Considering a Lease Back Option? Here’s What Sellers and Buyers Need to Know

There are a lot of times when a seller wants to sell their home quickly, but that doesn’t always mean they are ready to move quickly. Situations like waiting on a new construction home to be finished, the start or end of the school year, problems scheduling movers or the timing of a work-related relocation are just a few of the reasons a seller may want to stay put for just a bit longer.

Rather than having the seller go through the hassle and expense of two moves, the seller and buyer can agree on a lease back option. Offering a lease-back option can help buyers win the contract, while sellers will appreciate the extra time to move.

How does a lease-back option work?

Lease-back options are usually negotiated at the time of contract. Just like an offer to purchase, a lease-back option is a binding contract that allows the seller to continue to occupy the property post-closing. It is sometimes referred to as a delayed occupancy agreement.

The property still closes as it normally would and the seller receives whatever proceeds they have coming from the sale of the home. The different is that they simply delay their moving date and continue to have full possession and use of he home for a mutually agreed-upon period of time.

There are a few different ways to do a lease-back option. In one scenario, the full amount of rental fees to cover the lease-back period are deducted from the total sum of the purchase contract. Another option is to have funds equal to the agreed-upon rent held in escrow. The buyer then draws from the escrow over the period of time the lease-back agreement is in effect.

The preferred option, however, is to write the lease-back as a completely separate transaction from the purchase. Under this method, buyer and seller enter into a binding contract apart from the purchase. The seller pays rent to the new owner for each month of the lease. This method has the advantage of protecting the buyer because landlord-tenant laws will apply.

Buyers should include a final walkthrough at the end of any agreement to ensure the property is in the same condition as at the time of purchase. Responsibility of the tenant for making an necessary repairs of damage they caused should be written into the lease-back agreement, just as with any lease agreement.

As the owner of the property, the buyer is responsibly for insurance, taxes, HOA fees, and regular maintenance and repairs. For example, if the HVAC system has a problem during lease-back, it is the buyer who will be responsible for repairs and not the seller, who is now a tenant.

As tenant, the seller is responsible for the rental fee, general upkeep and all utilities. They are relieved of the responsibilities of mortgage and other owner-related financial obligations.

Agreements can be a win-win

In a competitive market, a buyer who has the flexibility and willingness to offer a lease-back option may put themselves at an advantage over other potential buyers who want to move in immediately. The buyer can begin to enjoy tax and equity advantages. Both seller and buyer have incentive to maintain the property in its existing condition.