It's become commonplace in my real estate market to negotiate a temporary residential lease as an addendum to the sales contract. Let me pause a moment for those of you who need to groan or roll your eyes. This is a topic which people -- both professionals, as well as consumers -- stand on two sides of a fence. That's why I want to bring it up and see what you think.
First, a temporary lease is simply when a buyer leases from a seller a few days before closing and funding; or, what's more likely in my market today is when a seller leases back from a buyer a few days after closing and funding.
Temporary leases are not designed for 6 months or 12 months. In Texas, they are usually an addendum to the sales contract designed to be about 90 days or fewer. In many cases, they last only a few days and in many cases they are free to the tenant.
So why would someone want to lease temporarily?
It's a matter of fact for me: temporary leases have become more common in my market. It's another matter of fact for me: The most common negotiated term in a contract is price. The second most negotiated term is possession which is generally tied to the closing date. Price and possession are cri-ti-cal to a deal. So what's the correlation between the most negotiated terms (perhaps not price, but possession) and the commonality of temporary leases? There are a few related things here to consider.
In today's market, a closing and funding is dependent on a few things:
- The contractual closing date;
- The lender's ability to get the docs to the closer timely;
- The closer's ability to get the docs prepared timely and get the buyer and seller to sign timely;
- The lender's ability to fund the loan timely.
Obviously there are no guarantees all these items will happen in the order or timing they should. However, the buyer or seller may have a specific need as far as possession (different from closing and funding) that a lease could fill.
Here is the most common two uses of temporary leases for me this year, how common they are occuring for me right now, and what some of the terms are:
- Sellers sometimes lease back a few days from buyers for purposes of not having to move out of their home until after closing and funding occurs 100%. These tend to be free leasbacks. They tend to include the family pet staying and utilities remaining in the former owners name until the seller moves out. They tend to be 48 or 72 hours. That is most common. About 1 in 4 to 1 in 5 owner occupants request it. It's a 2 page addendum in Texas spelling out the terms of the lease. In other words, it's fairly common.
- Buyers sometimes lease back a few days from sellers before closing often times because the seller has already vacated and the buyer wants to go ahead and take possession a few days before closing and funding. A buyer recently suggested a leaseback to my seller because my seller vacated, the buyer's loan ran late, the buyer offered to lease back for purposes of going ahead and paying the seller for lost time, so to speak, and keeping her own plans to move in on said contract date although the loan was in a line to close. The buyer was able to move on in and the owners were able to collect rent to offset their expenses of continued ownership and the whole thing helped everyone. Win/wins are good. Sometimes if a buyer purchases a vacant home, but is in a hurry and the title company, lender, HOA, and all involved can't pump a deal out fast enough, the buyer might ask to lease it in the interim. This is also negotiated, I would say, about 1 in 10 times when a house is already vacant. I would say, though, there is usually a per day charge to do that. It's common for buyers to consider what the seller is incurring per day in principal, interest, taxes and insurance and the risk of leasing and come up with a figure per day that seems fair.
Are there risks associated? Of course. There are risks to all business transactions. Do I recommend leases? Of course. All terms can be negotiated to the benefit of the parties. When it helps the deal work, it helps the deal work. But it's important to think them through and come to fair terms for my clients.
What are some common unfair terms, in my opinion?
I once had another realtor tell me they never collect a deposit in a temporary lease situation -- she didn't even know there was a spot for it on the addendum. My only question was, "Are you crazy?" Of course, I didn't ask that. I simply said the seller will require a deposit. Another term is consider the pets. If pets are there now, pets will continue to live there. It's odd to me to expect them to kennel Fido if they didn't before.
There are many times a lease breathes life into an otherwise dead deal. Sometimes it pays to be flexible. Sometimes it pains. Is it moot? Is it impossible? Is it too risky? Or is it beneficial? Just think it through.