky when the renters decide that they are not going to leave on the appointed date. "It's not so much that they don't want to get out, it's that they have nowhere to go, in most situations," says Valerie Huffman, vice president of education for Weichert Realtors for the capital region.

Ms. Huffman recalls a situation where a buyer rented back to the seller, who was purchasing a home in another state. The seller did not get the job transfer he was expecting, so he did not have the job or the funds he needed to move to his new home. "It can happen," Ms. Huffman says. "It can get very emotional."

Mr. Comerford says the key to a successful rent-back is a complete understanding of the agreement and the unforeseen circumstances that might come up. He urges both parties to take the time out to carefully review the contract.

"People are often so rushed they're sitting there with so much paperwork that they aren't even focused on the rent-back agreement," he says. The few minutes it takes to go over these details may prevent disastrous consequences. "It's that simple and that complicated."

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