The Pros and Cons of a Lease Forward (or Lease Back)

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Once upon a time, not so long ago, there was a family of investors who loved their job and all that it entailed.  They had gotten a great deal on a property, and although it was further away then they would have liked, the price was right.

There were a couple of questionable issues: It needed some foundation work, and it had a pool which can be scary.  All in all it was a great property.  After the remodel, the house was listed and though it did sit a little longer on the market then this happy family would have liked, it finally went under contract.  The spectacular listing agent (that would be me) thought she had done all of her homework with the lender and the buyer’s agent and felt assured that the property would close in the prescribed time alloted.  Even though it was a VA loan.  And even knowing that the lender had some issues in the past closing another deal on time….<Insert wishful thinking here>  So ten days before closing, when asked by the buyers agent if a lease forward might be possible for her clients to make the transition more smooth for them (they were selling a house 3 hours away)  we agreed.

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The Problem…

Fast forward to the day before closing.  The sensational listing agent was hard at work at her desk wrapping up for the day when she received a disturbing call from, not the buyers agent or the lender but from the title company informing her that closing was not taking place the next day.  After a flurry of phone calls to get to the bottom of the situation, the listing agent discovers that not only is the property not closing the next day, it’s questionable as to when or even IF the property is going to close.  In the meantime, the buyers have moved in.  This happy investor family has now become a landlord.  They were not so happy anymore.

To make an incredibly long story short, the property did end up closing almost 3 1/2 months after originally planned.  In the meantime, the buyers settled in and began contacting us about issues that came up on their inspection report that they never asked us for during option.  Things like hose bib leaks, kitchen sink drainage, etc.  Suddenly now because we were the landlord, it was a like a free card to ask for the moon.  Let me just say, it was a painful 3 months.

Lessons Learned…

So this experience was definitely a learning curve and really highlighted the following points I think are important:

  • Get a written lease contract on whatever form your state uses!  This will save you hours of pain and suffering.  Spell out every last detail and expectation and leave nothing to be assumed.
  • Stipulate in the lease that material changes to the property can not be made until after closing and charge a deposit that can be credited back at closing!  I had another situation where my clients agreed to lease forward 3 days before closing and the buyers got in, started ripping stuff out and discovered a leak in one corner of their roof that their inspector had missed.  The day of closing they were refusing to sign unless the sellers compensated for it.  What a nightmare!
  • Ensure that the rental amount you are charging is the current market rate.  That way if you find yourself in a situation like we were in with closing pushed back 3 months you are at least pulling in fair market value in rent.Even though we’ve had a couple of scary experiences with leasing before closing, we would do it again.  It can be a great incentive for a buyer or seller to offer that option so I don’t think it should be ignored.  It is just important to have all expectations lined out in writing.As for the happy investor family from above?  They took notes, learned from experience, dusted themselves off and rode off into the sunset onto another deal.  They are again, happy doing what they enjoy!

    Happy investing!
    Photo: hannah sheffield

About Author

Katherine Grote, co-founder of I Buy Austin Houses.com, (Google+) has been involved in real estate for 7 years. Through her experience, Katherine has gained the expertise to sell a home fast. With experience in short sales, REO's, multi-family, and rentals, Katherine is a well-rounded licensed Realtor as well as an avid investor in residential properties.

4 Comments

  1. Brandon Turner

    Great article, Katherine! I tried to actually do one of these recently, when a closing was taking FOREVER (it took 5 months for the buyer to go through the USDA loan process) but she didn’t want to. I figured it would have saved me about 3 months of holding costs. I didn’t even know this was done, or had a fancy name! Thanks for tips!

    • Thanks! Argh!! USDA! The mere mention of that entity brings terror to me! LOL! But lease backs or forwards seriously can work. I certainly don’t want to scare anyone away. Especially in a situation exactly as you just mentioned. You’ve just got to be aware! Have a great weekend.

  2. I don’t think I’d ever let a buyer move in early for all those reasons.
    I once let them move their stuff and charged a storage fee.
    Even that was a nightmare.

    IF I ever considered doing that I’d :
    1) Charge the higher of my estimated holding costs or market rent.
    2) Have them waive any financing contingency so if they don’t close they lose the deposit.
    3) Collect the maximum amount allowed by law from you “tenants” up front regardless of how long they should be there. Credit any unused at closing. For me that would be 3 months rent.
    4) I’d have then sign that ANY repairs made prior to closing will be deducted from the collected security deposit.

    You are doing them a HUGE favor and taking a big risk. Take big time precautions if you consider it.

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