Signing a lease before closing

18 Replies

Hello,

I was wondering if anyone has experience with signing a lease with a tenant before closing on the property?  I am under contract on a duplex in Denver with a close date of December 1.  A woman has reached out through the seller and is interested in renting it and moving in December 7.  She seems to meet all of the criteria (but I will do a complete screening), but I am unsure about the legality of entering into a lease before we close.  I don't want to turn away a good tenant since this is a terrible time of year to find a tenant.  Any suggestions or knowledge are appreciated!  Thanks!

In short, don't do it. Are you already advertising the property? If so, I'm not sure I'd recommend that you do that either.

Close on the property and then treat it as yours. If closing gets postponed or even cancelled, you'll be in a mess.

Same with when you do own it and have a tenant move out. Just wait until the tenant is out before trying to rerent it. Lots of people try to show a unit when the tenant is still there and the tenant gets mad. Or they don't move out in time. Or there is more damage and cleaning than expected.

305-537-6252

Thanks @Nicole W.  And  no, I am not advertising the property, the woman is a friend of the seller and reached out to me.  

@Vanessa T. personally I would have no problem doing it. Disclose the situation and let them know they can't move in if you don't close.  I would advertise as well, provided the property is move-in ready. No point in giving up a month's rent on the 0.1% chance it doesn't close on time. Disclose the situation and reassure the prospects of your intent and ability to close. 

Many times, it's not even your fault that closing isn't on time. It could be the title company, the lender, the seller....lots of factors that can delay a closing date. So hopefully a potential tenant wouldn't have their UHaul all loaded up the morning of your original closing date only to find out it's been delayed for a week or however long.

305-537-6252

Screen the applicant yourself and if acceptable (probably doubtful) have the seller sign the lease with her. She can move in regardless of the closing date and you inherit the lease at closing.

Make sure you screen and it is your contract the tenant and seller sign.

@Bill S. would you sign a lease with them?  Is that legal if I don’t own the property? 

I would do it as well. Disclose it, and include a contingency in the lease document for the first term. 

Unless you think you're below market I can't think of a reason not to sign as long as the prospective tenant is aware of their risk, and you've built in an 'out' in case of closing issues. 

Yea. You definitely don't want to advertise it until after you close. In terms of renting it though, thats another issue. You could probably have them put down a hold deposit to lock it in. Just make the hold deposit contingent on you closing and giving you a certain period of time to get the place rent ready.  I don't know what that gains you though. 

Normally, I would never want to have someone put down a hold deposit without seeing a property. But since she is a friend of a seller, this is a bit different. I'd still probably wait til after you close to have them walk it with you so you can tell her what you are and aren't going to do.

Maybe she assumes you'll be repainting the entire house and replacing all the light fixtures. And you get it and say, no, I'm repainting these three rooms only and leaving the lights as is.

If you are going to do it, I would have them put a hold deposit down of say 500 or 1k and then put in the hold deposit receipt language all the key caveats:
1) Landlord hereby accepts the hold deposit and will hold said property until such and such date. Should Landlord not close on such and such date for any reason, then landlord shall have the option to refund said hold deposit and not be held liable by applicant in any way.

2), etc, etc, etc.

@Vanessa T. others have covered the lease issue. Remember, timid landlords have skinny kids (not my saying but one I like).

In Colorado, having a contract to purchase is having what is known as "equitable interest". Legally you can sign a lease for a property you don't own if you have it under contract. I have seen people wait to sign the lease until the move-in. In that case, no one is bound because there is no written agreement. Just be aware that the tenant can bail on you sinces the knife cuts both ways.

As pointed out, there are many reasons outside of your control that cause a deal not to close. If you talk to title people you will find out that they rarely happen and in most cases things are worked out in a few days at most. 

If you want zero risk, don't do it. It'll only cost you a few weeks rent. I think the risk is very low and the money is worth the little bit of stress. As I said, I would do it if the property was in good condition. 

