Seller rent back or tenant in possession
You are buying a property to owner occupy or for investment. Should you allow the Seller or a tenant to stay in possession after close? A contract is only as good as the parties willing to honor it
Both realtors/brokers unless they are the property manager are out of the equation after Close of Escrow which means they are not involved in this after close. I can’t provide legal nor property management advice
You should consult a real estate attorney for any questions about landlord tenant law, property management, including the process of evicting a tenant and the costs and financial impact that an eviction may have. As well, consult an accountant for any tax implications
In both scenarios, you are a landlord and should familiarize yourself with landlord/tenant obligations
You should consult your insurance company on liability issues or how claims are handled
Seller
In CA, a rent-back negotiated during a sale in escrow is handled using 1 of 2 forms. These forms are provided as a courtesy to both parties during escrow, but they are contracts that govern use of the home after close where both realtors & brokers are no longer involved. Therefore you should consult an attorney about the terms
The Seller can stay in the home for up to 29 days, which does not establish tenancy and the CAR Form Seller in Possession aka SIP is used
You can allow a Seller a longer term you are buying in cash or are buying it with financing as an investment property. You would use the Residential Lease After Sale form aka RLAS
If you have a mortgage as an owner occupied property, the lender may only allow a seller rent back for up to 59 days using the RLAS
Sellers often want this rent back for free, with the perspective of total cost of purchase in lieu of passing money back and forth. Here are some key considerations:
This is a contract between the Buyer & Seller, the Seller is your tenant after close and governed by local & state laws
What happens if the property is damaged? What is wear & tear vs Seller damage vs major issues?
What if the property becomes uninhabitable- will you pay to relocate them if they failed to obtain insurance?
If there are significant repairs needed at the property, but the Seller did not agree to repair during escrow and instead provided a credit, will you be conducting these repairs during their rent back? What happens if these repairs include health & safety items and become an issue during the Seller’s tenancy? What happens if the issues worsen?
If you charge $0, and the Seller / tenant overstays, what is your recourse financially? I would recommend setting a financial amount / value of the rent back, even if you opt to waive it for a specific term
Do you take a deposit?
If you do take a monthly payment, please consult with your accountant on any tax implications
Tenant
In CA, leases survive sales. It is key to get an estoppel and the leases during escrow. As well, a list of owner vs tenant property such as whether the appliances belong to the tenant
Review the CA rent control law and any local ordinances around rent control or eviction
If you do not wish to inherit the tenant, you will want to negotiate while in escrow with the Seller to see if they are amenable to giving notice to the tenant or incentivizing them financially to move out prior to Close of Escrow. Even if notice is given by the Seller, if the tenant is not moving out until after close, and they do not move out, it is your responsibility to work with an attorney to explore you options.