Rent-back clause prevents financial disaster

October 21, 2014

How much earnest money did the buyer put down? Are there contingencies in the contract the buyer could not meet that allows them to cancel the transaction, such as financing?

© 2014 Richard Montgomery

Reader ​Question: The buyer backed out just days before closing which left me in a financial disaster. I made my income out of my home renting rooms. I had to give them notice to move prior to the closing date. Is there anything I can do? Meredith P.

Monty’s Answer: Hello Meredith, and thanks for your question. This may be a perfect use for the rent-back clause.  There are too many unanswered questions about your situation to comment. How much earnest money did the buyer put down? Are there contingencies in the contract the buyer could not meet that allows them to cancel the transaction, such as financing?

Take the contract to a real estate attorney and ask if you have recourse, and if you do have recourse, what are your chances of actually collecting? Do you have an agent? Did your real estate agent advise you to give your residents notice before the contingencies were met?

Depending on what the attorney advises, you may be better off focusing on finding another buyer, re-renting the rooms or both. In seeking another buyer, consider structuring the transaction differently.

Scrutinize the agent

If you did not engage an agent before, consider it for this transaction. A good real estate agent can make a big difference in how well the entire process flows. If you had an agent, it is difficult to image the circumstances where they would allow this to happen. Consider replacing them.

Ensuring a successful real estate closing is attainable. Many real estate closings take place on time and as agreed. Experience has demonstrated the more information both parties to the transaction gather and absorb throughout the entire process, the less likely there will be issues at closing. Understand each contingency when negotiating the contract so you can better plan ahead. Then, follow up with your agent for delivery of written verification as each requirement is satisfied. Follow-up and trust (but verify) is the best mindset to maintain between acceptance of an offer and the physical closing.

Even sound contracts can fail

Often times, what happens in a transaction is out of our hands. For that reason, it is good strategy for the seller to maintain occupancy after closing and pay rent on a daily basis for some short period of time. In your case, you would not give your tenants notice to move until the transaction closed. If the buyer balked at this suggestion and wanted occupancy at closing, fine. As long as there was enough non-refundable earnest money in escrow to make it worth your while if the buyer walked after you booted your tenants. It will relieve a lot of pressure.

This rent-back negotiation is a conscious part of the offer to purchase. Many times the closing date in the contract can change as the picture crystallizes. If the buyer wants the contract extended, only agree if the contract is amended. With the rent-back, if the closing fails permanently, you still have your renters.

If someone loses a job, has an accident, becomes seriously ill, omitted significant financial information in applying for a mortgage or other reasons, it may affect the closing.

Here Is how the rent-back works

The seller remains in the home after the closing, and an escrow is established in the purchase agreement specifically to guarantee delivery of the home in the same condition as when the buyer last viewed it. Remember to include the exact time of the day you will vacate the property. The seller pays rent to the buyer after the closing as the closing triggers the cessation of the sellers cost of ownership and the beginning of the buyers cost of ownership. Most often, a penalty is negotiated based on the costs the buyer will incur as the new owner plus a last minute stay at a hotel if you fail to move out as agreed. Many states have pre-printed clauses in their state approved forms that simply require a fill-in-the-blank approach to the escrow amount. These funds are held by the title company and distributed to the appropriate party as agreed.

All parties come away happy

There is no guarantee the closing will take place at a time or date established in the contract for all the reasons stated above. However, anticipating future events when negotiating the purchase agreement, keeping your mind on the process, paying attention and regular communication with the agents will reduce or eliminate the chance of frustrating delays.