Imagine this: you’ve found the ideal Chicago home, but the home sellers can’t vacate the property on the closing date. They need to stay in the home for three additional weeks until they close on their new home. They’ll pay you rent for each day that they hold occupancy. This situation is known as a sale-and-leaseback. While it sounds innocent enough, this seller contingency can cause serious pitfalls for home buyers. Here’s what you need to know!
First, there is an upside – the seller should be paying you market-rate rent during their post-closing occupancy period. In some areas of Chicago, this can be a nice chunk of change. That money could help offset some of your own closing expenses.
The problem is, once you become the homeowner, you are responsible for all the liabilities and expenses of that property. Situations can arise during the seller’s post-closing occupancy that become your problems to solve. What if the hot water heater fails? Who will take care of the yard? Having a well-written contract that itemizes areas of responsibility is a must. But even if the seller agrees to handle ongoing care and maintenance during his occupancy, you’re ultimately the person responsible for the property, including taxes, code compliance, HOA compliance, major repairs and so on. It’s like being a landlord but less profitable! You’re also on the hook if the seller doesn’t keep his promises.
There are other potential issues detrimental to your interests. A sale-and-leaseback contingency might mean there are financial problems on the seller’s side. A sale-and-leaseback might solve the seller’s cash crunch, but it can increase your expenses. You might need to rent a storage unit, or extend your apartment lease. Or, you could incur double moving expenses as you hop from your current digs into a temporary residence. Worst-case scenario: the seller keeps pushing his exit date into the future, basically refusing to move while presenting a series of excuses. At some point you’ll need to start an eviction process, which can be expensive and stressful.
The biggest reasons to refuse a seller’s sale-and-leaseback contingency involve the stipulations of your mortgage and homeowner’s insurance. Owner-occupancy is usually required by your mortgage lender. As the buyer getting the mortgage, the bank expects you to live in the home. A short term of seller occupancy may not violate this clause; but you must verify the occupancy requirements of your mortgage before agreeing to seller occupancy. If you lose the mortgage, you’ll lose the house!
Furthermore, your homeowner’s insurance policy might not cover damages incurred by the seller during his occupancy. A separate insurance rider may be needed for the seller occupancy period, or an entirely different policy may be required!
We’ve given you some very good reasons to be cautious about sale-and-leaseback contingencies! That doesn’t mean you should automatically turn down a good home involving one. Much depends on the amount of time the seller needs, and the reasons for the post-closing occupancy, and how strict your mortgage and insurance conditions are. An expert broker from StartingPoint Realty can help you determine your risk position, and give you the information you need to make the best decisions!
StartingPoint Realty – dedicated to first-time Chicago home buyers!
StartingPoint Realty proudly serves first-time home buyers throughout Chicago and the Northwest suburbs. We provide complete education and guidance during the entire home buying process! Attend a free home buying seminar to begin your path to home ownership!
We also provide many other resources to help you become a successful home buyer! Need down payment assistance? Check out our list of home buyer assistance programs on our website! Visit our Chicago Resource Center for no-pressure information and assistance.
Always feel welcome to contact us for help with your Chicago home buying questions!
Ryan Gable Broker/CEO Starting Point Realty
Become a StartingPoint Realty Facebook Fan
Follow StartingPoint Realty on Twitter