Real Estate: Rent Back Question

[JDAZ11]

Had anyone ever done a rent back after closing?

Our agreement was to rent back to the sellers for a month and a half. Our mortgage guy actually suggested this at one point, but our agent said not to mention it to the bank or the insurance company - which always made me super nervous, but honestly I haven't been feeling great, and just wanted to come to an agreement, so we agreed to that.

So now we are trying to get homeowners insurance. The problem seems to be that because the house is valued above 1M for insurance (we didn't pay that much), all the insurance companies will send out an appraiser POST closing. Apparently two weeks to a month.... And the sellers will still live there.

So DH and I aren't really sure what we should do. We know people rent back all the time, but for some reason our agent has never dealt with this post closing insurance adjuster visit, and so has no idea how to handle it.

Any advice?


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[MrsK]

The agent said not to mention it because it could be classified as an investment property instead of a home. Your mortgage is structured differently (not as favorably) if it's not your home. The insurance company won't want to insure contents that are not yours. For a rental, they only insure structure and fixtures, not contents. Never heard of an inspection after closing. You need the insurance for the mortgage. The structure and fixtures are valued the same regardless.

[JDAZ11]

Right. So I guess the deal is that sellers keep their policy as well. Then we are also taking a $15K security deposit from them. Anyway, I know people do this, and the guy at our bank suggested it when they wouldn't let our crazy low rate float for more than 60 days. So I know the bank doesn't think it's a total deal breaker. It's just the insurance. And every single company will send someone out post closing for a "luxury" home valued over $1M. Even though we pay a years worth of the insurance at closing. It makes no sense, but that is apparently how they all do it. So there has to be some way to address this with them also. The RE company has an insurance broker, and we asked her. Still waiting for a response. Was just wondering if anyone had done it before.


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[MrsK]

The sellers need a renter's policy for their stuff. Can't the insurance company just inspect the property when the tenant is not there? Your lease should give you the right to do that.

[JDAZ11]

We thought about them just coming when they aren't there. It still all just seems weird. Apparently they don't need to switch to a renters policy, they just keep their existing policy in place - according to the agents and a lawyer at the RE agency we spoke to - although we only asked him about personal liability for injuries on the property etc.


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[MrsK]

Imagine if there is a fire. Unlikely but that's what you insure for. You/your lender needs to be reimbursed for the damage to the structure. The tenant needs to be reimbursed for their furnishings/contents/stuff. Neither insurance company is going to want to pay more than their share.

[JDAZ11]

Oh well the seller may need to worry about additional coverage, but this lawyer said that their homeowners policy would be extended and cover their stuff. I don't care about their stuff, so it's not my problem. Anyway, the broker is clearing it with the insurance company. Apparently it happens all the time, so shouldn't be an issue. But still waiting to hear for sure. I'm glad she said something. I felt uncomfortable not telling them.


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[MrsK]

Yes, their homeowners policy covers thr house and their stuff. So does YOUR policy. Therein lies the problem. Both companies would expect the other to pay.

[JDAZ11]

I think it's going to be the same company as of right now.


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[MrsK]

I think it's going to be the same company as of right now.


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Well then they'll know anyway.

[Deebs]

When we moved here, the realtors insisted this is the only way home purchases are done here. We only did a week of rent back, but I would NEVER, EVER, EVER do it again. When the previous owners moved out, their movers scratched up walls, couldn't get a couch or fridge out of the basement, so we were just left to deal with that and had little recourse. We couldn't say we wouldn't close - we already had. The walk through occurred at closing so it was then useless. Our insurance was able to write us a short term policy, but that was the only part that went well.


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[JDAZ11]

Yeah - we know all that, which is why we asked for the 15K security deposit. It was just that our rate was insanely low, and they have already gone up, so we really didn't want to risk it. Anyway, I was really just super uncomfortable not telling the insurance co about the rent back. Since it looks like we are going with the same company, that is obviously a non issue now. But thanks! No way for us to get out of the rent-back now or we will likely loose our $50K earnest $, so that's a bad option!


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[Deebs]

Yeah - don't do that.


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[ladymoreta]

We had the same problem. I think most people just don't tell their insurance companies and hope for the best. I wasn't comfortable doing that, so we used the 30 day grace period, and the sellers had to move out after that.

It comes down to the laws about insurance and mortgages. They can't write a homeowners mortgage for a property without homeowners insurance. A landlord property won't work because homeowners is required for that type of loan. An insurance company can't write a homeowners policy for a property where you will not be the primary inhabitant within 30 days. It would have to be a different type of policy. If you have a claim on the property and you've lied about living there, there's a good chance they could deny or try to deny the claim.

I'm not sure why long rent backs have become so popular. When we were trying to do it, it seemed pretty illegal.

[GrayMatterWife]

We did a very short, one-month leaseback. It was non-eventful and the tenants left the place in absolutely IMMACULATE shape. But, listen to MrsK's advice--she practiced in this area of the law.