Hi @Vanessa T. ,

I personally wouldn't sign any lease with a tenant until I owned it. However as @Thomas S. mentioned the existing owner can sign if you agree and it is all on them until closing. You just inherit the tenant and if something bad happens they have the tenant and you are clear.

good Luck!

Mike Cumbie, Real Estate Agent in NY (#10401285310)

@Vanessa T. To echo some of the above, I have seen a seller sign a lease with a new tenant during the closing process here in Colorado. You just want to make sure you are on the same page with the seller if you decide to go that route to make sure you've screened well. The time I saw this happen did not turn out well because there was no communication between buyer and seller what was going on. That tenant turned out to be an eviction down the road.

Jared Bouzek, Lender in CO (#1428276)
720-984-2516

Hello!

My suggestion is not to have the prospect sign a lease. Even though it is definitely harder to get tenants in the winter months, having someone sign a lease prior to closing may not be such a good idea -- especially if there are current tenants in the property. There are a multitude of different issues that could arise that may either push closing out further than expected or the home may end up having issues that are out of your control (although we hope that wouldn't happen). You don't want to have someone sign a lease with the expectations to move in on a specific date (and possibly even give their current landlord notice) and not be able to move in due to a delay or issue.

If you were adamant on maintaining this prospective tenant, I would make sure to give full disclosure on the situation and ensure the prospective tenant is aware that if you do not close (or if closing is pushed out) that you are not legally responsible and that in this event, their move in date will be moved accordingly. It is also important that you get those stipulations in writing and have the prospect sign a disclosure stating that they are fully aware of these guidelines.

If the tenant is okay with those stipulations, then by all means, draw up an agreement (I still wouldn't suggest having them sign a lease), possibly collect a deposit to hold the property (and to ensure they are serious), have them sign a disclo and handle it from there. 

Good luck!

-Tiana

I usually add an addendum in my lease that starts with:

"This lease is not operative until ..." (then add whatever)

I started doing it when I heard tenants paid deposits, or the first month's rent, and then the checks bounce, and turns around and say, but I got a lease.

Regarding the line that states, "This lease is not operative until...", what if closing is indeed delayed or worse, cancelled? Then you would still be in the same sticky situation of now having a lease with someone on a property that you don't own.
Shouldn't instead, there simply be a separate agreement made that states that a lease will be created once the property closes and that either party can cancel this agreement at any time if closing does not happen in a timely manner?

305-537-6252
Originally posted by @Nicole W.:

Regarding the line that states, "This lease is not operative until...", what if closing is indeed delayed or worse, cancelled? Then you would still be in the same sticky situation of now having a lease with someone on a property that you don't own.
Shouldn't instead, there simply be a separate agreement made that states that a lease will be created once the property closes and that either party can cancel this agreement at any time if closing does not happen in a timely manner?

 I see your point because my wife used to be a banker, and very cautious. I can see OP's point as this is a tough time of the years to rent, particularly after Thanksgiving.

I rented to quite a few tenants where I was not the first choice. Usually applicants for rental with condos and coops was accepted but subject to the approval of HOA or Coop boards, and till then careful landlords will not offer a lease. They're told the board will vote on it at the next meeting. They have no idea, rather not wait, just go with my rental.

Then, I heard of cases of accepted applications subject to approval only to have it revoked as someone else better came along. So my suggestion is one way to get around it, assuring the tenant, yes, I will go with you when it closes.

With your agreement, my experience is if the renter is in need of a place, would just go with his 2nd choice.

If the friend was that hot of a prospect for the rental, the SELLER would already have them in there.. 

Wait, don't muddy the waters.  Lot's of fish in the sea.. 

Thanks for all the thoughts and insight. It is very helpful and much appreciated! The owner is currently occupying the property and will be moving out of state when the sale closes. In addition, the inspection was good with a few little things that we will do. But the property was just completely updated so it is ready to go.  

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