In Part 1 of our post we talked about risks to the buyer of renting a short sale listing before the sale occurs. In Part 2, we will talk about the risks to the seller and other important issues regarding this topic.
Risks to a seller who rents the home to the buyer before a sale occurs.
– Liability. If the home is not properly insured, the owner of record still bears responsibility for whatever occurs on the premises. If the buyer or their guests are injured, the seller is still responsible. If the property is damaged by a fire, a fallen tree, or other event, then the seller may contractually be obligated to pay for repairs.
– Accusations of misuse of the rent. The buyer may question what the seller is doing with the rent money if they’re not paying the mortgage lender, the insurance policy, or for property maintenance.
– Maintenance. The buyer, as a tenant, may expect that the seller perform the duties normally expected of a landlord. The buyer may expect the landlord to conduct maintenance and repairs.
– Alterations. Some buyers, believing that they can do with the home as they wish, may knock down walls or make other major alterations to the property. If the buyer conducts demolition or renovation work and later fails to purchase the property, then the seller may be stuck with a house in worse condition than when they gave possession to the buyer.
– Breach of the lease term. If the seller signs a long-term lease with the buyer, and the house is foreclosed before the end of the lease, then the seller will have breached the lease by failing to provide housing. Depending on how the lease is written, the seller may be liable for providing housing or compensation to the buyer for failure to uphold the lease for the duration of the term.
– Assignment of rents. Some mortgage paperwork gives the lender the right to collect the rent if the borrower defaults. It is possible that the lender may call for an assignment of rents and have the legal right to receive the rent that the seller was counting on.
– Eviction. If the buyer does not pay the rent, then the seller may have to initiate foreclosure proceedings.
– Short sale disapproval. If the seller receives a substantial amount of rent, their mortgage lender might decline the short sale due to the seller having too much income.
There are other issues surrounding the pre-settlement occupancy of the house by the buyer. One is how much rent the buyer should pay, and how that rent should be allocated. Some buyers might insist upon paying no rent whatsoever, as they may argue that the seller is not going to pay the mortgage lender. Other buyers may request to pay a below-market rent. The amount of rent to be paid is negotiable.
The disbursement of the rent is also negotiable. Generally in a landlord-tenant relationship, the landlord receives all the rent. However, the buyer might ask to place the monthly rent into an escrow account. Some buyers may desire to build up some money in the escrow account to be allocated toward their down payment. Depending upon the escrow agreement between the parties, the buyer might agree to disburse some of the funds to the seller or to repairmen. It is possible that the buyer might seek to have the funds released back to them if the short sale is not approved.
Having the buyer move in prior to the sale is a creative solution in some cases, but it is one that also brings potential pitfalls.