Keep Seller as Tenant?

Question

Seller has made it clear that she would like to stay on as a tenant for some period of time. She is near retirement, but not quite ready. I am new to investing in general and have not heard of this yet.

What red flags should I be on the lookout for here? What steps/documents/etc. should I ensure are in place to make sure I am covered? Example: assuming I close, should I still take a deposit?

Northern CA single family home with mother in law unit.

Account Closed · Answer

You would have to treat her as any other tenant. And remember, no good deed goes unpunished. At some point she will believe she still owns the house and it will become a big mess and lawsuit. Ask me how I know.

Joe Splitrock · Answer

@Alex Folchi everyone I have talked to who has done this said it turned out badly. The owner never leaves, so you never have a vacant property to document condition and settle out who owns what. The "owner" feels much more entitled than a new tenant you select. As a result they feel they can do what they want, as if they still owned it. A bigger concern is since the tenant was a previous owner, they could try to claim some ongoing right to the property. California is notorious for bad situations where tenants live in properties for months without rent. I have even seen cases where previous owners stay as tenants and claim they were tricked out of their property. If it was anywhere but California, but in California, no way would I do this. If you do, follow the advice from @Mark Faustrum and hold money in escrow. It is more complicated, but it gives you more power and less risk.

Mark F. · Answer

@Alex Folchi if you do go that route just protect yourself, have the lawyers draw up a post possession agreement with a heft escrow hold back, perhaps $10k that stays there until she moves out and the house is delivered to you in the same position at it was on closing date. Document the condition with photos and video during the typical pre closing walk thru and you should be good to go. If she complies with the terms of the agreement the funds are released from escrow, if not you have that money there to protect yourself..... just a thought.

Mitch Messer · Answer

Hey @Alex Folchi, welcome to BiggerPockets and congrats on your deal!

I would strongly discourage you from renting to this seller.

Here's why:

• She's never going to be "just a tenant." She already knows you personally, so when things do go sideways, she's going to make it personal for you! Does she have your cell phone number? Your email? Not good!
• She also knows you're a real estate investor, so she probably already thinks you're rich! I can hear it now: "Why can't you replace that?" "What does it matter if I pay a little late?" Not exactly the kind of tenant I'd want!
• Once you buy this house and become the owner, any pre-existing maintenance and repair issues (even those you aren't aware of yet but she is!) are now your responsibility to address. Within 30 days, under California law.

It's also worth asking yourself: If she loves the house so much, why did she sell it now? If she just needed the money, and wanted to stay, why not do a reverse mortgage?

I'd proceed with extreme caution and beware the "Trojan horse" seller/tenant!

Jim Adams, III · Answer

I like to "decide before I have to decide" and one of those decision has been- I don't allow the seller to stay on as a tenant.  The potential for problems is just too great.  So while I've never personally rented to the former homeowner, I've never seen an example of that working out well.

Account Closed · Answer

I've made every mistake you can make investing in single family real estate, that's why I'm an "expert".

I used to be Pert.

Definition: Pert "High-spirited,  lively,  or  cheerful, Impudently  bold;  saucy"

Now I'm ExpertDefinition: EX-Pert "used to be High-spirited,  lively,  or  cheerful, Impudently  bold;  saucy but bought a single family property and reality set in" ;-)

Just kidding. I love what I do and by God's grace have made a lot of money.

James Carlson · Answer

@Alex Folchi

Yeah, I wouldn't let any fear of the unknown stop you. But be clear with the lease about expectations. The thing I would want to make sure she understands is that as a tenant, she shouldn't be making changes to the house without consulting you. I could see her -- as Account Closed alluded to above -- still thinking of the place as her own and modifying things. Anything she does going forward she has to pay for, get permission for, or have it subtracted from her security deposit at the end.

Mark F. · Answer

@Alex Folchi sounds like you've gotten some good advise, especially if its a property in CA as @Joe Splitrock mentioned. The time I did it was when the seller needed a little extra time to find a new place to move and needed a short lease back until they had that worked out.

Bottom line I guess is go with you instinct, more often then not that will help steer you in the right direction when have have all your information to make an informed decision.

Alex Folchi · Answer

@Mark Faustrum @Joe Splitrock

Thank you both for your detailed responses.  Limiting the risk by holding a substantial deposit in escrow until she does in fact vacate is great advice.  I am honestly not sure I will even go this route at all, but if I do, I have already started preliminary conversations with my attorney about this process.

I especially hear you about CA specific concerns.  I have heard similar stories (not about sellers staying as tenants specifically, but horror stories for tenants in general), and this additional risk worries me.  Really appreciate the help.

James Carlson · Answer

@Alex Folchi

It happens all the time here in Denver and Colorado Springs. The market moves so quick that syncing up a sell and a buy is tough, so you get sellers asking for a post-closing occupancy agreement all the time. It sounds like a win for everyone if she needs a place, and you want to have a tenant in as soon as possible. The big question is if she's willing to pay the rent you want. If she's lived there for awhile, her mortgage might be quite a bit lower than the rent you could garner, so while a win-win is nice, doing so at the expense of hundreds per month is not so nice.

And yes, it's a standard tenant situation. Have her sign a standard lease and bring the security deposit check to the closing table. Good luck!

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