Sticking Point: Temporary Residential Leases

By
Real Estate Broker/Owner with Kristen Correa Real Estate & Reedy Creek Realty Services 0514644

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:

  1. The contractual closing date;
  2. The lender's ability to get the docs to the closer timely;
  3. The closer's ability to get the docs prepared timely and get the buyer and seller to sign timely;
  4. 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.

lease

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.

Posted by

Kristen Correa Real Estate

Comments (10)

Alia Marie Hazen
REMAX EQUITY GROUP INC - Portland, OR

This is a great blog -- and really smart content.

Jun 16, 2010 01:40 PM
Lois Davies
Century 21 Birchwood Realty, Inc. - Cape Coral, FL
Cape Coral & SW Florida

I wish this was a more accepted situation where I am. The agents I have tried to work with to do a temporary lease have all said NO (emphatically); they are not comfortable with it. Liability issues seem to be the stopper.

Jun 16, 2010 02:48 PM
Kristen Correa, Broker
Kristen Correa Real Estate & Reedy Creek Realty Services - Keller, TX
I love coffee & real estate. I am out of coffee!

The emphatical answer is really one of the inspirations to think this out online. Why some consumers and some realtors think being non-negotiable on anything and not hearing out the other party and making some attempt to make everything a win-win is beyond me. The people who "just say no" need to consider the possibility it could actually be lucrative and beneficial to deminish stress, not be the source of it.

Jun 16, 2010 03:11 PM
Lori Churchill Cofer
Beasley Realty - Pullman, WA
Realtor - 509-330-0086 - Pullman, WA

Kristen,

They are not really common in our area as well.  That being said, I did use this not so long ago.  We had a trifecta of clsoings resulting in 4 families moving....it worked well for all parties involved.

Jun 17, 2010 03:39 AM
Jen Wing
JPW Field Inspections - Chico, CA
Field Inspections Since 2007

We did this when we bought our house.  Lack of income on a vacant house was stressing the sellers out, but we didn't want to close until we the buyers had gotten everything resolved.  It took a lot longer than both parties thought.  

I thought it was brilliant when one of the realtors suggested we move in before it closed.   We moved in in April, it closed middle of June.  That was in 2002.  It was a win/win because they were no longer concerned about the lost income, we had a date to give our landlord. 

Jen Wing

Jun 17, 2010 01:09 PM
Sher'ri Sanchez
Century 21 Judge Fite - Fort Worth, TX

from the Buyers point of view, how can a tempory lease be enforced? For instance...my buyers purchase a home, the seller required a 3 day leaseback, he was to maintain the property and leave in move in condition. He did not...along taking items that were a part of the home. How can the lease be enforced and the seller made to bring back the items taken?

Nov 21, 2011 12:28 AM
Nick Walton
JP & Associates REALTORS® - Frisco, TX
Call 469-556-2393

I just received an email from the buyers agent, ( I represent the seller) asking for a temp. lease back today.

I told him no, because there are so many things that could go wrong that it is just not a good idea. We are two weeks from closing so the loan could fall through, and exiction proceedings it not my idea of fun.

I have done a few temp. lease backs for my sellers where they require a couple of extra day after they close on their current home to close on their new home. These have always worked out ok especially when the buyer of their home is in an apartment and has till the end of the month to move out anyway.

Jul 12, 2012 08:34 AM
Richard Weeks

How could you tell him no without consulting with your client?

Mar 27, 2017 11:00 AM
Anonymous
Elie

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Sep 30, 2013 01:25 AM
#8
Anonymous
Janie

I'm the seller, I have a buyer with a pending contract. We have extended the contract twice, first because they needed to raise their credit score by a few points. Thinking they were doing a good thing by selling their share of their business, they sold it and now their projected income is too low. Now lender says they will qualify for a loan but only after they sell their home to purchase ours. They have asked if we will do a buyers temporary lease for up to six months, I need advice please. I need the income but I'm afraid that if they don't get loan during that time. And then decide to leave, will I end up have a loss because of repairs that might be needed if they damage my property.Thank u in advance

Jul 24, 2016 03:16 PM
#10